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EX-12 - EX-12 - LEVI STRAUSS & COf58032exv12.htm
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EX-32 - EX-32 - LEVI STRAUSS & COf58032exv32.htm
EX-31.2 - EX-31.2 - LEVI STRAUSS & COf58032exv31w2.htm
EX-31.1 - EX-31.1 - LEVI STRAUSS & COf58032exv31w1.htm
Table of Contents

 
UNITED STATES SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
 
 
 
 
Form 10-K
 
 
 
 
 
     
(Mark One)    
þ
  ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934
or
o
  TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934
 
For the fiscal year ended November 28, 2010
 
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)
 
(415) 501-6000
(Registrant’s telephone number, including area code)
 
 
 
Securities registered pursuant to Section 12(b) of the Act: None
 
Securities registered pursuant to Section 12(g) of the Act: None
 
 
 
 
Indicate by check mark if the registrant is a well-known seasoned issuer, as defined in Rule 405 of the Securities Act.  Yes o     No þ
 
Indicate by check mark if the registrant is not required to file reports pursuant to Section 13 or Section 15(d) of the Act.  Yes o     No þ
 
Indicate by check mark whether the registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days.  Yes þ     No o
 
Indicate by check mark whether the registrant 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 if disclosure of delinquent filers pursuant to Item 405 of Regulation S-K (§ 229.405 of this chapter) is not contained herein, and will not be contained, to the best of registrant’s knowledge, in definitive proxy or information statements incorporated by reference in Part III of this Form 10-K or any amendment to this Form 10-K.  þ
 
Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, or a non-accelerated filer or a smaller reporting company. See definition of “Large accelerated filer,” “accelerated filer” and “smaller reporting company” in Rule 12b-2 of the Exchange Act. (Check one):
 
             
Large accelerated filer 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 — 37,323,947 shares outstanding on February 3, 2011
 
Documents incorporated by reference: None
 


 

 
LEVI STRAUSS & CO.
 
TABLE OF CONTENTS TO FORM 10-K
 
FOR FISCAL YEAR ENDING NOVEMBER 28, 2010
 
                 
        Page
 
PART I
  Item 1.     Business     2  
  Item 1A.     Risk Factors     9  
  Item 1B.     Unresolved Staff Comments     17  
  Item 2.     Properties     18  
  Item 3.     Legal Proceedings     18  
  Item 4.     Submission of Matters to a Vote of Security Holders     18  
 
PART II
  Item 5.     Market for Registrant’s Common Equity, Related Stockholder Matters and Issuer Purchases of Equity Securities     19  
  Item 6.     Selected Financial Data     20  
  Item 7.     Management’s Discussion and Analysis of Financial Condition and Results of Operations     21  
  Item 7A.     Quantitative and Qualitative Disclosures About Market Risk     42  
  Item 8.     Financial Statements and Supplementary Data     45  
  Item 9.     Changes in and Disagreements with Accountants on Accounting and Financial Disclosure     95  
  Item 9A(T).     Controls and Procedures     95  
  Item 9B.     Other Information     95  
 
PART III
  Item 10.     Directors and Executive Officers     96  
  Item 11.     Executive Compensation     101  
  Item 12.     Security Ownership of Certain Beneficial Owners and Management and Related Stockholder Matters     121  
  Item 13.     Certain Relationships and Related Transactions, and Director Independence     123  
  Item 14.     Principal Accountant Fees and Services     123  
 
PART IV
  Item 15.     Exhibits, Financial Statement Schedules     125  
SIGNATURES     129  
Supplemental Information     131  
 EX-12
 EX-21
 EX-31.1
 EX-31.2
 EX-32


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PART I
 
Item 1.   BUSINESS
 
Overview
 
From our California Gold Rush beginnings, we have grown into one of the world’s largest brand-name apparel companies. A history of responsible business practices, rooted in our core values, has helped us build our brands and engender consumer trust around the world. Under our brand names, we design and market products that include jeans, casual and dress pants, tops, skirts, jackets, footwear, and related accessories for men, women and children. We also license our trademarks for a wide array of products, including accessories, pants, tops, footwear and other products.
 
An Authentic American Icon
 
Our Levi’s® brand has become one of the most widely recognized brands in the history of the apparel industry. Its broad distribution reflects the brand’s appeal across consumers of all ages and lifestyles. Its merchandising and marketing reflect the brand’s core attributes: original, definitive, honest, confident and youthful.
 
Our Dockers® brand was at the forefront of the business casual trend in the United States. It has since grown to be a global brand covering a wide range of khaki and khaki-inspired styles for men and women with products rooted in the brand’s heritage of the essential khaki pant. We also bring style, authenticity and quality to a broader base of jeanswear consumers through our Signature by Levi Strauss & Co.tm brand and our recently-launched Denizentm brand.
 
Our Global Reach
 
Our products are sold in more than 110 countries, including established markets, which we refer to as mature markets, such as the United States, Japan, and Western Europe, and developing markets, such as India, China, Brazil and Russia. We group these markets into three geographic regions: Americas, Europe and Asia Pacific. We support our brands throughout these regions through a global infrastructure, developing, sourcing and marketing our products around the world. Although our brands are recognized as authentically “American,” we derive approximately half of our net revenues from outside the United States. A summary of financial information for each geographical region, which comprise our three reporting segments, is found in Note 19 to our audited consolidated financial statements included in this report.
 
Our products are sold in approximately 55,000 retail locations, including approximately 2,300 retail stores dedicated to our brands, both franchised and company-operated. We distribute our Levi’s® and Dockers® products primarily through chain retailers and department stores in the United States and primarily through department stores, specialty retailers and franchised stores outside of the United States. Levi’s® and Dockers® products are also sold through brand-dedicated online stores operated by us as well as the online stores of certain of our key wholesale customers and other third parties. We distribute Signature by Levi Strauss & Co.tm brand products primarily through mass channel retailers in the United States and Canada and franchised stores in Asia Pacific, and we distribute Denizentm products through franchised stores in Asia Pacific.
 
Levi Strauss & Co. was founded in San Francisco, California, in 1853 and incorporated in Delaware in 1971. We conduct our operations outside the United States through foreign subsidiaries owned directly or indirectly by Levi Strauss & Co. We have headquarter offices in San Francisco, Brussels and Singapore. Our corporate offices are located at Levi’s Plaza, 1155 Battery Street, San Francisco, California 94111, and our main telephone number is (415) 501-6000.
 
Our common stock is primarily owned by descendants of the family of Levi Strauss and their relatives.
 
Our Website — www.levistrauss.com — contains additional and detailed information about our history, our products and our commitments. Financial news and reports and related information about our company can be found at http://www.levistrauss.com/Financials. Our Website and the information contained on our Website are not part of this annual report and are not incorporated by reference into this annual report.


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Our Business Strategies
 
Our management team is actively investing in strategies to grow our business, respond to marketplace dynamics and build on our competitive strengths. Our key long-term strategies are:
 
  •  Build upon our brands’ leadership in jeans and khakis.  We intend to build upon our brand equity and our design and marketing expertise to expand the reach and appeal of our brands globally. We believe that our insights, innovation and market responsiveness enable us to create trend-right and trend-leading products and marketing programs that appeal to our existing consumer base, while also providing a solid foundation to enhance our appeal to under-served consumer segments. As an example, in 2010 we introduced our new Levi’s® Curve ID fit system for women. We also seek to further extend our brands’ leadership in jeans and khakis into product and pricing categories that we believe offer attractive opportunities for growth.
 
  •  Diversify and transform our wholesale business.  We intend to develop new wholesale opportunities based on targeted consumer segments and seek to continue to strengthen our relationship with existing wholesale customers. We are focused on generating competitive economics and engaging in collaborative volume, inventory and marketing planning to achieve mutual commercial success with our customers. Our goal is to be central to our wholesale customers’ success by using our brands and our strengths in product development and marketing to drive consumer traffic and demand to their stores.
 
  •  Accelerate growth through dedicated retail stores.  We continue to seek opportunities for strategic expansion of our dedicated store presence around the world. We believe dedicated full-price and outlet stores represent an attractive opportunity to establish incremental distribution and sales as well as to showcase the full breadth of our product offerings and to enhance our brands’ appeal. We aim to provide a compelling and brand-elevating consumer experience in our dedicated retail stores.
 
  •  Capitalize upon our global footprint.  Our global footprint is a key factor in the success of the above strategies. We intend to leverage our expansive global presence and local-market talent to drive growth globally and will focus on those markets that offer us the best opportunities for profitable growth, including an emphasis on fast-growing developing markets and their emerging middle-class consumers, such as the recent launch of our Denizentm brand in certain markets in our Asia Pacific region. We aim to identify global consumer trends, adapt successes from one market to another and drive growth across our brand portfolio, balancing the power of our global reach with local-market insight. Our recent appointment of newly-created global brand leadership positions is an important element of this strategic goal.
 
  •  Drive productivity to enable investment in initiatives intended to deliver sustained, incremental growth.  We are focused on deriving greater efficiencies in our operations by increasing cost effectiveness across our brands and support functions and undertaking projects to transform our supply chain and information systems. We intend to invest the benefits of these efforts into our businesses to drive growth and to continue to build sustainability and social responsibility into all aspects of our operations, including our global sourcing arrangements.
 
Our Brands and Products
 
We offer a broad range of products, including jeans, casual and dress pants, tops, skirts, jackets, footwear and related accessories. Across all of our brands, pants — including jeans, casual pants and dress pants — represented approximately 84%, 85% and 85% of our total units sold in each of fiscal years 2010, 2009 and 2008, respectively. Men’s products generated approximately 72%, 73% and 75% of our total net sales in each of fiscal years 2010, 2009 and 2008, respectively.
 
Levi’s® Brand
 
The Levi’s® brand epitomizes classic American style and effortless cool and is positioned as the original and definitive jeans brand. Since their inception in 1873, Levi’s® jeans have become one of the most recognizable garments in the world — reflecting the aspirations and earning the loyalty of people for generations. Consumers around the world instantly recognize the distinctive traits of Levi’s® jeans — the double arc of stitching, known as the Arcuate Stitching Design, and the red Tab Device, a fabric tab stitched into the back right pocket. Today, the


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Levi’s® brand continues to evolve, driven by its distinctive pioneering and innovative spirit. Our range of leading jeanswear and accessories for men, women and children is available in more than 110 countries, allowing individuals around the world to express their personal style.
 
The current Levi’s® product range includes:
 
  •  Levi’s® Red Tabtm Products.  These products are the foundation of the brand. They encompass a wide range of jeans and jeanswear offered in a variety of fits, fabrics, finishes, styles and price points intended to appeal to a broad spectrum of consumers. The line is anchored by the flagship 501® jean, the original and best-selling five-pocket jean in history. The Red Tabtm line also incorporates a full range of jeanswear fits and styles designed specifically for women. Sales of Red Tabtm products represented the majority of our Levi’s® brand net sales in all three of our regions in fiscal years 2010, 2009 and 2008.
 
  •  Premium Products.  In addition to Levi’s® Red Tabtm premium products available around the world, we offer an expanded range of high-end products. Our most premium Levi’s® jeanswear product lines are managed under one division based in Amsterdam which oversees the marketing and development of these global premium product lines.
 
Our Levi’s® brand products accounted for approximately 81%, 79% and 76% of our total net sales in fiscal 2010, 2009 and 2008, respectively, approximately half of which were generated in our Americas region.
 
Dockers® Brand
 
The Dockers® brand has embodied the spirit of khaki for 25 years. First introduced in 1986 as an alternative between jeans and dress pants, the Dockers® brand is positioned as the khaki authority with a range of khaki-inspired products. In 2009, the Dockers® brand launched the Wear the Pants campaign globally, with a focus on khakis’ masculinity and swagger, and reminding men that Dockers® is indeed the world’s best and most loved khaki brand. The focus on men and pants continues, as the brand modernizes the category and engages a new generation of men. The brand also offers a complete range of khakis and khaki-inspired styles for women, with products designed to flatter her figure and inspire her individual style.
 
Our Dockers® brand products accounted for approximately 15%, 16% and 18% of our total net sales in fiscal 2010, 2009 and 2008, respectively. Although the substantial majority of these net sales were in the Americas region, Dockers® brand products are sold in more than 50 countries.
 
Signature by Levi Strauss & Co.tm Brand and Denizentm Brand
 
In addition to our Levi’s® and Dockers® brands, we offer two brands focused on consumers who seek high-quality, affordable and fashionable jeanswear from a company they trust. We offer denim jeans, casual pants, tops and jackets in a variety of fits, fabrics and finishes for men, women and kids under the Signature by Levi Strauss & Co.tm brand through the mass retail channel in the United States and Canada and franchised stores in Asia Pacific. We also recently launched the Denizentm brand in Asia Pacific to reach consumers in the emerging middle class in developing markets who seek high-quality jeanswear and other fashion essentials at affordable prices. The product collection — including a variety of jeans, tops and accessories — complements active lifestyles and empowers consumers to express their aspirations, individuality and attitudes.
 
Signature by Levi Strauss & Co.tm brand and Denizentm brand products accounted for approximately 4%, 5% and 6% of our total net sales in fiscal years 2010, 2009 and 2008, respectively. Given that it launched late in 2010, Denizentm brand products sales had a limited impact on these numbers.
 
Licensing
 
The appeal of our brands across consumer groups and our global reach enable us to license our Levi’s® and Dockers® trademarks for a variety of product categories in multiple markets in each of our regions, including footwear, belts, wallets and bags, outerwear, sweaters, dress shirts, kidswear, sleepwear and hosiery. We also license our Signature by Levi Strauss & Co.tm and our Denizentm trademarks in various markets for certain product categories.


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In addition to product category licenses, we enter into regional license agreements with third parties to produce, market and distribute our products in several countries around the world, including various Latin American, Middle Eastern and Asia Pacific countries.
 
We enter into licensing agreements with our licensees covering royalty payments, product design and manufacturing standards, marketing and sale of licensed products, and protection of our trademarks. We require our licensees to comply with our code of conduct for contract manufacturing and engage independent monitors to perform regular on-site inspections and assessments of production facilities.
 
Sales, Distribution and Customers
 
We distribute our products through a wide variety of retail formats around the world, including chain and department stores, franchise stores dedicated to our brands, our own company-operated retail network, multi-brand specialty stores, mass channel retailers, and both company-operated and retailer websites.
 
Multi-brand Retailers
 
We seek to make our brands and products available where consumers shop, including offering products and assortments that are appropriately tailored for our wholesale customers and their retail consumers. Our products are also sold through authorized third-party Internet sites. Sales to our top ten wholesale customers accounted for approximately 33%, 36% and 37% of our total net revenues in fiscal years 2010, 2009 and 2008, respectively. No customer represented 10% or more of net revenues in any of these years, although our largest customer in 2010 and 2009, Kohl’s Corporation, accounted for nearly 10% of net revenues in each year. The loss of one of these or any major customer could have a material adverse effect on one or more of our segments or on the company as a whole.
 
Dedicated Stores
 
We believe retail stores dedicated to our brands are important for the growth, visibility, availability and commercial success of our brands, and they are an increasingly important part of our strategy for expanding distribution of our products in all three of our regions. Our brand-dedicated stores are either operated by us or by independent third parties such as franchisees and licensees. In addition to the dedicated stores, we maintain brand-dedicated websites that sell products directly to retail consumers.
 
Company-operated retail stores.  Our company-operated retail and online stores, including both full-price and outlet stores, generated approximately 15%, 11% and 8% of our net revenues in fiscal 2010, 2009 and 2008, respectively. As of November 28, 2010, we had 470 company-operated stores, predominantly Levi’s® stores, located in 27 countries across our three regions. We had 190 stores in the Americas, 173 stores in Europe and 107 stores in Asia Pacific. During 2010, we added 79 company-operated stores and closed 23 stores.
 
Franchised and other stores.  Franchised, licensed, or other forms of brand-dedicated stores operated by independent third parties sell Levi’s®, Dockers®, Signature by Levi Strauss & Co.tm and Denizentm products in markets outside the United States. There were approximately 1,800 of these stores as of November 28, 2010, and they are a key element of our international distribution. In addition to these stores, we consider our network of dedicated shop-in-shops located within department stores, which may be either operated directly by us or third parties, to be an important component of our retail distribution in international markets. Approximately 300 dedicated shop-in-shops were operated directly by us as of November 28, 2010.
 
Seasonality of Sales
 
We typically achieve our largest quarterly revenues in the fourth quarter, reflecting the “holiday” season, generally followed by the third quarter, reflecting the Fall or “back to school” season. In both 2010 and in 2009, our net revenues in the first, second, third and fourth quarters represented 23%, 22%, 25% and 30%, respectively, of our total net revenues for the 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


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quarter of fiscal years 2010, 2009 and 2008 consisted of 13 weeks, with the exception of the fourth quarter of 2008, which consisted of 14 weeks.
 
Marketing and Promotion
 
We root our marketing in globally consistent brand messages that reflect the unique attributes of our brands, including the Levi’s® brand as the original and definitive jeans brand and the Dockers® brand as world’s best and most loved khaki. We support our brands with a diverse mix of marketing initiatives to drive consumer demand.
 
We advertise around the world through a broad mix of media, including television, national publications, the Internet, cinema, billboards and other outdoor vehicles. We use other marketing vehicles, including event and music sponsorships, product placement in major motion pictures, television shows, music videos and leading fashion magazines, and alternative marketing techniques, including street-level events and similar targeted “viral” marketing activities.
 
We also use our Websites, www.levi.com, www.dockers.com, www.levistrausssignature.com, and www.denizen.com, as marketing vehicles in relevant markets to enhance consumer understanding of our brands and help consumers find and buy our products.
 
Sourcing and Logistics
 
Organization.  Our global sourcing and regional logistics organizations are responsible for taking a product from the design concept stage through production to delivery to our customers. Our objective is to leverage our global scale to achieve product development and sourcing efficiencies and reduce total product and distribution costs while maintaining our focus on local service levels and working capital management.
 
Product procurement.  We source nearly all of our products through independent contract manufacturers. The remainder are sourced from our company-operated manufacturing and finishing plants, including facilities for our innovation and development efforts that provide us with the opportunity to develop new jean styles and finishes. See “Item 2 — Properties” for more information about those manufacturing facilities.
 
Sources and availability of raw materials.  The principal fabrics used in our business are cotton, blends, synthetics and wools. The prices we pay our suppliers for our products are dependent in part on the market price for raw materials — primarily cotton — used to produce them. The price and availability of cotton may fluctuate substantially, depending on a variety of factors. For example, during the second half of fiscal year 2010, the price of cotton increased substantially as a result of various dynamics in the commodity markets. The majority of our products sold during that time had been sourced prior to the increase in cotton prices and therefore the cotton price increases had little impact during fiscal year 2010. We have already begun to raise product prices in an attempt to mitigate the impact of these higher costs. However, continued fluctuations in price may cause a decrease of our profitability if we are not able to respond with further product pricing actions or could impair our ability to meet customer demand in a timely manner.
 
Sourcing locations.  We use numerous independent contract manufacturers located throughout the world for the production and finishing of our garments. We conduct assessments of political, social, economic, trade, labor and intellectual property protection conditions in the countries in which we source our products before we place production in those countries and on an ongoing basis.
 
In 2010, we sourced products from contractors located in approximately 34 countries around the world. We sourced products in North and South Asia, South and Central America (including Mexico and the Caribbean), Europe and Africa. We expect to increase our sourcing from contractors located in Asia. No single country accounted for more than 20% of our sourcing in 2010.
 
Sourcing practices.  Our sourcing practices include these elements:
 
  •  We require all third-party contractors and subcontractors who manufacture or finish products for us to comply with our code of conduct relating to supplier working conditions as well as environmental and employment practices. We also require our licensees to ensure that their manufacturers comply with our requirements.


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  •  Our code of conduct covers employment practices such as wages and benefits, working hours, health and safety, working age and discriminatory practices, environmental matters such as wastewater treatment and solid waste disposal, and ethical and legal conduct.
 
  •  We regularly assess manufacturing and finishing facilities through periodic on-site facility inspections and improvement activities, including use of independent monitors to supplement our internal staff. We integrate review and performance results into our sourcing decisions.
 
We disclose the names and locations of our contract manufacturers to encourage collaboration among apparel companies in factory monitoring and improvement. We regularly evaluate and refine our code of conduct processes.
 
Logistics.  We own and operate dedicated distribution centers in a number of countries. For more information, see “Item 2 — Properties.” Distribution center activities include receiving finished goods from our contractors and plants, inspecting those products, preparing them for presentation at retail, and shipping them to our customers and to our own stores. Our distribution centers maintain a combination of replenishment and seasonal inventory from which we ship to our stores and wholesale customers. In certain locations around the globe we have consolidated our distribution centers to service multiple countries and brands. Our inventory significantly builds during peaks in seasonal shipping periods. We are constantly monitoring our inventory levels and adjusting them as necessary to meet market demand. In addition, we outsource some of our logistics activities to third-party logistics providers.
 
Competition
 
The worldwide apparel industry is highly competitive and fragmented. It is characterized by low barriers to entry, brands targeted at specific consumer segments, many regional and local competitors, and an increasing number of global competitors. Principal competitive factors include:
 
  •  developing products with relevant fits, finishes, fabrics, style and performance features;
 
  •  maintaining favorable brand recognition and appeal through strong and effective marketing;
 
  •  anticipating and responding to changing consumer demands in a timely manner;
 
  •  providing sufficient retail distribution, visibility and availability, and presenting products effectively at retail;
 
  •  delivering compelling value for the price; and
 
  •  generating competitive economics for wholesale customers, including retailers, franchisees, and distributors.
 
We face competition from a broad range of competitors at the worldwide, regional and local levels in diverse channels across a wide range of retail price points. Worldwide, a few of our primary competitors include vertically integrated specialty stores operated by such companies such as Gap Inc. and Inditex; jeanswear brands such as those marketed by VF Corporation, a competitor in multiple channels and product lines including through their Wrangler, Lee and Seven for All Mankind brands; and athletic wear companies such as adidas Group and Nike, Inc. In addition, each region faces local or regional competition, such as G-Star and Diesel in Europe; Pepe in Spain; Brax in Germany; UNIQLO in Asia Pacific; Edwin in Japan; Apple/Texwood in China; and retailers’ private or exclusive labels such as those from Wal-Mart Stores, Inc. (Faded Glory brand); Target Corporation (Mossimo and Merona brands); JC Penney (Arizona brand) and Macy’s (INC. brand) in the Americas. Many of our regional competitors are also seeking to expand globally through an expanded store footprint and the e-commerce channel. For more information on the factors affecting our competitive position, see “Item 1A — Risk Factors.”
 
Trademarks
 
We have more than 5,000 trademark registrations and pending applications in approximately 180 countries worldwide, and we acquire rights in new trademarks according to business needs. Substantially all of our global trademarks are owned by Levi Strauss & Co., the parent and U.S. operating company. We regard our trademarks as our most valuable assets and believe they have substantial value in the marketing of our products. The Levi’s®,


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Dockers® and 501® trademarks, the Arcuate Stitching Design, the Tab Device, the Two Horse® Design, the Housemark and the Wings and Anchor Design are among our core trademarks.
 
We protect these trademarks by registering them with the U.S. Patent and Trademark Office and with governmental agencies in other countries, particularly where our products are manufactured or sold. We work vigorously to enforce and protect our trademark rights by engaging in regular market reviews, helping local law enforcement authorities detect and prosecute counterfeiters, issuing cease-and-desist letters against third parties infringing or denigrating our trademarks, opposing registration of infringing trademarks, and initiating litigation as necessary. We currently are pursuing approximately 540 infringement matters around the world. We also work with trade groups and industry participants seeking to strengthen laws relating to the protection of intellectual property rights in markets around the world.
 
Employees
 
As of November 28, 2010, we employed approximately 16,200 people, approximately 8,900 of whom were located in the Americas, 4,800 in Europe, and 2,500 in Asia Pacific. Approximately 3,800 of our employees were associated with manufacturing of our products, 6,700 worked in retail, including seasonal employees, 1,700 worked in distribution and 4,000 were other non-production employees.
 
History and Corporate Citizenship
 
Our history and longevity are unique in the apparel industry. Our commitment to quality, innovation and corporate citizenship began with our founder, Levi Strauss, who infused the business with the principle of responsible commercial success that has been embedded in our business practices throughout our more than 150-year history. This mixture of history, quality, innovation and corporate citizenship contributes to the iconic reputations of our brands.
 
In 1853, during the California Gold Rush, Mr. Strauss opened a wholesale dry goods business in San Francisco that became known as “Levi Strauss & Co.” Seeing a need for work pants that could hold up under rough conditions, he and Jacob Davis, a tailor, created the first jean. In 1873, they received a U.S. patent for “waist overalls” with metal rivets at points of strain. The first product line designated by the lot number “501” was created in 1890.
 
In the 19th and early 20th centuries, our work pants were worn primarily by cowboys, miners and other working men in the western United States. Then, in 1934, we introduced our first jeans for women, and after World War II, our jeans began to appeal to a wider market. By the 1960s they had become a symbol of American culture, representing a unique blend of history and youth. We opened our export and international businesses in the 1950s and 1960s. In 1986, we introduced the Dockers® brand of casual apparel which revolutionized the concept of business casual.
 
Throughout this long history, we upheld our strong belief that we can help shape society through civic engagement and community involvement, responsible labor and workplace practices, philanthropy, ethical conduct, environmental stewardship and transparency. We have engaged in a “profits through principles” business approach from the earliest years of the business. Among our milestone initiatives over the years, we integrated our factories two decades prior to the U.S. civil rights movement and federally mandated desegregation, we developed a comprehensive supplier code of conduct requiring safe and healthy working conditions among our suppliers (a first of its kind for a multinational apparel company), and we offered full medical benefits to domestic partners of employees prior to other companies of our size, a practice that is widely accepted today.
 
Our Website — www.levistrauss.com — contains additional and detailed information about our history and corporate citizenship initiatives. Our Website and the information contained on our Website are not part of this annual report and are not incorporated by reference into this annual report.


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Item 1A.   RISK FACTORS
 
Risks Relating to the Industry in Which We Compete
 
Our revenues are influenced by general economic conditions.
 
Apparel is a cyclical industry that is dependent upon the overall level of consumer spending. Our wholesale customers anticipate and respond to adverse changes in economic conditions and uncertainty by reducing inventories and canceling orders. Our brand-dedicated stores are also affected by these conditions which may lead to a decline in consumer traffic to, and spending in, these stores. As a result, factors that diminish consumer spending and confidence in any of the markets in which we compete, particularly deterioration in general economic conditions, high levels and fear of unemployment, increases in energy costs or interest rates, housing market downturns, fear about and impact of pandemic illness, and other factors such as acts of war, acts of nature or terrorist or political events that impact consumer confidence, could reduce our sales and adversely affect our business and financial condition through their impact on our wholesale customers as well as its direct impact on us. For example, the global financial economic downturn that began in 2008 continued to impact consumer confidence and spending negatively. Even when the economy rebounds we do not anticipate that our wholesale customers will return to carrying the levels of inventory in our products as that prior to the downturn. These outcomes and behaviors have and may continue to adversely affect our business and financial condition.
 
Intense competition in the worldwide apparel industry could lead to reduced sales and prices.
 
We face a variety of competitive challenges from jeanswear and casual apparel marketers, fashion-oriented apparel marketers, athletic and sportswear marketers, vertically integrated specialty stores, and retailers of private-label products. Some of these competitors have greater financial and marketing resources than we do and may be able to adapt to changes in consumer preferences or retail requirements more quickly, devote greater resources to the building and sustaining of their brand equity and the marketing and sale of their products, or adopt more aggressive pricing policies than we can. As a result, we may not be able to compete as effectively with them and may not be able to maintain or grow the equity of and demand for our brands. Increased competition in the worldwide apparel industry — including from the international expansion and increased e-commerce presence of vertically integrated specialty stores, from department stores, chain stores and mass channel retailers developing exclusive labels, and from well-known and successful non-apparel brands (such as athletic wear marketers) expanding into jeans and casual apparel — could reduce our sales and adversely affect our business and financial condition.
 
The success of our business depends upon our ability to offer innovative and updated products at attractive price points.
 
The worldwide apparel industry is characterized by constant product innovation due to changing fashion trends and consumer preferences and by the rapid replication of new products by competitors. As a result, our success depends in large part on our ability to develop, market and deliver innovative and stylish products at a pace, intensity, and price competitive with other brands in our segments. We must also have the agility to respond to changes in consumer preference such as the consumer shift in Japan away from premium-priced brands to lower-priced fast-fashion products. In addition, we must create products at a range of price points that appeal to the consumers of both our wholesale customers and our dedicated retail stores. Failure on our part to regularly and rapidly develop innovative and stylish products and update core products could limit sales growth, adversely affect retail and consumer acceptance of our products, negatively impact the consumer traffic in our dedicated retail stores, leave us with a substantial amount of unsold inventory which we may be forced to sell at discounted prices, and impair the image of our brands. Moreover, our newer products may not produce as high a gross margin as our traditional products and thus may have an adverse effect on our overall margins and profitability.
 
The worldwide apparel industry is subject to ongoing pricing pressure.
 
The apparel market is characterized by low barriers to entry for both suppliers and marketers, global sourcing through suppliers located throughout the world, trade liberalization, continuing movement of product sourcing to lower cost countries, and the ongoing emergence of new competitors with widely varying strategies and resources.


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These factors as well as the impact of increasing prices of raw materials, such as cotton which has been subject to significant price variability in recent months, have contributed, and may continue to contribute to, ongoing pricing pressure throughout the supply chain. This pressure has had and may continue to have the following effects:
 
  •  require us to introduce lower-priced products or provide new or enhanced products at the same prices;
 
  •  require us to raise wholesale prices on existing products resulting in decreased sales volume;
 
  •  result in reduced gross margins across our product lines;
 
  •  increase retailer demands for allowances, incentives and other forms of economic support; and
 
  •  increase pressure on us to reduce our production costs and our operating expenses.
 
Any of these factors could adversely affect our business and financial condition.
 
Increases in the price of raw materials or their reduced availability could increase our cost of goods and negatively impact our financial results.
 
The principal materials used in our business are cotton, blends, synthetics and wools. The prices we pay our suppliers for our products are dependent in part on the market price for raw materials — primarily cotton — used to produce them. The price and availability of cotton may fluctuate substantially, depending on a variety of factors, including demand, acreage devoted to cotton crops and crop yields, weather, supply conditions, transportation costs, energy prices, work stoppages, government regulation and government policy, economic climates, market speculation and other unpredictable factors. Any and all of these factors may be exacerbated by global climate change. During the course of the second half of fiscal year 2010, the price of cotton increased substantially as a result of various dynamics in the commodity markets. Fluctuations in the price and availability of raw materials have not materially affected our cost of goods in recent years, but continued increases in raw material costs, unless sufficiently offset with our pricing actions, might cause a decrease in our profitability; while any related pricing actions might cause a decline in our sales volume. Moreover, any decrease in the availability of cotton could impair our ability to meet our production requirements in a timely manner. Both the increased cost and lower availability of cotton may also have an adverse impact on our cash and working capital needs as well as those of our suppliers.
 
Our business is subject to risks associated with sourcing and manufacturing overseas.
 
We import both raw materials and finished garments into all of our operating regions. Our ability to import products in a timely and cost-effective manner may be affected by conditions at ports or issues that otherwise affect transportation and warehousing providers, such as port and shipping capacity, labor disputes and work stoppages, political unrest, severe weather, or security requirements in the United States and other countries. These issues could delay importation of products or require us to locate alternative ports or warehousing providers to avoid disruption to our customers. These alternatives may not be available on short notice or could result in higher transportation costs, which could have an adverse impact on our business and financial condition.
 
Substantially all of our import operations are subject to customs and tax requirements and to tariffs and quotas set by governments through mutual agreements or bilateral actions. In addition, the countries in which our products are manufactured or imported may from time to time impose additional quotas, duties, tariffs or other restrictions on our imports or adversely modify existing restrictions. Adverse changes in these import costs and restrictions, or our suppliers’ failure to comply with customs regulations or similar laws, could harm our business.
 
Our operations are also subject to the effects of international trade agreements and regulations such as the North American Free Trade Agreement, the Dominican-Republic Central America Free Trade Agreement, the Egypt Qualified Industrial Zone program, and the activities and regulations of the World Trade Organization. Although generally these trade agreements have positive effects on trade liberalization, sourcing flexibility and cost of goods by reducing or eliminating the duties and/or quotas assessed on products manufactured in a particular country, trade agreements can also impose requirements that adversely affect our business, such as setting quotas on products that may be imported from a particular country into our key markets such as the United States or the European Union.


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Risks Relating to Our Business
 
Our net sales for fiscal year 2010 were below our peak level of 1996, and actions we have taken, and may take in the future, to address net sales growth and other issues facing our business may not be successful over the long term.
 
Our net sales were $7.1 billion in 1996, fell to $4.1 billion in 2003, and were $4.3 billion in 2010. We face intense competition, customer financial hardship and consolidation, increased focus by retailers on private-label offerings, expansion of and growth in new distribution sales channels, declining sales of traditional core products and continuing pressure on both wholesale and retail pricing. Our ability to successfully compete could be impaired by our debt and interest payments, which reduces our operating flexibility and could limit our ability to respond to developments in the worldwide apparel industry as effectively as competitors that do not have comparable debt levels. In addition, the strategic, operations and management changes we have made in recent years to improve our business and drive future sales growth may not be successful over the long term.
 
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 33% and 36% of total net revenues in 2010 and 2009, respectively. Our largest customer in both 2010 and 2009, Kohl’s Corporation, accounted for nearly 10% of net revenues in each year. While we have long-standing relationships with our wholesale customers, we do not have long-term contracts with them. As a result, purchases generally occur on an order-by-order basis, and the relationship, as well as particular orders, can generally be terminated by either party at any time. If any major customer decreases or ceases its purchases from us, reduces the floor space, assortments, fixtures or advertising for our products or changes its manner of doing business with us for any reason, such actions could adversely affect our business and financial condition.
 
For example, our wholesale customers are subject to the fluctuations in general economic cycles and the current global economic conditions which are impacting consumer spending, and our customers may also be affected by the credit environment, which may impact their ability to access the credit necessary to operate their business. The performance and financial condition of a wholesale customer may cause us to alter our business terms or to cease doing business with that customer, which could in turn adversely affect our own business and financial condition. In addition, our wholesale customers may change their apparel strategies or reduce fixture spaces and purchases of brands that do not meet their strategic requirements, leading to a loss of sales for our products at those customers.
 
In addition, the retail industry in the United States has experienced substantial consolidation in recent years, and further consolidation may occur. Consolidation in the retail industry typically results in store closures, centralized purchasing decisions, increased customer leverage over suppliers, greater exposure for suppliers to credit risk and an increased emphasis by retailers on inventory management and productivity, any of which can, and have, adversely impacted our net revenues, margins and ability to operate efficiently.
 
Our introduction of a new brand creates risks for us and may not be successful.
 
In August 2010, we launched the Denizentm brand in Asia Pacific to reach consumers in the emerging middle class in developing markets who seek high-quality jeanswear and other fashion essentials at affordable prices. The product will continue to roll out through 2011. We face a number of risks with respect to this new offering. Launching and growing a new brand involves considerable investment, particularly in the inventory necessary to meet product launch as well as ongoing service requirements, and advertising. As a result, we will have increases in working capital requirements associated with the new brand and may experience increased operating costs where we transition from the Signature brand to the Denizentm brand. The required investments are initially made with limited information regarding actual consumer acceptance of the brand, as we are entering into a new business with no history of performance and no guarantees of a successful response in the marketplace. Additionally, our relationships with our current customers may be adversely affected if they react negatively to our selling the brand


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through a distribution channel other than their own. Any of these risks could result in decreased sales, additional expenses and increased working capital requirements, which may adversely affect our business and financial condition.
 
We may be unable to maintain or increase our sales through our primary distribution channels.
 
In the United States, chain stores and department stores are the primary distribution channels for our Levi’s® and Dockers® products, and the mass channel is the primary distribution channel for Signature products. Outside the United States, department stores and independent jeanswear retailers have traditionally been our primary distribution channels.
 
We may be unable to maintain or increase sales of our products through these distribution channels for several reasons, including the following:
 
  •  The retailers in these channels maintain — and seek to grow — substantial private-label and exclusive offerings as they strive to differentiate the brands and products they offer from those of their competitors.
 
  •  These retailers may also change their apparel strategies and reduce fixture spaces and purchases of brands misaligned with their strategic requirements.
 
  •  Other channels, including vertically integrated specialty stores, account for a substantial portion of jeanswear and casual wear sales. In some of our mature markets, these stores have already placed competitive pressure on our primary distribution channels, and many of these stores are now looking to our developing markets to grow their business.
 
Further success by retailer private-labels and vertically integrated specialty stores may continue to adversely affect the sales of our products across all channels, as well as the profitability of our brand-dedicated stores. Additionally, our ability to secure or maintain retail floor space, market share and sales in these channels depends on our ability to offer differentiated products and to increase retailer profitability on our products, which could have an adverse impact on our margins.
 
During the past several years, we have experienced significant changes in senior management and our board. The success of our business depends on our ability to attract and retain qualified and effective senior management and board leadership.
 
The composition of our senior management team and the board has changed significantly in recent years. Recent changes in our senior management team include the departure of Armin Broger, who had been Senior Vice President and President, Levi Strauss Europe, in November 2010, and Jaime Cohen Szulc, Chief Marketing Officer — Levi’s®, in August 2010. In addition, on September 21, 2010, we announced that three members of our management team were changing their roles to assume global responsibility for all product, marketing and business operations for the Levi’s®, Dockers®, and Denizentm brands. Specifically, Robert L. Hanson was appointed Executive Vice President and President, Global Levi’s®, James Calhoun was appointed Executive Vice President and President, Global Dockers®, and Aaron Beng-Keong Boey was appointed Executive Vice President and President, Global Denizentm. Our board added two new members in 2010: Fernando Aguirre joined on October 1, 2010, and Robert A. Eckert on May 10, 2010. Peter A. Georgescu resigned from our board in July, 2010. In total, half of our current Board joined in 2007 or later. Collective or individual changes in our senior management group or board membership could have an adverse effect on our ability to determine and implement our strategies, which in turn may adversely affect our business and results of operations.
 
Increasing the number of company-operated stores will require us to enhance our capabilities and increase our expenditures and will increasingly impact our financial performance.
 
Although our business is substantially a wholesale business, we operated 470 retail stores as of November 28, 2010. As part of our objective to accelerate growth through dedicated retail stores, we plan to continue to strategically open company-operated retail stores. The results from our retail network may be adversely impacted if we do not find ways to generate sufficient sales from our existing and new company-operated stores, which may be particularly challenging in light of the ongoing global economic downturn. Like other retail operators, we


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regularly assess store performance and as part of that review we may determine to close or impair the value of underperforming stores in the future.
 
Any increase in the number of company-operated stores will require us to further develop our retailing skills and capabilities. We will be required to enter into additional leases, which will cause an increase in our rental expenses and off-balance sheet rental obligations and our capital expenditures for retail locations. These commitments may be costly to terminate, and these investments may be difficult to recapture if we decide to close stores or change our strategy. We must also offer a broad product assortment (especially women’s and tops), appropriately manage retail inventory levels, install and operate effective retail systems, execute effective pricing strategies, and integrate our stores into our overall business mix. Finally, we will need to hire and train additional qualified employees and incur additional costs to operate these stores, which will increase our operating expenses. These factors, including those relating to securing retail space and management talent, are even more challenging considering that many of our competitors either have large company-operated retail operations today or are seeking to expand substantially their retail presence. If the actions we are taking to expand our retail network are not successful on a sustained basis, our margins, results of operations and ability to grow may be adversely affected.
 
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 making changes to legacy systems, replacing legacy systems with successor systems with new functionality and acquiring new systems with new functionality. These types of activities subject us to inherent costs and risks associated with replacing and changing these systems, including impairment of our ability to fulfill customer orders, potential disruption of our internal control structure, substantial capital expenditures, additional administration and operating expenses, retention of sufficiently skilled personnel to implement and operate the new systems, demands on management time, and other risks and costs of delays or difficulties in transitioning to new systems or of integrating new systems into our current systems. Our system implementations may not result in productivity improvements at a level that outweighs the costs of implementation, or at all. In addition, the implementation of new technology systems may cause disruptions in our business operations and have an adverse effect on our business and operations, if not anticipated and appropriately mitigated.
 
We currently rely on contract manufacturing of our products. Our inability to secure production sources meeting our quality, cost, working conditions and other requirements, or failures by our contractors to perform, could harm our sales, service levels and reputation.
 
We source approximately 95% of our products from independent contract manufacturers who purchase fabric and make our products and may also provide us with design and development services. As a result, we must locate and secure production capacity. We depend on independent manufacturers to maintain adequate financial resources, including access to sufficient credit, secure a sufficient supply of raw materials, and maintain sufficient development and manufacturing capacity in an environment characterized by continuing cost pressure and demands for product innovation and speed-to-market. In addition, we do not have material long-term contracts with any of our independent manufacturers, and these manufacturers generally may unilaterally terminate their relationship with us at any time. Finally, we may experience capability-building and infrastructure challenges as we expand our sourcing to new contractors throughout the world.
 
Our suppliers are subject to the fluctuations in general economic cycles, and the global economic conditions may impact their ability to operate their business. They may also be impacted by the increasing costs of raw materials, labor and distribution, resulting in demands for less attractive contract terms or an inability for them to meet our requirements or conduct their own businesses. The performance and financial condition of a supplier may cause us to alter our business terms or to cease doing business with a particular supplier, or change our sourcing practices generally, which could in turn adversely affect our own business and financial condition.
 
Our dependence on contract manufacturing could subject us to difficulty in obtaining timely delivery of products of acceptable quality. A contractor’s failure to ship products to us in a timely manner or to meet our quality standards, or interference with our ability to receive shipments due to factors such as port or transportation conditions, could cause us to miss the delivery date requirements of our customers. Failing to make timely deliveries


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may cause our customers to cancel orders, refuse to accept deliveries, impose non-compliance charges, demand reduced prices, or reduce future orders, any of which could harm our sales and margins.
 
We require contractors to meet our standards in terms of working conditions, environmental protection, security and other matters before we are willing to place business with them. As such, we may not be able to obtain the lowest-cost production. In addition, the labor and business practices of apparel manufacturers have received increased attention from the media, non-governmental organizations, consumers and governmental agencies in recent years. Any failure by our independent manufacturers to adhere to labor or other laws or appropriate labor or business practices, and the potential litigation, negative publicity and political pressure relating to any of these events, could harm our business and reputation.
 
We are a global company with significant revenues coming from our Europe and Asia Pacific businesses, which exposes us to political and economic risks as well as the impact of foreign currency fluctuations.
 
We generated approximately 42%, 43% and 44% of our net revenues from our Europe and Asia Pacific businesses in 2010, 2009 and 2008, respectively. A substantial amount of our products came from sources outside of the country of distribution. As a result, we are subject to the risks of doing business outside of the United States, including:
 
  •  currency fluctuations, which have impacted our results of operations significantly in recent years;
 
  •  changes in tariffs and taxes;
 
  •  regulatory restrictions on repatriating foreign funds back to the United States;
 
  •  less protective foreign laws relating to intellectual property; and
 
  •  political, economic and social instability.
 
The functional currency for most of our foreign operations is the applicable local currency. As a result, fluctuations in foreign currency exchange rates affect the results of our operations and the value of our foreign assets and liabilities, including debt, which in turn may benefit or adversely affect results of operations and cash flows and the comparability of period-to-period results of operations. In addition, we engage in hedging activities to manage our foreign currency exposures resulting from certain product sourcing activities, some intercompany sales, foreign subsidiaries’ royalty payments, earnings repatriations, net investment in foreign operations and funding activities. However, our earnings may be subject to volatility since we do not fully hedge our foreign currency exposures and we are required to record in income the changes in the market values of our exposure management instruments that we do not designate or that do not qualify for hedge accounting treatment. Changes in the value of the relevant currencies may affect the cost of certain items required in our operations as the majority of our sourcing activities are conducted in U.S. Dollars. Changes in currency exchange rates may also affect the relative prices at which we and foreign competitors sell products in the same market. Foreign policies and actions regarding currency valuation could result in actions by the United States and other countries to offset the effects of such fluctuations. Recently, there has been a high level of volatility in foreign currency exchange rates and that level of volatility may continue and may adversely impact our business or financial conditions.
 
Furthermore, due to our global operations, we are subject to numerous domestic and foreign laws and regulations affecting our business, such as those related to labor, employment, worker health and safety, antitrust and competition, environmental protection, consumer protection, import/export, and anti-corruption, including but not limited to the Foreign Corrupt Practices Act which prohibits giving anything of value intended to influence the awarding of government contracts. Although we have put into place policies and procedures aimed at ensuring legal and regulatory compliance, our employees, subcontractors and agents could take actions that violate these requirements. Violations of these regulations could subject us to criminal or civil enforcement actions, any of which could have a material adverse effect on our business.
 
As a global company, we are exposed to risks of doing business in foreign jurisdictions and risks relating to U.S. policy with respect to companies doing business in foreign jurisdictions. Legislation or other changes in the U.S. tax laws could increase our U.S. income tax liability and adversely affect our after-tax profitability.


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We have made changes in our logistics operations in recent years and continue to look for opportunities to increase efficiencies.
 
We take actions to optimize our distribution network from time to time and will continue to seek additional opportunities for further improvement. Changes in logistics and distribution activities could result in temporary shipping disruptions and increased expense as we bring new arrangements to full operation, which could have an adverse effect on our results of operations.
 
Most of the employees in our production and distribution facilities are covered by collective bargaining agreements, and any material job actions could negatively affect our results of operations.
 
In North America, most of our distribution employees are covered by various collective bargaining agreements, and outside North America, most of our production and distribution employees are covered by either industry-sponsored and/or state-sponsored collective bargaining mechanisms. Any work stoppages or other job actions by these employees could harm our business and reputation.
 
Our licensees may not comply with our product quality, manufacturing standards, marketing and other requirements.
 
We license our trademarks to third parties for manufacturing, marketing and distribution of various products. While we enter into comprehensive agreements with our licensees covering product design, product quality, sourcing, manufacturing, marketing and other requirements, our licensees may not comply fully with those agreements. Non-compliance could include marketing products under our brand names that do not meet our quality and other requirements or engaging in manufacturing practices that do not meet our supplier code of conduct. These activities could harm our brand equity, our reputation and our business.
 
Our success depends on the continued protection of our trademarks and other proprietary intellectual property rights.
 
Our trademarks and other intellectual property rights are important to our success and competitive position, and the loss of or inability to enforce trademark and other proprietary intellectual property rights could harm our business. We devote substantial resources to the establishment and protection of our trademark and other proprietary intellectual property rights on a worldwide basis. Our efforts to establish and protect our trademark and other proprietary intellectual property rights may not be adequate to prevent imitation of our products by others or to prevent others from seeking to block sales of our products. Unauthorized copying of our products or unauthorized use of our trademarks or other proprietary rights may not only erode sales of our products but may also cause significant damage to our brand names and our ability to effectively represent ourselves to our customers, contractors, suppliers and/or licensees. Moreover, others may seek to assert rights in, or ownership of, our trademarks and other proprietary intellectual property, and we may not be able to successfully resolve those claims. In addition, the laws and enforcement mechanisms of some foreign countries may not allow us to protect our proprietary rights to the same extent as we are able to in the United States and other countries.
 
We have substantial liabilities and cash requirements associated with postretirement benefits, pension and our deferred compensation plans.
 
Our postretirement benefits, pension, and our deferred compensation plans result in substantial liabilities on our balance sheet. These plans and activities have and will generate substantial cash requirements for us, and these requirements may increase beyond our expectations in future years based on changing market conditions. The difference between plan obligations and assets, or the funded status of the plans, is a significant factor in determining the net periodic benefit costs of our pension plans and the ongoing funding requirements of those plans. Many variables, such as changes in interest rates, mortality rates, health care costs, investment returns, and/or the market value of plan assets can affect the funded status of our defined benefit pension, other postretirement, and postemployment benefit plans and cause volatility in the net periodic benefit cost and future funding requirements of the plans. Our current estimates indicate our future annual funding requirements may increase to $135 million in 2011. While actual results may differ from these estimates, the increased pension expense and related funding may


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extend into future years if current market conditions persist. Plan liabilities may impair our liquidity, have an unfavorable impact on our ability to obtain financing and place us at a competitive disadvantage compared to some of our competitors who do not have such liabilities and cash requirements.
 
Earthquakes or other events outside of our control may damage our facilities or the facilities of third parties on which we depend.
 
Our corporate headquarters are located in California near major geologic faults that have experienced earthquakes in the past. An earthquake or other natural disaster or the loss of power caused by power shortages could disrupt operations or impair critical systems. Any of these disruptions or other events outside of our control could affect our business negatively, harming our operating results. In addition, if any of our other facilities, including our manufacturing, finishing or distribution facilities or our company-operated or franchised stores, or the facilities of our suppliers or customers, is affected by earthquakes, power shortages, floods, monsoons, terrorism, epidemics or other events outside of our control, our business could suffer.
 
Risks Relating to Our Debt
 
We have debt and interest payment requirements at a level that may restrict our future operations.
 
As of November 28, 2010, we had approximately $1.9 billion of debt, of which all but approximately $108.3 million was unsecured, and we had $369.0 million of additional borrowing capacity under our senior secured revolving credit facility. Our credit facility matures in 2012, at which time our total borrowings outstanding under the credit facility become due. Our debt requires us to dedicate a substantial portion of any cash flow from operations to the payment of interest and principal due under our debt, which will reduce funds available for other business purposes, and result in us having lower net income than we would otherwise have had. It could also have important adverse consequences to holders of our securities. Our ability to successfully compete could be impaired by our debt and interest expense; for example, our debt and interest levels could:
 
  •  increase our vulnerability to general adverse economic and industry conditions;
 
  •  limit our flexibility in planning for or reacting to changes in our business and industry;
 
  •  place us at a competitive disadvantage compared to some of our competitors that have less debt; and
 
  •  limit our ability to obtain additional financing required to fund working capital and capital expenditures and for other general corporate purposes.
 
In addition, borrowings under our senior secured revolving credit facility and our unsecured term loan bear interest at variable rates of interest. As a result, increases in market interest rates would require a greater portion of our cash flow to be used to pay interest, which could further hinder our operations and affect the trading price of our debt securities. Our ability to satisfy our obligations and to reduce our total debt depends on our future operating performance and on economic, financial, competitive and other factors, many of which are beyond our control.
 
The downturn in the economy and the volatility in the capital markets could limit our ability to access capital or could increase our costs of capital.
 
We experienced a dramatic downturn in the U.S. and global economy and disruption in the credit markets, which began in 2008. Although we have had continued solid operating cash flow, any continued or repeated downturn or disruption in the credit markets may reduce sources of liquidity available to us. We can provide no assurance that we will continue to meet our capital requirements from our cash resources, future cash flow and external sources of financing, particularly if current market or economic conditions continue or deteriorate further. We manage cash and cash equivalents in various institutions at levels beyond FDIC coverage limits, and we purchase investments not guaranteed by the FDIC. Accordingly, there may be a risk that we will not recover the full principal of our investments or that their liquidity may be diminished. We rely on multiple financial institutions to provide funding pursuant to existing credit agreements, and those institutions may not be able to meet their obligations to provide funding in a timely manner, or at all, when we require it. The cost of or lack of available credit


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could impact our ability to develop sufficient liquidity to maintain or grow our business, which in turn may adversely affect our business and results of operations.
 
Restrictions in our notes indentures, unsecured term loan and senior secured revolving credit facility may limit our activities, including dividend payments, share repurchases and acquisitions.
 
The indentures relating to our senior unsecured notes, our Euro notes, our Yen-denominated Eurobonds, our unsecured term loan and our senior secured revolving credit facility contain restrictions, including covenants limiting our ability to incur additional debt, grant liens, make acquisitions and other investments, prepay specified debt, consolidate, merge or acquire other businesses, sell assets, pay dividends and other distributions, repurchase stock, and enter into transactions with affiliates. These restrictions, in combination with our leveraged condition, may make it more difficult for us to successfully execute our business strategy, grow our business or compete with companies not similarly restricted.
 
If our foreign subsidiaries are unable to distribute cash to us when needed, we may be unable to satisfy our obligations under our debt securities, which could force us to sell assets or use cash that we were planning to use elsewhere in our business.
 
We conduct our international operations through foreign subsidiaries, and therefore we depend upon funds from our foreign subsidiaries for a portion of the funds necessary to meet our debt service obligations. We only receive the cash that remains after our foreign subsidiaries satisfy their obligations. Any agreements our foreign subsidiaries enter into with other parties, as well as applicable laws and regulations limiting the right and ability of non-U.S. subsidiaries and affiliates to pay dividends and remit cash to affiliated companies, may restrict the ability of our foreign subsidiaries to pay dividends or make other distributions to us. If those subsidiaries are unable to pass on the amount of cash that we need, we will be unable to make payments on our debt obligations, which could force us to sell assets or use cash that we were planning on using elsewhere in our business, which could hinder our operations and affect the trading price of our debt securities.
 
Our corporate governance structure may result in actions that conflict with our creditors’ interests as holders of our debt securities.
 
All of our common stock is owned by a voting trust described under “Item 12 — Security Ownership of Certain Beneficial Owners and Management and Related Stockholder Matters.” Four voting trustees have the exclusive ability to elect and remove directors, amend our by-laws and take other actions which would normally be within the power of stockholders of a Delaware corporation. The voting trust is subject to expiration on April 15, 2011. As a result, the voting powers currently held by the voting trustees will shift to the hands of all stockholders and the stockholders will engage in voting procedures that they have not had available to them in 15 years. This new engagement in stockholder voting procedures may create distractions for management or the board which may make it more difficult for us to successfully execute our business strategy, grow our business or compete with companies not similarly structured.
 
Item 1B.   UNRESOLVED STAFF COMMENTS
 
Not applicable.


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Item 2.   PROPERTIES
 
We conduct manufacturing, distribution and administrative activities in owned and leased facilities. We operate three manufacturing-related facilities abroad and ten distribution-only centers around the world. We have renewal rights for most of our property leases. We anticipate that we will be able to extend these leases on terms satisfactory to us or, if necessary, locate substitute facilities on acceptable terms. We believe our facilities and equipment are in good condition and are suitable for our needs. Information about our key operating properties in use as of November 28, 2010, is summarized in the following table:
 
         
Location
 
Primary Use
 
Leased/Owned
 
Americas
       
Hebron, KY
  Distribution   Owned
Canton, MS
  Distribution   Owned
Henderson, NV
  Distribution   Owned
Westlake, TX
  Data Center   Leased
Etobicoke, Canada
  Distribution   Owned
Naucalpan, Mexico
  Distribution   Leased
Cuautitlan, Mexico
  Distribution   Leased
         
Europe
       
Plock, Poland
  Manufacturing and Finishing   Leased(1)
Northhampton, U.K.
  Distribution   Owned
Sabadell, Spain
  Distribution   Leased
Corlu, Turkey
  Manufacturing, Finishing and Distribution   Owned
         
Asia Pacific
       
Adelaide, Australia
  Distribution   Leased
Cape Town, South Africa
  Manufacturing, Finishing and Distribution   Leased
Hiratsuka Kanagawa, Japan
  Distribution   Owned(2)
 
 
(1) Building and improvements are owned but subject to a ground lease.
 
(2) Owned by our 84%-owned Japanese subsidiary.
 
Our global headquarters and the headquarters of our Americas region are both located in leased premises in San Francisco, California. Our Europe and Asia Pacific headquarters are located in leased premises in Brussels, Belgium and Singapore, respectively. As of November 28, 2010, we also leased or owned 104 administrative and sales offices in 40 countries, as well as leased a small number of warehouses in seven countries. We own or lease several facilities that are no longer in operation that we are working to sell or sublease.
 
In addition, as of November 28, 2010, we had 470 company-operated retail and outlet stores in leased premises in 27 countries. We had 190 stores in the Americas region, 173 stores in the Europe region and 107 stores in the Asia Pacific region.
 
Item 3.   LEGAL PROCEEDINGS
 
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 of these pending legal proceedings that will have a material impact on our financial condition, results of operations or cash flows.
 
Item 4.   SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS
 
No matters were submitted to a vote of our security holders during the fourth quarter of the fiscal year ended November 28, 2010.


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PART II
 
Item 5.   MARKET FOR REGISTRANT’S COMMON EQUITY, RELATED STOCKHOLDER MATTERS AND ISSUER PURCHASES OF EQUITY SECURITIES
 
All outstanding shares of our common stock are deposited in a voting trust, a legal arrangement that transfers the voting power of the shares to a trustee or group of trustees. The four voting trustees are Miriam L. Haas, Peter E. Haas Jr., Robert D. Haas and Stephen C. Neal, three of whom are also directors. The voting trustees have the exclusive ability to elect and remove directors, amend our by-laws and take certain other actions which would normally be within the power of stockholders of a Delaware corporation. Our equity holders, who, as a result of the voting trust, legally hold “voting trust certificates,” not stock, retain the right to direct the trustees on specified mergers and business combinations, liquidations, sales of substantially all of our assets and specified amendments to our certificate of incorporation.
 
The voting trust is subject to expiration on April 15, 2011. As a result, the voting trust certificates will be replaced by certificates for shares of common stock, and the voting powers currently held by the voting trustees will shift to the hands of all stockholders, and the stockholders will engage in voting procedures directly as voting matters arise.
 
Our common stock and the voting trust certificates are not publicly held or traded. All shares and the voting trust certificates are subject to a stockholders’ agreement. The agreement, which expires in April 2016, limits the transfer of shares and certificates to other holders, family members, specified charities and foundations and back to the Company. The agreement does not provide for registration rights or other contractual devices for forcing a public sale of shares or certificates, or other access to liquidity. The scheduled expiration date of the stockholders’ agreement is five years later than that of the voting trust agreement in order to permit an orderly transition from effective control by the voting trust trustees to direct control by the stockholders.
 
As of January 31, 2011, there were 213 record holders of voting trust certificates. Our shares are not registered on any national securities exchange, there is no established public trading market for our shares and none of our shares are convertible into shares of any other class of stock or other securities.
 
We paid cash dividends of $20 million on our common stock on May 12, 2010, and May 6, 2009. Subsequent to the fiscal year-end, on December 9, 2010, our board of directors declared a cash dividend of $20 million. Please see Note 14 to our audited consolidated financial statements included in this report for more information. 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 our board of directors depending upon, among other factors, the tax impact to the dividend recipients, our financial condition and compliance with the terms of our debt agreements. Our senior secured revolving credit facility and the indentures governing our senior unsecured notes limit our ability to pay dividends. For more detailed information about these limitations, see Note 6 to our audited consolidated financial statements included in this report.
 
We repurchased 2,217 shares of our common stock during the fourth quarter of the fiscal year ended November 28, 2010, in connection with the exercise of put rights under our 2006 Equity Incentive Plan. For more detailed information, see Note 11 to our audited consolidated financial statements included in this report.


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Item 6.   SELECTED FINANCIAL DATA
 
The following table sets forth our selected historical consolidated financial data which are derived from our consolidated financial statements for 2010, 2009, 2008, 2007 and 2006. The financial data set forth below should be read in conjunction with, and are qualified by reference to, “Item 7 — Management’s Discussion and Analysis of Financial Condition and Results of Operations,” our audited consolidated financial statements for 2010, 2009 and 2008 and the related notes to those audited consolidated financial statements, included elsewhere in this report.
 
                                         
    Year Ended
    Year Ended
    Year Ended
    Year Ended
    Year Ended
 
    November 28,
    November 29,
    November 30,
    November 25,
    November 26,
 
    2010     2009     2008     2007     2006  
    (Dollars in thousands)  
 
Statements of Income Data:
                                       
Net sales
  $ 4,325,908     $ 4,022,854     $ 4,303,075     $ 4,266,108     $ 4,106,572  
Licensing revenue
    84,741       82,912       97,839       94,821       86,375  
                                         
Net revenues
    4,410,649       4,105,766       4,400,914       4,360,929       4,192,947  
Cost of goods sold
    2,187,726       2,132,361       2,261,112       2,318,883       2,216,562  
                                         
Gross profit
    2,222,923       1,973,405       2,139,802       2,042,046       1,976,385  
Selling, general and administrative expenses
    1,841,562       1,595,317       1,614,730       1,401,005       1,362,726  
                                         
Operating income
    381,361       378,088       525,072       641,041       613,659  
Interest expense
    (135,823 )     (148,718 )     (154,086 )     (215,715 )     (250,637 )
Loss on early extinguishment of debt
    (16,587 )           (1,417 )     (63,838 )     (40,278 )
Other income (expense), net
    6,647       (39,445 )     (303 )     15,047       24,136  
                                         
Income before taxes
    235,598       189,925       369,266       376,535       346,880  
Income tax expense (benefit)(1)
    86,152       39,213       138,884       (84,759 )     106,159  
                                         
Net income
    149,446       150,712       230,382       461,294       240,721  
Net loss (income) attributable to noncontrolling interest
    7,057       1,163       (1,097 )     (909 )     (1,718 )
                                         
Net income attributable to Levi Strauss & Co. 
  $ 156,503     $ 151,875     $ 229,285     $ 460,385     $ 239,003  
                                         
Statements of Cash Flow Data:
                                       
Net cash flow provided by (used for):
                                       
Operating activities
  $ 146,274     $ 388,783     $ 224,809     $ 302,271     $ 261,880  
Investing activities
    (181,781 )     (233,029 )     (26,815 )     (107,277 )     (69,597 )
Financing activities
    32,313       (97,155 )     (135,460 )     (325,534 )     (155,228 )
Balance Sheet Data:
                                       
Cash and cash equivalents
  $ 269,726     $ 270,804     $ 210,812     $ 155,914     $ 279,501  
Working capital
    891,607       778,888       713,644       647,256       805,976  
Total assets
    3,135,249       2,989,381       2,776,875       2,850,666       2,804,065  
Total debt, excluding capital leases
    1,863,146       1,852,900       1,853,207       1,960,406       2,217,412  
Total capital leases
    5,355       7,365       7,806       8,177       4,694  
Total Levi Strauss & Co. stockholders’ deficit
    (219,609 )     (333,119 )     (349,517 )     (398,029 )     (994,047 )
Other Financial Data:
                                       
Depreciation and amortization
  $ 104,896     $ 84,603     $ 77,983     $ 67,514     $ 62,249  
Capital expenditures
    154,632       82,938       80,350       92,519       77,080  
Dividends paid
    20,013       20,001       49,953              
 
 
(1) In the fourth quarter of 2007, as a result of improvements in business performance and recent positive developments in an ongoing IRS examination, we reversed valuation allowances against our deferred tax assets for foreign tax credit carryforwards, as we believed that it was more likely than not that these credits will be utilized prior to their expiration.


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Item 7.   MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS
 
Overview
 
Our Company
 
We design and market jeans, casual and dress pants, tops, jackets, footwear and related accessories for men, women and children under our Levi’s®, Dockers®, Signature by Levi Strauss & Co.tm (“Signature”) and Denizentm 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 470 company-operated stores located in 27 countries, which collectively generated approximately 15% of our net revenues in 2010, as compared to 11% in 2009. In addition, we distribute our Levi’s® and Dockers® products through their respective brand-dedicated online stores operated by us as well as the online stores of certain of our key wholesale customers and other third parties. We distribute 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 Denizentm products through franchised stores in Asia Pacific.
 
Our Europe and Asia Pacific businesses, collectively, contributed approximately 42% of our net revenues and 38% of our regional operating income in 2010. Sales of Levi’s® brand products represented approximately 81% of our total net sales in 2010. Pants, including jeans, casual pants and dress pants, represented approximately 84% of our total units sold in 2010, and men’s products generated approximately 72% of our total net sales.
 
Trends Affecting our Business
 
We believe the key business and marketplace factors affecting us include the following:
 
  •  Continuing pressures in the U.S. and global economy related to the global economic downturn, access to credit, volatility in investment returns, real estate market and employment concerns, and other similar elements that impact consumer discretionary spending, which continues to be weak in many markets, especially in Europe, are creating a challenging retail environment for us and our customers.
 
  •  Wholesaler/retailer dynamics are changing as the wholesale channels face slowed growth prospects as a result of consolidation in the industry and the increasing presence of vertically integrated specialty stores. As a result, many of our customers desire increased returns on their investment with us through increased margins and inventory turns, and they continue to build competitive exclusive or private-label offerings. Many apparel wholesalers, including us, seek to strengthen relationships with customers as a result of these changes in the marketplace through efforts such as investment in new products, marketing programs, fixtures and collaborative planning systems.
 
  •  Many apparel companies that have traditionally relied on wholesale distribution channels have invested in expanding their own retail store distribution network, which has raised competitiveness in the retail market.
 
  •  More competitors are seeking growth globally, thereby raising the competitiveness of the international markets. Some of these competitors are entering into markets where we already have a mature business such as the United States, Japan, Western Europe and Canada, and those new brands provide consumers discretionary purchase alternatives and lower-priced apparel offerings. Opportunities for major brands also are increasing in rapidly growing developing markets such as India, China, Brazil and Russia.


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  •  The increasingly global nature of our business exposes us to earnings volatility resulting from exchange rate fluctuations.
 
  •  Brand and product proliferation continues around the world as we and other companies compete through differentiated brands and products targeted for specific consumers, price-points and retail segments. In addition, the ways of marketing these brands are changing to new mediums, challenging the effectiveness of more mass-market approaches such as television advertising.
 
  •  Competition for resources throughout the supply chain has increased, causing us and other apparel manufacturers to continue to seek alternative sourcing channels and create new efficiencies in our global supply chain. Trends affecting the supply chain include:
 
  •  the proliferation of low-cost sourcing alternatives around the world, which enables competitors to attract consumers with a constant flow of competitively-priced new products, resulting in reduced barriers to entry for new competitors.
 
  •  the impact of increasing prices and tightened supply of labor and raw materials, such as cotton, which has contributed, and may continue to contribute, to ongoing pricing pressure throughout the supply chain. In particular, during the second half of 2010, the price of cotton increased substantially as a result of various dynamics in the commodity markets.
 
Trends such as these bring additional pressure on us and other wholesalers and retailers to shorten lead-times, reduce costs and raise product prices, and both the increased cost and lower availability of cotton may have an adverse impact on our cash and working capital needs as well as those of our suppliers. We have already begun to raise product prices in an attempt to mitigate the impact of these higher costs. However, further increases in cotton prices and other costs of production and distribution could negatively impact financial results.
 
These factors contribute to a global market environment of intense competition, constant product innovation and continuing cost pressure, and combine with the global economic downturn to create a challenging commercial and economic environment. We expect these factors to continue into the foreseeable future. In addition to these industry trends, we will remain focused on our key strategies and will continue to invest in the business, including investments in our retail and wholesale network and our information technology infrastructure, resulting in increased advertising and promotion expense, capital expenditure and selling expense. We believe that we will maintain a gross margin in the high-40s to low-50s.
 
Our 2010 Results
 
Our 2010 results reflect net revenue growth and the effects of the strategic investments we have made to support our long-term objectives.
 
  •  Net revenues.  Our consolidated net revenues increased by 7% compared to 2009, an increase of 6% on a constant-currency basis, reflecting growth in each of our geographic regions. Increased net revenues driven by our acquisitions in 2009, growth in revenues associated with the Levi’s® brand, and the expansion of our dedicated store network globally were partially offset by declines in the wholesale channel in certain markets.
 
  •  Operating income.  Our operating income increased by $3 million and our operating margin declined as compared to 2009, as the benefits from a higher gross margin and the increase in our net revenues were offset by our continued strategic investments, including the expansion of our dedicated store network as well as advertising and promotion expenses to support the growth of our brands.
 
  •  Cash flows.  Cash flows provided by operating activities were $146 million in 2010 as compared to $389 million in 2009. This reflects our planned expenditures in our strategic business initiatives and inventory build in support of our growth. Lower operating cash flows were countered by a decline in required payments on the trademark tranche of our senior secured revolving credit facility and a significant decline in cash used for acquisitions as compared to 2009.


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Our Objectives
 
Our key long-term objectives are to strengthen our brands globally in order to deliver sustainable profitable growth, continue to generate strong cash flow and reduce our debt. Critical strategies to achieve these objectives include building upon our leadership position in the jean and khaki categories through continued product and marketing innovation, enhancing relationships with wholesale customers and expanding our dedicated store network to drive sales growth, capitalizing on our global footprint to maximize opportunities in targeted growth markets, and continuously increasing our productivity. We expect that our execution of these strategies will continue to result in increased advertising and selling expenses, a lower operating margin, and high capital expenditures during the 2011 fiscal year.
 
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 2010, 2009 and 2008 consisted of 13 weeks, with the exception of the fourth quarter of 2008, which consisted of 14 weeks.
 
Segments.  We manage our business according to three regional segments: the Americas, Europe and Asia Pacific. In the first quarter of 2010, accountability for information technology 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 2010, 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. The September 2010 announcement of our brand-led organization focuses on creating a leadership structure to enable a consistent product and consumer experience around the world for each of our brands. We continue to measure our business performance by region.
 
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
 
2010 compared to 2009
 
The following table summarizes, for the periods indicated, the consolidated statements of income, the changes in these items from period to period and these items expressed as a percentage of net revenues:
 
                                         
    Year Ended  
                      November 28,
    November 29,
 
                %
    2010
    2009
 
    November 28,
    November 29,
    Increase
    % of Net
    % of Net
 
    2010     2009     (Decrease)     Revenues     Revenues  
          (Dollars in millions)        
 
Net sales
  $ 4,325.9     $ 4,022.9       7.5 %     98.1 %     98.0 %
Licensing revenue
    84.7       82.9       2.2 %     1.9 %     2.0 %
                                         
Net revenues
    4,410.6       4,105.8       7.4 %     100.0 %     100.0 %
Cost of goods sold
    2,187.7       2,132.4       2.6 %     49.6 %     51.9 %
                                         
Gross profit
    2,222.9       1,973.4       12.6 %     50.4 %     48.1 %
Selling, general and administrative expenses
    1,841.5       1,595.3       15.4 %     41.8 %     38.9 %
                                         
Operating income
    381.4       378.1       0.9 %     8.6 %     9.2 %
Interest expense
    (135.8 )     (148.7 )     (8.7 )%     (3.1 )%     (3.6 )%
Loss on early extinguishment of debt
    (16.6 )                 (0.4 )%      
Other income (expense), net
    6.6       (39.5 )     (116.9 )%     0.2 %     (1.0 )%
                                         
Income before income taxes
    235.6       189.9       24.0 %     5.3 %     4.6 %
Income tax expense
    86.2       39.2       119.7 %     2.0 %     1.0 %
                                         
Net income
    149.4       150.7       (0.8 )%     3.4 %     3.7 %
Net loss attributable to noncontrolling
                                       
interest
    7.1       1.2       506.8 %     0.2 %      
                                         
Net income attributable to Levi
                                       
Strauss & Co. 
  $ 156.5     $ 151.9       3.0 %     3.5 %     3.7 %
                                         
 
Net revenues
 
The following table presents net revenues by reporting segment for the periods indicated and the changes in net revenues by reporting segment on both reported and constant-currency bases from period to period:
 
                                 
    Year Ended  
                % Increase (Decrease)  
    November 28,
    November 29,
    As
    Constant
 
    2010     2009     Reported     Currency  
    (Dollars in millions)  
 
Net revenues:
                               
Americas
  $ 2,549.1     $ 2,357.7       8.1 %     7.1 %
Europe
    1,105.2       1,042.1       6.1 %     7.5 %
Asia Pacific
    756.3       706.0       7.1 %     0.3 %
                                 
Total Net Revenues
  $ 4,410.6     $ 4,105.8       7.4 %     6.0 %
                                 
 
Total net revenues increased on both reported and constant-currency bases for the year ended November 28, 2010, as compared to the prior year. Changes in foreign currency exchange rates affected our consolidated reported amounts favorably by approximately $53 million.


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Americas.  On both reported and constant-currency bases, net revenues in our Americas region increased in 2010. Currency affected net revenues favorably by approximately $23 million.
 
Levi’s® brand net revenues increased, driven by the outlet stores we acquired in July 2009, as well as strong performance of our men’s and juniors’ products in the wholesale channel. The improved Levi’s® brand performance was partially offset by declines of net sales from our Signature and U.S. Dockers® brands as compared to 2009, although for the fourth quarter, Dockers® brand net sales increased as compared to the prior year, primarily driven by men’s long bottoms.
 
Europe.  Net revenues in our Europe region increased on both reported and constant-currency bases. Currency affected net revenues unfavorably by approximately $18 million.
 
The increase was driven by the positive impact of our Levi’s® brand, including our 2009 footwear and accessories business acquisition and our expanding company-operated retail network throughout the region, and was partially offset by continued sales declines in our traditional wholesale channels, reflecting the region’s ongoing depressed economic environment.
 
Asia Pacific.  Net revenues in Asia Pacific increased on both reported and constant-currency bases. Currency affected net revenues favorably by approximately $48 million.
 
Net revenues in the region increased primarily due to the continued expansion of our brand-dedicated retail network in our emerging markets of China and India, offset by continued net revenue declines due to the weak performance of our business in Japan.
 
Gross profit
 
The following table shows consolidated gross profit and gross margin for the periods indicated and the changes in these items from period to period:
 
                         
    Year Ended  
                %
 
    November 28,
    November 29,
    Increase
 
    2010     2009     (Decrease)  
    (Dollars in millions)  
 
Net revenues
  $ 4,410.6     $ 4,105.8       7.4 %
Cost of goods sold
    2,187.7       2,132.4       2.6 %
                         
Gross profit
  $ 2,222.9     $ 1,973.4       12.6 %
                         
Gross margin
    50.4 %     48.1 %        
 
Compared to the prior year, gross profit increased in 2010 primarily due to the increase in our constant-currency net revenues, improved gross margins in each of our regions, and a favorable currency impact of approximately $47 million. The improvement in our gross margin primarily reflected the increased contribution from our company-operated retail network, which generally has a higher gross margin than our wholesale business.


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Selling, general and administrative expenses
 
The following table shows our selling, general and administrative expenses (“SG&A”) for the periods indicated, the changes in these items from period to period and these items expressed as a percentage of net revenues:
 
                                         
    Year Ended  
                      November 28,
    November 29,
 
                %
    2010
    2009
 
    November 28,
    November 29,
    Increase
    % of Net
    % of Net
 
    2010     2009     (Decrease)     Revenues     Revenues  
    (Dollars in millions)  
 
Selling
  $ 636.8     $ 498.9       27.7 %     14.4 %     12.1 %
Advertising and promotion
    327.8       266.1       23.2 %     7.4 %     6.5 %
Administration
    403.7       371.8       8.6 %     9.2 %     9.1 %
Other
    473.2       458.5       3.2 %     10.7 %     11.2 %
                                         
Total SG&A
  $ 1,841.5     $ 1,595.3       15.4 %     41.8 %     38.9 %
                                         
 
Currency contributed approximately $12 million of the $246.2 million increase in SG&A expenses as compared to the prior year.
 
Selling.  Selling expenses increased across all business segments, primarily reflecting higher costs, such as rents and increased headcount, associated with the continued expansion of our company-operated store network.
 
Advertising and promotion.  The increase in advertising and promotion expenses was attributable to the planned increase in support of our U.S. Levi’s® and U.S. Dockers® brands, as well as our global launch of our Levi’s® Curve ID jeans for women and the launch of our Denizentm brand in the Asia Pacific region.
 
Administration.  The increase in administration expenses reflect higher costs associated with our pension and postretirement benefit plans, as well as higher costs related to various corporate initiatives, including costs in the third quarter of 2010 associated with executive separations.
 
Other.  Other SG&A expenses include distribution, information technology, and marketing organization costs. The increase in expenses was primarily due to 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 certain components of corporate expense for the periods indicated, the changes in these items from period to period and these items expressed as a percentage of net revenues:
 
                                         
    Year Ended  
                      November 28,
    November 29,
 
                %
    2010
    2009
 
    November 28
    November 29
    Increase
    % of Net
    % of Net
 
    2010     2009     (Decrease)     Revenues     Revenues  
    (Dollars in millions)  
 
Operating income:
                                       
Americas
  $ 402.5     $ 346.3       16.2 %     15.8 %     14.7 %
Europe
    163.5       154.8       5.6 %     14.8 %     14.9 %
Asia Pacific
    86.3       91.0       (5.2 )%     11.4 %     12.9 %
                                         
Total regional operating income
    652.3       592.1       10.2 %     14.8 %*     14.4 %*
Corporate expenses
    270.9       214.0       26.6 %     6.1 %*     5.2 %*
                                         
Total operating income
  $ 381.4     $ 378.1       0.9 %     8.6 %*     9.2 %*
                                         
Operating margin
    8.6 %     9.2 %                        
 
 
* Percentage of consolidated net revenues
 
Currency favorably affected total operating income by approximately $35 million in 2010.
 
Regional operating income.
 
  •  Americas.  Operating income and operating margin reflected the region’s improvement in gross margin and higher constant-currency net revenues, the effects of which were partially offset by the increased selling and advertising expenses.
 
  •  Europe.  The increase in the region’s operating income was primarily due to the favorable impact of currency. The region’s higher constant-currency net revenues and gross margin improvement were more than offset by higher expenses reflecting our retail expansion.
 
  •  Asia Pacific.  Despite the favorable impact of currency and improved gross margin, the region’s operating income decreased due to the net sales declines in Japan as well as the region’s retail expansion and increased advertising.
 
Corporate.  Corporate expenses are selling, general and administrative expenses that are not attributed to any of our regional operating segments. Corporate expenses for 2010 increased due to higher costs associated with our pension and postretirement benefit plans and higher costs related to various corporate initiatives, including costs in the third quarter of 2010 associated with executive separations, as well as the increased marketing costs. Corporate expenses also increased due to the classification of information technology and marketing staff costs of a global nature that were centralized under corporate management beginning in 2010; these costs were not significant to any of our regional segments individually or to prior periods, and as such, prior period amounts were not reclassified.
 
Corporate expenses in 2010 and 2009 include amortization of prior service benefit of $29.6 million and $39.7 million, respectively, related to postretirement benefit plan amendments in 2004 and 2003. We will continue to amortize the prior service benefit in the future. For more information, see Note 8 to our audited consolidated financial statements included in this report.
 
Interest expense
 
Interest expense was $135.8 million for the year ended November 28, 2010, as compared to $148.7 million in the prior year. The decrease in interest expense was driven primarily by lower average borrowing rates in 2010, resulting from our debt refinancing activity that occurred in the second quarter of 2010, and lower interest expense on our deferred compensation plans in 2010.


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The weighted-average interest rate on average borrowings outstanding for 2010 was 7.05% as compared to 7.44% for 2009.
 
Loss on early extinguishment of debt
 
For the year ended November 28, 2010, we recorded a $16.6 million loss on early extinguishment of debt as a result of our debt refinancing activities during the second quarter of 2010. The loss was comprised of tender premiums of $30.2 million and the write-off of $7.6 million of unamortized debt issuance costs net of applicable premium, offset by a gain of $21.2 million related to the partial repurchase of Yen-denominated Eurobonds due 2016 at a discount to their par value.
 
Other income (expense), net
 
Other income (expense), net, primarily consists of foreign exchange management activities and transactions. For the year ended November 28, 2010, we recorded net income of $6.6 million compared to net expense of $39.5 million for the prior year.
 
The income in 2010 primarily reflects transaction gains on our foreign currency denominated balances, partially offset by losses on foreign exchange derivatives which economically hedge future cash flow obligations of our foreign operations. The expense in 2009 reflected losses on foreign exchange derivatives.
 
Income tax expense
 
Income tax expense was $86.2 million for the year ended November 28, 2010, compared to $39.2 million for the prior year. Our effective tax rate was 36.6% for the year ended November 28, 2010, compared to 20.6% for the prior year.
 
The 16.0 percentage point increase in our effective tax rate was primarily driven by two significant discrete income tax charges recognized during the second quarter of 2010, as well as our inability to benefit current year losses in our Japanese subsidiary. The $47.0 million increase in our income tax expense was primarily attributed to the same factors coupled with an increase in income before income taxes.
 
Due primarily to our recent negative financial performance in Japan, we recognized a discrete expense of $14.2 million during the second quarter of 2010 to recognize a valuation allowance to fully offset the amount of the existing net deferred tax assets of our Japanese subsidiary as of the beginning of our fiscal year 2010, as we no longer expect to benefit from those assets. Furthermore, in 2010 we were not able to benefit our current year losses in Japan, which further increased the valuation allowance by $13.3 million.
 
Additionally, we recognized an expense of $14.0 million in the second quarter of 2010 due to the enactment in March 2010 of the Patient Protection and Affordable Care Act, which includes a provision eliminating, beginning in our tax year 2014, the tax deductibility of the costs of providing Medicare Part D-equivalent prescription drug benefits to retirees to the extent of the Federal subsidy received.


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2009 compared to 2008
 
The following table summarizes, for the periods indicated, the consolidated statements of income, the changes in these items from period to period and these items expressed as a percentage of net revenues:
 
                                         
    Year Ended  
                      November 29,
    November 30,
 
                %
    2009
    2008
 
    November 29,
    November 30,
    Increase
    % of Net
    % of Net
 
    2009     2008     (Decrease)     Revenues     Revenues  
    (Dollars in millions)  
 
Net sales
  $ 4,022.9     $ 4,303.1       (6.5 )%     98.0 %     97.8 %
Licensing revenue
    82.9       97.8       (15.3 )%     2.0 %     2.2 %
                                         
Net revenues
    4,105.8       4,400.9       (6.7 )%     100.0 %     100.0 %
Cost of goods sold
    2,132.4       2,261.1       (5.7 )%     51.9 %     51.4 %
                                         
Gross profit
    1,973.4       2,139.8       (7.8 )%     48.1 %     48.6 %
Selling, general and administrative expenses
    1,595.3       1,614.7       (1.2 )%     38.9 %     36.7 %
                                         
Operating income
    378.1       525.1       (28.0 )%     9.2 %     11.9 %
Interest expense
    (148.7 )     (154.1 )     (3.5 )%     (3.6 )%     (3.5 )%
Loss on early extinguishment of debt
          (1.4 )     (100.0 )%            
Other expense, net
    (39.5 )     (0.3 )     12,918.2 %     (1.0 )%      
                                         
Income before income taxes
    189.9       369.3       (48.6 )%     4.6 %     8.4 %
Income tax expense
    39.2       138.9       (71.8 )%     1.0 %     3.2 %
                                         
Net income
    150.7       230.4       (34.6 )%     3.7 %     5.2 %
Net loss (income) attributable to noncontrolling interest
    1.2       (1.1 )     (206.0 )%            
                                         
Net income attributable to Levi Strauss & Co. 
  $ 151.9     $ 229.3       (33.8 )%     3.7 %     5.2 %
                                         
 
Net revenues
 
The following table presents net revenues by reporting segment for the periods indicated and the changes in net revenues by reporting segment on both reported and constant-currency bases from period to period:
 
                                 
    Year Ended  
                % Increase (Decrease)  
    November 29,
    November 30,
    As
    Constant
 
   
2009
    2008     Reported     Currency  
    (Dollars in millions)  
 
Net revenues:
                               
Americas
  $ 2,357.7     $ 2,476.4       (4.8 )%     (3.2 )%
Europe
    1,042.1       1,195.6       (12.8 )%     (3.3 )%
Asia Pacific
    706.0       728.9       (3.2 )%     (0.9 )%
                                 
Total net revenues
  $ 4,105.8     $ 4,400.9       (6.7 )%     (2.9 )%
                                 
 
Total net revenues decreased on both reported and constant-currency bases for the year ended November 29, 2009, as compared to the prior year. Reported amounts were affected unfavorably by changes in foreign currency exchange rates across all regions, particularly in Europe.
 
Americas.  On both reported and constant-currency bases, net revenues in our Americas region decreased in 2009. Currency affected net revenues unfavorably by approximately $39 million.


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Net revenues decreased due to the weak economic environment, lower demand for our U.S. Dockers® brand products, and lower sales of Signature products. These declines were partially offset by increased Levi’s® brand revenues driven by strong performance of our men’s and boy’s products and growth in the Juniors business in our wholesale channel, and increased revenues from our retail network from our July 13, 2009, acquisition of the operating rights to 73 Levi’s® and Dockers® outlet stores from Anchor Blue Retail Group, Inc.
 
As compared to prior year, 2009 also reflects the loss of customers due to bankruptcy in the second and third quarters of 2008. In addition, 2008 was adversely impacted by issues we encountered during our stabilization of an enterprise resource planning (“ERP”) system in the United States in the beginning of the second quarter of 2008.
 
Europe.  Net revenues in Europe decreased on both reported and constant-currency bases. Currency affected net revenues unfavorably by approximately $118 million.
 
The region’s depressed retail environment drove net revenue declines across most markets, primarily due to lower sales in our wholesale channels. This was partially offset by the impact of our business acquisitions and our expanding company-operated retail network throughout the region.
 
Asia Pacific.  Net revenues in Asia Pacific decreased on both reported and constant-currency bases. Currency affected net revenues unfavorably by approximately $17 million.
 
Net revenues in the region decreased primarily due to lower sales in Japan. These declines were offset by strong performance in most other markets in the region, driven by product promotions and the continued expansion of our brand-dedicated store network.
 
Gross profit
 
The following table shows consolidated gross profit and gross margin for the periods indicated and the changes in these items from period to period:
 
                         
    Year Ended  
                %
 
    November 29,
    November 30,
    Increase
 
   
2009
    2008     (Decrease)  
    (Dollars in millions)  
 
Net revenues
  $ 4,105.8     $ 4,400.9       (6.7 )%
Cost of goods sold
    2,132.4       2,261.1       (5.7 )%
                         
Gross profit
  $ 1,973.4     $ 2,139.8       (7.8 )%
                         
Gross margin
    48.1 %     48.6 %        
 
Compared to the prior year, gross profit declined in 2009 primarily due to the unfavorable impact of currency across all regions, which totaled approximately $128 million. Excluding the effects of currency, the impact of our lower net revenues to gross profit was partially offset by a slight improvement in gross margin, primarily driven by our Americas region, due to the strong performance of the Levi’s® brand, and the increased contribution from our company-operated retail network, which has a higher gross margin than our wholesale business.


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Selling, general and administrative expenses
 
The following table shows our selling, general and administrative expenses (“SG&A”) for the periods indicated, the changes in these items from period to period and these items expressed as a percentage of net revenues:
 
                                         
    Year Ended  
                      November 29,
    November 30,
 
                %
    2009
    2008
 
    November 29,
    November 30,
    Increase
    % of Net
    % of Net
 
    2009     2008     (Decrease)     Revenues     Revenues  
          (Dollars in millions)        
 
Selling
  $ 498.9     $ 438.9       13.6 %     12.1 %     10.0 %
Advertising and promotion
    266.1       297.9       (10.6 )%     6.5 %     6.8 %
Administration
    371.8       372.5       (0.2 )%     9.1 %     8.5 %
Other
    458.5       505.4       (9.3 )%     11.2 %     11.5 %
                                         
Total SG&A
  $ 1,595.3     $ 1,614.7       (1.2 )%     38.9 %     36.7 %
                                         
 
Compared to the prior year, total SG&A expenses declined in 2009 due to a favorable currency impact of approximately $62 million.
 
Selling.  Selling expenses increased across all business segments, primarily reflecting additional company-operated stores, partially offset by a favorable currency impact of $25 million in 2009.
 
Advertising and promotion.  The decrease in advertising and promotion expenses was attributable to the effects of currency and planned reduction of our advertising activities in most markets as compared to the prior year.
 
Administration.  Administration expenses include corporate expenses and other administrative charges. Currency favorably impacted these expenses by $13 million in 2009. Reflected in 2009 are increased pension expense of approximately $38 million and costs associated with our business acquisitions during the year, while 2008 included higher costs associated with our conversion to an ERP system in the United States as well as various other corporate initiatives.
 
Other.  Other SG&A costs include distribution, information technology, and marketing organization costs, gain or loss on sale of assets and other operating income. Currency favorably impacted these expenses by $14 million in 2009. The decrease in expenses was primarily due to lower distribution costs, resulting from actions we have taken in recent years to restructure our distribution center operations and the decline in sales volume, as well as lower marketing organization costs.


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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:
 
                                         
    Year Ended  
                      November 29,
    November 30,
 
                %
    2009
    2008
 
    November 29,
    November 30,
    Increase
    % of Net
    % of Net
 
    2009     2008     (Decrease)     Revenues     Revenues  
    (Dollars in millions)  
 
Operating income:
                                       
Americas
  $ 346.3     $ 346.9       (0.2 )%     14.7 %     14.0 %
Europe
    154.8       257.9       (40.0 )%     14.9 %     21.6 %
Asia Pacific
    91.0       99.5       (8.6 )%     12.9 %     13.7 %
                                         
Total regional operating income
    592.1       704.3       (15.9 )%     14.4 %*     16.0 %*
Corporate expenses
    214.0       179.2       19.4 %     5.2 %*     4.1 %*
                                         
Total operating income
  $ 378.1     $ 525.1       (28.0 )%     9.2 %*     11.9 %*
                                         
Operating margin
    9.2 %     11.9 %                        
 
 
* Percentage of consolidated net revenues
 
Currency unfavorably affected operating income by approximately $66 million in 2009.
 
Regional operating income.
 
  •  Americas.  Operating income decreased due to the unfavorable impact of currency. Excluding currency, operating income increased due to an improved operating margin, driven by the improved gross margin and lower SG&A expenses in the region.
 
  •  Europe.  The decrease in the region’s operating income was due to the unfavorable impact of currency, as well as a decline in operating margin. The decline in operating margin is due to the sales decline in our wholesale channel and higher expenses from our retail network, which reflects our increasing investment in company-operated store expansion and acquisitions in 2009.
 
  •  Asia Pacific.  Operating income decreased due to the unfavorable impact of currency, as the decline in Japan’s operating income was substantially offset by the revenue growth and lower SG&A expenses in most other markets in the region.
 
Corporate.  Corporate expense is comprised of net restructuring charges and other corporate expenses, including corporate staff costs. Corporate expenses in 2009 reflect the higher pension expense, resulting from the decline in the fair value of our pension plan assets in 2008, higher severance costs for headcount reductions, and increased incentive compensation accruals, relating to greater achievement against our internally-set objectives. These increases were partially offset by a decline in corporate staff costs in 2009, reflecting our cost-cutting initiatives.
 
Corporate expenses in 2009 and 2008 include amortization of prior service benefit of $39.7 million and $41.4 million, respectively, related to postretirement benefit plan amendments in 2004 and 2003. We will continue to amortize the prior service benefit in the future; however, it will decline in 2010 by approximately $10 million, in relation to the expected service lives of the employees affected by these plan changes. We also expect the higher pension expenses to continue in 2010, despite a recovery in asset values, as changes in the financial markets during 2009, including a decrease in corporate bond yield indices, drove a reduction in the discount rates used to measure our benefit obligations. Higher pension expense may potentially extend into future periods should market conditions persist. For more information, see Note 8 to our audited consolidated financial statements included in this report.


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Interest expense
 
Interest expense was $148.7 million for the year ended November 29, 2009, as compared to $154.1 million in the prior year. Lower average borrowing rates and lower debt levels in 2009, resulting primarily from our required payments on the trademark tranche of our senior secured revolving credit facility, caused the decrease.
 
The weighted-average interest rate on average borrowings outstanding for 2009 was 7.44% as compared to 8.09% for 2008.
 
Other expense, net
 
Other expense, net, primarily consists of foreign exchange management activities and transactions. For the year ended November 29, 2009, we recorded net expense of $39.5 million compared to $0.3 million for the prior year. The increase in expense primarily reflects losses in 2009 on foreign exchange derivatives which economically hedge future cash flow obligations of our foreign operations, partially offset by foreign currency transaction gains. During 2009, the U.S. Dollar depreciated relative to the rate included in many of our forward contracts, particularly the Euro and the Australian Dollar, negatively impacting the value of the related derivatives.
 
Income tax expense
 
Income tax expense was $39.2 million for the year ended November 29, 2009, compared to $138.9 million for the prior year. Our effective tax rate was 20.6% for the year ended November 29, 2009, compared to 37.6% for the prior year.
 
The decrease in income tax expense and effective tax rate was primarily driven by the reduction in income before income taxes and a $33.2 million tax benefit relating to the expected reversal of basis differences, consisting primarily of undistributed earnings in investments in certain foreign subsidiaries. During the fourth quarter of 2009, we adopted specific plans to remit the prior undistributed earnings of certain foreign subsidiaries, which were previously considered permanently reinvested. As a result of the planned distribution, we recognized a deferred tax asset and a corresponding tax benefit of $33.2 million, for the foreign tax credits in excess of the associated U.S. income tax liability that are expected to become available upon the planned distribution.
 
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 November 28, 2010, 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 $369.0 million, as our total availability of $445.5 million, based on collateral levels as defined by the agreement, was reduced by $76.5 million of other credit-related instruments.


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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 and with the implementation of an unfunded availability reserve of $50 million, which implementation will reduce availability under our credit facility.
 
As of November 28, 2010, we had cash and cash equivalents totaling $269.7 million, resulting in a net liquidity position (unused availability and cash and cash equivalents) of $638.7 million.
 
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.
 
The following table presents selected cash uses in 2010 and the related projected cash uses for these items in 2011 as of November 28, 2010:
 
                 
          Projected
 
    Cash Used in
    Cash Uses in
 
    2010     2011  
    (Dollars in millions)  
 
Capital expenditures(1)
  $ 155     $ 140  
Interest
    147       119  
Federal, foreign and state taxes (net of refunds)
    53       60  
Pension plans(2)
    38       135  
Postretirement health benefit plans
    20       20  
Business acquisitions(3)
    12        
Dividend
    20       20  
                 
Total selected cash requirements
  $ 445     $ 494  
                 
 
 
(1) Capital expenditures consists primarily of costs associated with information technology systems and investment in company-operated retail stores. In 2010, we also remodeled the Company’s headquarters. Cash used in 2010 includes approximately $16 million of tenant improvement allowances that were paid directly by the landlord.
 
(2) The estimated increase in pension contribution in 2011 is primarily due to the reduction of the fair value of the plan assets of our U.S. pension plans at November 28, 2010, as compared to the related plan obligations. However, the 2011 contribution amounts will be recalculated at the end of the plans’ fiscal years, which for our U.S. pension plans are at the beginning of the Company’s third fiscal quarter. Accordingly, actual contributions may differ materially from those presented here, based on factors such as changes in discount rates and the valuation of pension assets, as well as alternative methods that may be available to us for measuring our funding obligation. We are currently evaluating such alternatives, which could provide opportunities to significantly lower the required contribution amount.
 
(3) Cash used reflects final purchase price payment for our 2009 acquisition of a former licensee in Europe.


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The following table provides information about our significant cash contractual obligations and commitments as of November 28, 2010:
 
                                                         
    Payments Due or Projected by Period  
    Total     2011     2012     2013     2014     2015     Thereafter  
    (Dollars in millions)  
 
Contractual and Long-term Liabilities:
                                                       
Short-term and long-term debt obligations(1)
  $ 1,863     $ 46     $ 108     $     $ 324     $     $ 1,385  
Interest(2)
    826       119       117       113       105       104       268  
Capital lease obligations
    6       2       2       2                    
Operating leases(3)
    758       147       125       99       79       69       239  
Purchase obligations(4)
    550       504       25       19       2              
Postretirement obligations(5)
    175       20       19       19       18       18       81  
Pension obligations(6)
    430       135       55       52       49       41       98  
Long-term employee related benefits(7)
    89       10       9       9       9       9       43  
                                                         
Total
  $ 4,697     $ 983     $ 460     $ 313     $ 586     $ 241     $ 2,114  
                                                         
 
 
(1) The terms of the trademark tranche of our credit facility require payments of the remaining balance at maturity in 2012. Additionally, the 2011 amount consists of short-term borrowings.
 
(2) Interest obligations are computed using constant interest rates until maturity. The LIBOR rate as of November 28, 2010, was used for variable-rate debt.
 
(3) Amounts reflect contractual obligations relating to our existing leased facilities as of November 28, 2010, and therefore do not reflect our planned future openings of company-operated retail stores. For more information, see “Item 2 — Properties.”
 
(4) Amounts reflect estimated commitments of $457 million for inventory purchases and $93 million for human resources, advertising, information technology and other professional services.
 
(5) The amounts presented in the table represent an estimate for the next ten years of our projected payments, based on information provided by our plans’ actuaries, and have not been reduced by estimated Medicare subsidy receipts, the amounts of which are not material. Our policy is to fund postretirement benefits as claims and premiums are paid. For more information, see Note 8 to our audited consolidated financial statements included in this report.
 
(6) The amounts presented in the table represent an estimate of our projected contributions to the plans for the next ten years based on information provided by our plans’ actuaries. For U.S. qualified plans, these estimates comply with minimum funded status and minimum required contributions under the Pension Protection Act. The substantial pension contribution estimated for 2011 is primarily due to the reduction of the fair value of the plan assets of our U.S. pension plans at November 28, 2010, as compared to the related plan obligations. However, the 2011 contribution amounts will be recalculated at the end of the plans’ fiscal years, which for our U.S. pension plans are at the beginning of the Company’s third fiscal quarter. Accordingly, actual contributions may differ materially from those presented here, based on factors such as changes in discount rates and the valuation of pension assets, as well as alternative methods that may be available to us for measuring our funding obligation. We are currently evaluating such alternatives, which could provide opportunities to significantly lower the required contribution amount. For more information, see Note 8 to our audited consolidated financial statements included in this report.
 
(7) Long-term employee-related benefits relate to the current and non-current portion of deferred compensation arrangements and workers’ compensation. We estimated these payments based on prior experience and forecasted activity for these items. For more information, see Note 12 to our audited consolidated financial statements included in this report.
 
This table does not include amounts related to our income tax liabilities associated with uncertain tax positions of $150.7 million, as we are unable to make reasonable estimates for the periods in which these liabilities may become due. We do not anticipate a material effect on our liquidity as a result of payments in future periods of liabilities for uncertain tax positions.
 
Information in the two preceding tables reflects our estimates of future cash payments. These estimates and projections are based upon assumptions that are inherently subject to significant economic, competitive, legislative and other uncertainties and contingencies, many of which are beyond our control. Accordingly, our actual expenditures and liabilities may be materially higher or lower than the estimates and projections reflected in these tables. The inclusion of these projections and estimates should not be regarded as a representation by us that the estimates will prove to be correct.


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Cash flows
 
The following table summarizes, for the periods indicated, selected items in our consolidated statements of cash flows:
 
                         
    Year Ended
    November 28,
  November 29,
  November 30,
    2010   2009   2008
    (Dollars in millions)
 
Cash provided by operating activities
  $ 146.3     $ 388.8     $ 224.8  
Cash used for investing activities
    (181.8 )     (233.0 )     (26.8 )
Cash provided by (used for) financing activities
    32.3       (97.2 )     (135.5 )
Cash and cash equivalents
    269.7       270.8       210.8  
 
2010 as compared to 2009
 
Cash flows from operating activities
 
Cash provided by operating activities was $146.3 million for 2010, as compared to $388.8 million for 2009. Operating cash declined compared to the prior year due to higher payments to vendors, reflecting our retail expansion and increased advertising as well as higher cash used for inventory, in support of our business growth. This decline was partially offset by an increase in cash collected from customers, reflecting our higher net revenues.
 
Cash flows from investing activities
 
Cash used for investing activities was $181.8 million for 2010 compared to $233.0 million for 2009. As compared to the prior year, the decrease in cash used for investing activities primarily reflects less cash used for acquisitions and lower payments on the settlement of our forward foreign exchange contracts, partially offset by more cash used towards the remodeling of the Company’s headquarters as well as our information technology systems associated with the installation of our global ERP system and our company-operated retail stores.
 
Cash flows from financing activities
 
Cash provided by financing activities was $32.3 million for 2010 compared to cash used of $97.2 million for 2009. Net cash provided in 2010 reflected our May 2010 refinancing activities. Cash used in 2009 primarily related to required payments on the trademark tranche of our senior secured revolving credit facility; no such payment is required in 2010.
 
2009 as compared to 2008
 
Cash flows from operating activities
 
Cash provided by operating activities was $388.8 million for 2009, as compared to $224.8 million for 2008. As compared to the prior year, we used less cash for inventory, reflecting our focus on inventory management, and payments to vendors declined, reflecting our lower SG&A expenses. These results more than offset the decline in our cash collections, which was driven primarily by our lower net revenues as well as our lower beginning accounts receivable balance. Additionally, the increase in cash provided by operating activities reflected lower payments for incentive compensation and interest.
 
Cash flows from investing activities
 
Cash used for investing activities was $233.0 million for 2009 compared to $26.8 million for 2008. As compared to the prior year, the increase in cash used for investing activities primarily reflects business acquisitions in our Americas and Europe regions, as well as higher payments on settlement of forward foreign exchange contracts.


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Cash flows from financing activities
 
Cash used for financing activities was $97.2 million for 2009 compared to $135.5 million for 2008. Cash used in both periods primarily related to required payments on the trademark tranche of our senior secured revolving credit facility and our dividend payments to stockholders. Cash used for financing activities in 2008 also reflects our redemption in March 2008 of our remaining $18.8 million outstanding 12.25% senior notes due 2012.
 
Indebtedness
 
The borrower of substantially all of our debt is Levi Strauss & Co., the parent and U.S. operating company. Of our total debt of $1.9 billion, 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 November 28, 2010. Our required aggregate debt principal payments, excluding short-term borrowings, are $108.3 million in 2012, $323.7 million in 2014 and the remaining $1.4 billion in years after 2015. Short-term borrowings totaling $46.4 million as of November 28, 2010, are expected to be either paid over the next twelve months or refinanced at the end of their applicable terms.
 
Our long-term debt agreements contain customary covenants restricting our activities as well as those of our subsidiaries. Currently, we are in compliance with all of these covenants.
 
Effects of Inflation
 
We believe that inflation in the regions where most of our sales occur has not had a significant effect on our net revenues or profitability.
 
Off-Balance Sheet Arrangements, Guarantees and Other Contingent Obligations
 
Off-balance sheet arrangements and other.  We have contractual commitments for non-cancelable operating leases; for more information, see Note 13 to our audited consolidated financial statements included in this report. We participate in a multiemployer pension plan, however our exposure to risks arising from participation in the plan and the extent to which we can be liable to the plan for other participating employers’ obligations are not material in the near-term. We have no other material non-cancelable guarantees or commitments, and no material special-purpose entities or other off-balance sheet debt obligations.
 
Indemnification agreements.  In the ordinary course of our business, we enter into agreements containing indemnification provisions under which we agree to indemnify the other party for specified claims and losses. For example, our trademark license agreements, real estate leases, consulting agreements, logistics outsourcing agreements, securities purchase agreements and credit agreements typically contain these provisions. This type of indemnification provision obligates us to pay certain amounts associated with claims brought against the other party as the result of trademark infringement, negligence or willful misconduct of our employees, breach of contract by us including inaccuracy of representations and warranties, specified lawsuits in which we and the other party are co-defendants, product claims and other matters. These amounts are generally not readily quantifiable: the maximum possible liability or amount of potential payments that could arise out of an indemnification claim depends entirely on the specific facts and circumstances associated with the claim. We have insurance coverage that minimizes the potential exposure to certain of these claims. We also believe that the likelihood of substantial payment obligations under these agreements to third parties is low and that any such amounts would be immaterial.
 
Critical Accounting Policies, Assumptions and Estimates
 
The preparation of financial statements in conformity with generally accepted accounting principles in the United States requires management to make estimates and assumptions that affect the amounts reported in the consolidated financial statements and the related notes. We believe that the following discussion addresses our critical accounting policies, which are those that are most important to the portrayal of our financial condition and results of operations and require management’s most difficult, subjective and complex judgments, often as a result of the need to make estimates about the effect of matters that are inherently uncertain. Changes in such estimates, based on newly available information, or different assumptions or conditions, may affect amounts reported in future periods.


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We summarize our critical accounting policies below.
 
Revenue recognition.  Net sales is primarily comprised of sales of products to wholesale customers, including franchised stores, and direct sales to consumers at our company-operated and online stores and at our company-operated shop-in-shops located within department stores. We recognize revenue on sale of product when the goods are shipped or delivered and title to the goods passes to the customer provided that: there are no uncertainties regarding customer acceptance; persuasive evidence of an arrangement exists; the sales price is fixed or determinable; and collectability is reasonably assured. Revenue is recorded net of an allowance for estimated returns, discounts and retailer promotions and other similar incentives. Licensing revenues from the use of our trademarks in connection with the manufacturing, advertising, and distribution of trademarked products by third-party licensees are earned and recognized as products are sold by licensees based on royalty rates as set forth in the licensing agreements.
 
We recognize allowances for estimated returns in the period in which the related sale is recorded. We recognize allowances for estimated discounts, retailer promotions and other similar incentives at the later of the period in which the related sale is recorded or the period in which the sales incentive is offered to the customer. We estimate non-volume based allowances based on historical rates as well as customer and product-specific circumstances. Actual allowances may differ from estimates due to changes in sales volume based on retailer or consumer demand and changes in customer and product-specific circumstances. Sales and value-added taxes collected from customers and remitted to governmental authorities are presented on a net basis in the accompanying consolidated statements of income.
 
Accounts receivable, net.  We extend credit to our wholesale and licensing customers that satisfy pre-defined credit criteria. Accounts receivable are recorded net of an allowance for doubtful accounts. We estimate the allowance for doubtful accounts based upon an analysis of the aging of accounts receivable at the date of the consolidated financial statements, assessments of collectability based on historic trends, customer-specific circumstances, and an evaluation of economic conditions. Actual write-off of receivables may differ from estimates due to changes in customer and economic circumstances.
 
Inventory valuation.  We value inventories at the lower of cost or market value. Inventory cost is generally determined using the first-in first-out method. We include product costs, labor and related overhead, sourcing costs, inbound freight, internal transfers, and the cost of operating our remaining manufacturing facilities, including the related depreciation expense, in the cost of inventories. In determining inventory market values, substantial consideration is given to the expected product selling price. We estimate quantities of slow-moving and obsolete inventory by reviewing on-hand quantities, outstanding purchase obligations and forecasted sales. We then estimate expected selling prices based on our historical recovery rates for sale of slow-moving and obsolete inventory and other factors, such as market conditions, expected channel of disposition, and current consumer preferences. Estimates may differ from actual results due to changes in resale or market value, avenues of disposition, consumer and retailer preferences and economic conditions.
 
Impairment.  We review our goodwill and other non-amortized intangible assets for impairment annually in the fourth quarter of our fiscal year, or more frequently as warranted by events or changes in circumstances which indicate that the carrying amount may not be recoverable. In our impairment tests, we use a two-step approach. In the first step, we compare the carrying value of the applicable asset or reporting unit to its fair value, which we estimate using a discounted cash flow analysis or by comparison to the market values of similar assets. If the carrying amount of the asset or reporting unit exceeds its estimated fair value, we perform the second step, and determine the impairment loss, if any, as the excess of the carrying value of the goodwill or intangible asset over its fair value. The assumptions used in such valuations are subject to volatility and may differ from actual results; however, based on the carrying value of our goodwill and other non-amortized intangible assets as of November 28, 2010, relative to their estimated fair values, we do not anticipate any material impairment charges in the near-term.
 
We review our other long-lived assets for impairment whenever events or changes in circumstances indicate the carrying amount of an asset may not be recoverable. If the carrying amount of an other long-lived asset exceeds the expected future undiscounted cash flows, we measure and record an impairment loss for the excess of the carrying value of the asset over its fair value.


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To determine the fair value of impaired assets, we utilize the valuation technique or techniques deemed most appropriate based on the nature of the impaired asset and the data available, which may include the use of quoted market prices, prices for similar assets or other valuation techniques such as discounted future cash flows or earnings.
 
Income tax assets and liabilities.  We are subject to income taxes in both the 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, we evaluate all significant available positive and negative evidence, including historical operating results, estimates of future taxable income and the existence of prudent and feasible tax planning strategies. Changes in the expectations regarding the realization of deferred tax assets could materially impact income tax expense in future periods.
 
We do not recognize deferred taxes with respect to temporary differences between the book and tax bases in our investments in foreign subsidiaries, unless it becomes apparent that these temporary differences will reverse in the foreseeable future.
 
We continuously review issues raised in connection with all ongoing examinations and open tax years to evaluate the adequacy of our liabilities. We evaluate uncertain tax positions under a two-step approach. The first step is to evaluate the uncertain tax position for recognition by determining if the weight of available evidence indicates that it is more likely than not that the position will be sustained upon examination based on its technical merits. The second step is, for those positions that meet the recognition criteria, to measure the tax benefit as the largest amount that is more than fifty percent likely of being realized. We believe our recorded tax liabilities are adequate to cover all open tax years based on our assessment. This assessment relies on estimates and assumptions and involves significant judgments about future events. To the extent that our view as to the outcome of these matters changes, we will adjust income tax expense in the period in which such determination is made. We classify interest and penalties related to income taxes as income tax expense.
 
Derivative and foreign exchange management activities.  We recognize all derivatives as assets and liabilities at their fair values. We may use derivatives and establish programs from time to time to manage foreign currency and interest rate exposures that are sensitive to changes in market conditions. The instruments that we designate and that qualify for hedge accounting treatment hedge our net investment position in certain of our foreign. For these instruments, we document the hedge designation by identifying the hedging instrument, the nature of the risk being hedged and the approach for measuring hedge ineffectiveness. The ineffective portions of hedges are recorded in “Other income (expense), net” in our consolidated statements of income. The gains and losses on the instruments that we designate and that qualify for hedge accounting treatment are recorded in “Accumulated other comprehensive income (loss)” in our consolidated balance sheets until the underlying has been settled and is then reclassified to earnings. Changes in the fair values of the derivative instruments that we do not designate or that do not qualify for hedge accounting are recorded in “Other income (expense), net” or “Interest expense” in our consolidated statements of income to reflect the economic risk being mitigated.
 
Employee benefits and incentive compensation
 
Pension and postretirement benefits.  We have several non-contributory defined benefit retirement plans covering eligible employees. We also provide certain health care benefits for U.S. employees who meet age, participation and length of service requirements at retirement. In addition, we sponsor other retirement or post-employment plans for our foreign employees in accordance with local government programs and requirements. We retain the right to amend, curtail or discontinue any aspect of the plans, subject to local regulations. Any of these actions, either individually or in combination, could have a material impact on our consolidated financial statements and on our future financial performance.


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We recognize either an asset or liability for any plan’s funded status in our consolidated balance sheets. We measure changes in funded status using actuarial models which use an attribution approach that generally spreads individual events over the estimated service lives of the employees in the plan. The attribution approach assumes that employees render service over their service lives on a relatively smooth basis and as such, presumes that the income statement effects of pension or postretirement benefit plans should follow the same pattern. Our policy is to fund our pension plans based upon actuarial recommendations and in accordance with applicable laws, income tax regulations and credit agreements.
 
Net pension and postretirement benefit income or expense is generally determined using assumptions which include expected long-term rates of return on plan assets, discount rates, compensation rate increases and medical trend rates. We use a mix of actual historical rates, expected rates and external data to determine the assumptions used in the actuarial models. For example, we utilized a yield curve constructed from a portfolio of high-quality corporate bonds with various maturities to determine the appropriate discount rate to use for our U.S. benefit plans. Under this model, each year’s expected future benefit payments are discounted to their present value at the appropriate yield curve rate, thereby generating the overall discount rate. We utilized country-specific third-party bond indices to determine appropriate discount rates to use for benefit plans of our foreign subsidiaries. Changes in actuarial assumptions and estimates, either individually or in combination, could have a material impact on our consolidated financial statements and on our future financial performance. For example, as of November 28, 2010, a twenty-five basis-point change in the discount rate would yield an approximately three-percent change in the projected benefit obligation and annual service cost of our pension and postretirement benefit plans.
 
Employee incentive compensation.  We maintain short-term and long-term employee incentive compensation plans. These plans are intended to reward eligible employees for their contributions to our short-term and long-term success. For our short-term plans, the amount of the cash bonus earned depends upon business unit and corporate financial results as measured against pre-established targets, and also depends upon the performance and job level of the individual. Our long-term plans are intended to reward management for its long-term impact on our total earnings performance. Performance is measured at the end of a three-year period based on our performance over the period measured against certain pre-established targets such as earnings before interest, taxes, depreciation and amortization (“EBITDA”) or compound annual growth rates over the periods. We accrue the related compensation expense over the period of the plan, and changes in our projected future financial performance could have a material impact on our accruals.
 
Recently Issued Accounting Standards
 
See Note 1 to our audited consolidated financial statements included in this report for recently issued accounting standards, including the expected dates of adoption and expected impact to our consolidated financial statements upon adoption.
 
FORWARD-LOOKING STATEMENTS
 
Certain matters discussed in this report, including (without limitation) statements under “Management’s Discussion and Analysis of Financial Condition and Results of Operations” contain forward-looking statements. Although we believe that, in making any such statements, our expectations are based on reasonable assumptions, 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


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are necessarily estimates reflecting the best judgment of our senior management and involve a number of risks and uncertainties, some of which may be beyond our control, that could cause actual results to differ materially from those suggested by the forward-looking statements and include, without limitation:
 
  •  changes in the level of consumer spending for apparel in view of general economic conditions, and our ability to plan for and respond to the impact of those changes;
 
  •  consequences of impacts to the businesses of our wholesale customers caused by factors such as lower consumer spending, general economic conditions and changing consumer preferences;
 
  •  our ability to mitigate costs related to manufacturing, sourcing, and raw materials supply, such as cotton;
 
  •  our ability to grow our Dockers® brand and to expand our Denizentm 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 or economic instability in countries where we do business.
 
Our actual results might differ materially from historical performance or current expectations. We do not undertake any obligation to update or revise publicly any forward-looking statements, whether as a result of new information, future events or otherwise.


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Item 7A.   QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK
 
Investment and Credit Availability Risk
 
We manage cash and cash equivalents in various institutions at levels beyond FDIC coverage limits, and we purchase investments not guaranteed by the FDIC. Accordingly, there may be a risk that we will not recover the full principal of our investments or that their liquidity may be diminished. To mitigate this risk, our investment policy emphasizes preservation of principal and liquidity.
 
Multiple financial institutions are committed to provide loans and other credit instruments under our secured revolving credit facility. There may be a risk that some of these institutions cannot deliver against these obligations in a timely manner, or at all.
 
Derivative Financial Instruments
 
We are exposed to market risk primarily related to foreign currencies. We manage foreign currency risks with the objective to minimize the effect of fluctuations in foreign exchange rates on nonfunctional currency cash flows of the Company and its subsidiaries and selected assets or liabilities of the Company and its subsidiaries without exposing the Company to additional risk associated with transactions that could be regarded as speculative.
 
We are exposed to credit loss in the event of nonperformance by the counterparties to the forward foreign exchange. However, we believe that our exposures are appropriately diversified across counterparties and that these counterparties are creditworthy financial institutions. We monitor the creditworthiness of our counterparties in accordance with our foreign exchange and investment policies. In addition, we have International Swaps and Derivatives Association, Inc. (“ISDA”) master agreements in place with our counterparties to mitigate the credit risk related to the outstanding derivatives. These agreements provide the legal basis for over-the-counter transactions in many of the world’s commodity and financial markets.
 
Foreign Exchange Risk
 
The global scope of our business operations exposes us to the risk of fluctuations in foreign currency markets. This exposure is the result of certain product sourcing activities, some intercompany sales, foreign subsidiaries’ royalty payments, interest payments, earnings repatriations, net investment in foreign operations and funding activities. Our foreign currency management objective is to minimize the effect of fluctuations in foreign exchange rates on nonfunctional currency cash flows of the Company and its subsidiaries and selected assets or liabilities of the Company and its subsidiaries without exposing the Company to additional risk associated with transactions that could be regarded as speculative. We manage 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 may 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 associated with certain cash flows periodically and 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 Treasury committee. Members of our Treasury committee, comprised of a group of our senior financial executives, review our foreign exchange activities to ensure compliance with our policies. The operating policies and guidelines outlined in the foreign exchange risk management policy provide a framework that allows for 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.


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We use derivative instruments to manage certain but not all exposures to foreign currencies. Our approach to managing foreign currency exposures is consistent with that applied in previous years. As of November 28, 2010, we had forward foreign exchange contracts to buy $623.7 million and to sell $392.5 million against various foreign currencies. These contracts are at various exchange rates and expire at various dates through February 2012.
 
As of November 29, 2009, we had forward foreign exchange contracts to buy $523.5 million and to sell $175.1 million against various foreign currencies. These contracts are at various exchange rates and expire at various dates through December 2010.
 
The following table presents the currency, average forward exchange rate, notional amount and fair values for our outstanding forward and swap contracts as of November 28, 2010, and November 29, 2009. The average forward rate is the forward rate weighted by the total of the transacted amounts. The notional amount represents the U.S. Dollar equivalent amount of the foreign currency at the inception of the contracts. A positive notional amount represents a long position in U.S. Dollar versus the exposure currency, while a negative notional amount represents a short position in U.S. Dollar versus the exposure currency. The net position is the sum of all buy transactions and the sum of all sell transactions. All amounts are stated in U.S. Dollar equivalents. All transactions will mature before the end of February 2012.
 
                                                 
    As of November 28, 2010     As of November 29, 2009  
    Average Forward
    Notional
    Fair
    Average Forward
    Notional
    Fair
 
    Exchange Rate     Amount     Value     Exchange Rate     Amount     Value  
    (Dollars in thousands)  
 
Currency
                                               
Australian Dollar
    0.96     $ 29,475     $ (203 )     0.84     $ 53,061     $ (2,420 )
Brazilian Real
    1.87       656       (3 )     1.96       626       (23 )
Canadian Dollar
    1.02       30,126       (30 )     1.09       52,946       (1,972 )
Swiss Franc
    1.02       (35,178 )     (781 )     1.00       (15,246 )     (125 )
Czech Koruna
    17.96       2,799       156       17.36       2,689       62  
Danish Krone
    0.18       24,406       897       0.20       26,684       245  
Euro
    1.31       (72,842 )     (3,273 )     1.46       70,472       (1,192 )
British Pound Sterling
    0.63       37,447       626       0.62       34,414       (497 )
Hong Kong Dollar
                      7.75       (14 )      
Hungarian Forint
    201.26       (5,423 )     (392 )     200.87       (5,887 )     (392 )
Japanese Yen
    81.72       65,123       1,229       93.67       37,704       (3,228 )
South Korean Won
    1,133.51       21,244       576       1,224.91       16,745       (824 )
Mexican Peso
    12.72       57,854       (433 )     13.94       30,588       (1,623 )
Norwegian Krone
    0.17       10,709       630       0.17       8,878       (464 )
New Zealand Dollar
    1.31       (1,963 )     (430 )     1.38       (9,581 )     (270 )
Polish Zloty
    2.87       (45,139 )     (2,999 )     2.85       (52,830 )     224  
Russian Ruble
    31.24       13,804       388                    
Swedish Krona
    6.84       73,945       1,869       6.97       73,272       635  
Singapore Dollar
    1.29       (30,140 )     (428 )     1.40       (28,734 )     167  
New Taiwan Dollar
    30.28       27,209       (172 )     31.70       29,678       487  
South African Rand
    7.13       27,102       500       8.50       22,961       (2,588 )
                                                 
Total
          $ 231,214     $ (2,273 )           $ 348,426     $ (13,798 )
                                                 


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Interest rate risk
 
We maintain a mix of medium and long-term fixed- and variable-rate debt.
 
The following table provides information about our financial instruments that are sensitive to changes in interest rates. The table presents principal (face amount) outstanding balances of our debt instruments and the related weighted-average interest rates for the years indicated based on expected maturity dates. The applicable floating rate index is included for variable-rate instruments. All amounts are stated in U.S. Dollar equivalents.
 
                                                                         
                                                    As of
 
    As of November 28, 2010     November 29,
 
    Expected Maturity Date           Fair Value
    2009
 
    2011(1)     2012     2013     2014     2015     Thereafter     Total     2010     Total  
    (Dollars in thousands)  
 
Debt Instruments
                                                                       
Fixed Rate (US$)
  $     $     $     $     $     $ 875,000     $ 875,000     $ 915,686     $ 796,210  
Average Interest Rate
                                  8.13 %     8.13 %                
Fixed Rate (Yen 9.1 billion)
                                  109,062       109,062       98,063       231,709  
Average Interest Rate
                                  4.25 %     4.25 %                
Fixed Rate (Euro 300 million)
                                  400,740       400,740       407,993       372,325  
Average Interest Rate
                                  7.75 %     7.75 %                
Variable Rate (US$)
          108,250             325,000                   433,250       418,605       433,250  
Average Interest Rate(2)
          2.76 %           2.50 %                 2.57 %                
Total Principal (face amount) of our debt instruments
  $     $ 108,250     $     $ 325,000     $     $ 1,384,802     $ 1,818,052     $ 1,840,347     $ 1,833,494  
 
 
(1) Excludes short-term borrowings.
 
(2) Assumes no change in short-term interest rates. Expected maturities due 2012 relate to the trademark tranche of our senior revolving credit facility. Expected maturities due 2014 relate to our Senior Term Loan.


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Item 8.   FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA
 
Report of Independent Registered Public Accounting Firm
 
The Board of Directors and Stockholders of
Levi Strauss & Co.:
 
In our opinion, the accompanying consolidated balance sheets and the related consolidated statements of income, stockholders’ deficit and comprehensive income, and of cash flows present fairly, in all material respects, the financial position of Levi Strauss & Co. and its subsidiaries at November 28, 2010 and November 29, 2009, and the results of their operations and their cash flows for each of the three years in the period ended November 28, 2010, in conformity with accounting principles generally accepted in the United States of America. In addition, in our opinion, the related financial statement schedule listed in the index appearing under Item 15(2) presents fairly, in all material respects, the information set forth therein when read in conjunction with the related consolidated financial statements. These financial statements and the financial statement schedule are the responsibility of the Company’s management. Our responsibility is to express an opinion on these financial statements and the financial statement schedule based on our audits. We conducted our audits of these statements in accordance with the standards of the Public Company Accounting Oversight Board (United States). Those standards require that we plan and perform the audit to obtain reasonable assurance about whether the financial statements are free of material misstatement. An audit includes examining, on a test basis, evidence supporting the amounts and disclosures in the financial statements, assessing the accounting principles used and significant estimates made by management, and evaluating the overall financial statement presentation. We believe that our audits provide a reasonable basis for our opinion.
 
As discussed in Note 1 to the consolidated financial statements, the Company changed the manner in which it accounts for uncertain tax positions in fiscal 2008.
 
PricewaterhouseCoopers LLP
 
San Francisco, CA
February 8, 2011


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LEVI STRAUSS & CO. AND SUBSIDIARIES
 
CONSOLIDATED BALANCE SHEETS
 
                 
    November 28,
    November 29,
 
    2010     2009  
    (Dollars in thousands)  
 
ASSETS
                 
Current Assets:
               
Cash and cash equivalents
  $ 269,726     $ 270,804  
Restricted cash
    4,028       3,684  
Trade receivables, net of allowance for doubtful accounts of $24,617 and $22,523
    553,385       552,252  
Inventories:
               
Raw materials
    6,770       6,818  
Work-in-process
    9,405       10,908  
Finished goods
    563,728       433,546  
                 
Total inventories
    579,903       451,272  
Deferred tax assets, net
    137,892       135,508  
Other current assets
    106,198       92,344  
                 
Total current assets
    1,651,132       1,505,864  
Property, plant and equipment, net of accumulated depreciation of $683,258 and $664,891
    488,603       430,070  
Goodwill
    241,472       241,768  
Other intangible assets, net
    84,652       103,198  
Non-current deferred tax assets, net
    559,053       601,526  
Other assets
    110,337       106,955  
                 
Total assets
  $ 3,135,249     $ 2,989,381  
                 
 
LIABILITIES, TEMPORARY EQUITY AND STOCKHOLDERS’ DEFICIT
Current Liabilities:
               
Short-term borrowings
  $ 46,418     $ 18,749  
Current maturities of long-term debt
           
Current maturities of capital leases
    1,777       1,852  
Accounts payable
    212,935       198,220  
Other accrued liabilities
    275,443       271,019  
Accrued salaries, wages and employee benefits
    196,152       195,434  
Accrued interest payable
    9,685       28,709  
Accrued income taxes
    17,115       12,993  
                 
Total current liabilities
    759,525       726,976  
Long-term debt
    1,816,728       1,834,151  
Long-term capital leases
    3,578       5,513  
Postretirement medical benefits
    147,065       156,834  
Pension liability
    400,584       382,503  
Long-term employee related benefits
    102,764       97,508  
Long-term income tax liabilities
    50,552       55,862  
Other long-term liabilities
    54,281       43,480  
                 
Total liabilities
    3,335,077       3,302,827  
                 
Commitments and contingencies
               
Temporary equity
    8,973       1,938  
                 
Stockholders’ Deficit:
               
Levi Strauss & Co. stockholders’ deficit
               
Common stock — $.01 par value; 270,000,000 shares authorized; 37,322,358 shares and 37,284,741 shares issued and outstanding
    373       373  
Additional paid-in capital
    18,840       39,532  
Accumulated earnings (deficit)
    33,346       (123,157 )
Accumulated other comprehensive loss
    (272,168 )     (249,867 )
                 
Total Levi Strauss & Co. stockholders’ deficit
    (219,609 )     (333,119 )
Noncontrolling interest
    10,808       17,735  
                 
Total stockholders’ deficit
    (208,801 )     (315,384 )
                 
Total liabilities, temporary equity and stockholders’ deficit
  $ 3,135,249     $ 2,989,381  
                 
 
The accompanying notes are an integral part of these consolidated financial statements.


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LEVI STRAUSS & CO. AND SUBSIDIARIES
 
CONSOLIDATED STATEMENTS OF INCOME
 
                         
    Year Ended
    Year Ended
    Year Ended
 
    November 28,
    November 29,
    November 30,
 
    2010     2009     2008  
    (Dollars in thousands)  
 
Net sales
  $ 4,325,908     $ 4,022,854     $ 4,303,075  
Licensing revenue
    84,741       82,912       97,839  
                         
Net revenues
    4,410,649       4,105,766       4,400,914  
Cost of goods sold
    2,187,726       2,132,361       2,261,112  
                         
Gross profit
    2,222,923       1,973,405       2,139,802  
Selling, general and administrative expenses
    1,841,562       1,595,317       1,614,730  
                         
Operating income
    381,361       378,088       525,072  
Interest expense
    (135,823 )     (148,718 )     (154,086 )
Loss on early extinguishment of debt
    (16,587 )           (1,417 )
Other income (expense), net
    6,647       (39,445 )     (303 )
                         
Income before income taxes
    235,598       189,925       369,266  
Income tax expense
    86,152       39,213       138,884  
                         
Net income
    149,446       150,712       230,382  
Net loss (income) attributable to noncontrolling interest
    7,057       1,163       (1,097 )
                         
Net income attributable to Levi Strauss & Co. 
  $ 156,503     $ 151,875     $ 229,285  
                         
 
The accompanying notes are an integral part of these consolidated financial statements.


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LEVI STRAUSS & CO. AND SUBSIDIARIES
 
CONSOLIDATED STATEMENTS OF STOCKHOLDERS’ DEFICIT AND COMPREHENSIVE INCOME
 
                                                 
    Levi Strauss & Co. Stockholders              
                      Accumulated
             
          Additional
    Accumulated
    Other
             
    Common
    Paid-In
    Earnings
    Comprehensive
    Noncontrolling
    Stockholders’
 
    Stock     Capital     (Deficit)     Income (Loss)     Interest     Deficit  
    (Dollars in thousands)  
 
Balance at November 25, 2007
  $ 373     $ 92,650     $ (499,093 )   $ 8,041     $ 15,833     $ (382,196 )
                                                 
Net income
                229,285             1,097       230,382  
Other comprehensive (loss) income (net of tax)
                      (135,956 )     2,166       (133,790 )
                                                 
Total comprehensive income
                                            96,592  
                                                 
Cumulative-effect adjustment related to uncertain tax positions (amendment to ASC 740, “Income Taxes”)
                (5,224 )                 (5,224 )
Stock-based compensation, net
          10,360                         10,360  
Cash dividend paid
          (49,953 )                 (1,114 )     (51,067 )
                                                 
Balance at November 30, 2008
    373       53,057       (275,032 )     (127,915 )     17,982       (331,535 )
                                                 
Net income (loss)
                151,875             (1,163 )     150,712  
Other comprehensive (loss) income (net of tax)
                      (121,952 )     1,894       (120,058 )
                                                 
Total comprehensive income
                                            30,654  
                                                 
Stock-based compensation, net
          6,476                         6,476  
Cash dividend paid
          (20,001 )                 (978 )     (20,979 )
                                                 
Balance at November 29, 2009
    373       39,532       (123,157 )     (249,867 )     17,735       (315,384 )
                                                 
Net income (loss)
                156,503             (7,057 )     149,446  
Other comprehensive (loss) income (net of tax)
                      (22,301 )     130       (22,171 )
                                                 
Total comprehensive income
                                            127,275  
                                                 
Stock-based compensation, net
          (601 )                       (601 )
Repurchase of common stock
          (78 )                       (78 )
Cash dividend paid
          (20,013 )                       (20,013 )
                                                 
Balance at November 28, 2010
  $ 373     $ 18,840     $ 33,346     $ (272,168 )   $ 10,808     $ (208,801 )
                                                 
 
 
The accompanying notes are an integral part of these consolidated financial statements.


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LEVI STRAUSS & CO. AND SUBSIDIARIES
 
CONSOLIDATED STATEMENTS OF CASH FLOWS
 
                         
    Year Ended
    Year Ended
    Year Ended
 
    November 28,
    November 29,
    November 30,
 
    2010     2009     2008  
    (Dollars in thousands)  
 
                         
Cash Flows from Operating Activities:
                       
Net income
  $ 149,446     $ 150,712     $ 230,382  
Adjustments to reconcile net income to net cash provided by operating activities:
                       
Depreciation and amortization
    104,896       84,603       77,983  
Asset impairments
    6,865       16,814       20,308  
(Gain) loss on disposal of property, plant and equipment
    (248 )     (175 )     40  
Unrealized foreign exchange (gains) losses
    (17,662 )     14,657       50,736  
Realized loss (gain) on settlement of forward foreign exchange contracts not
                       
designated for hedge accounting
    16,342       50,760       (53,499 )
Employee benefit plans’ amortization from accumulated other comprehensive loss
    3,580       (19,730 )     (35,995 )
Employee benefit plans’ curtailment loss (gain), net
    106       1,643       (5,162 )
Noncash (gain) loss on extinguishment of debt, net of write-off of unamortized
                       
debt issuance costs
    (13,647 )           394  
Amortization of deferred debt issuance costs
    4,332       4,344       4,007  
Stock-based compensation
    6,438       7,822       6,832  
Allowance for doubtful accounts
    7,536       7,246       10,376  
Deferred income taxes
    31,113       (5,128 )     75,827  
Change in operating assets and liabilities (excluding assets and liabilities acquired):
                       
Trade receivables
    (30,259 )     27,568       61,707  
Inventories
    (148,533 )     113,014       (21,777 )
Other current assets
    (20,131 )     5,626       (25,400 )
Other non-current assets
    (7,160 )     (11,757 )     (16,773 )
Accounts payable and other accrued liabilities
    39,886       (58,185 )     (100,388 )
Income tax liabilities
    6,330       (3,377 )     3,923  
Accrued salaries, wages and employee benefits
    (18,463 )     (20,082 )     (30,566 )
Long-term employee related benefits
    6,335       26,871       (35,112 )
Other long-term liabilities
    19,120       (4,452 )     6,922  
Other, net
    52       (11 )     44  
                         
Net cash provided by operating activities
    146,274       388,783       224,809  
                         
Cash Flows from Investing Activities:
                       
Purchases of property, plant and equipment
    (154,632 )     (82,938 )     (80,350 )
Proceeds from sale of property, plant and equipment
    1,549       939       995  
(Payments) proceeds on settlement of forward foreign exchange
                       
contracts not designated for hedge accounting
    (16,342 )     (50,760 )     53,499  
Acquisitions, net of cash acquired
    (12,242 )     (100,270 )     (959 )
Other
    (114 )            
                         
Net cash used for investing activities
    (181,781 )     (233,029 )     (26,815 )
                         
Cash Flows from Financing Activities:
                       
Proceeds from issuance of long-term debt
    909,390              
Repayments of long-term debt and capital leases
    (866,051 )     (72,870 )     (94,904 )
Short-term borrowings, net
    27,311       (2,704 )     12,181  
Debt issuance costs
    (17,546 )           (446 )
Restricted cash
    (700 )     (602 )     (1,224 )
Repurchase of common stock
    (78 )            
Dividends to noncontrolling interest shareholders
          (978 )     (1,114 )
Dividend to stockholders
    (20,013 )     (20,001 )     (49,953 )
                         
Net cash provided by (used for) financing activities
    32,313       (97,155 )     (135,460 )
                         
Effect of exchange rate changes on cash and cash equivalents
    2,116       1,393       (7,636 )
                         
Net (decrease) increase in cash and cash equivalents
    (1,078 )     59,992       54,898  
Beginning cash and cash equivalents
    270,804       210,812       155,914  
                         
Ending cash and cash equivalents
  $ 269,726     $ 270,804     $ 210,812  
                         
                         
Supplemental disclosure of cash flow information:
                       
Cash paid during the period for:
                       
Interest
  $ 147,237     $ 135,576     $ 154,103  
Income taxes
    52,912       56,922       63,107  
                         
 
The accompanying notes are an integral part of these consolidated financial statements.


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LEVI STRAUSS & CO. AND SUBSIDIARIES
 
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
 
FOR THE YEARS ENDED NOVEMBER 28, 2010, NOVEMBER 29, 2009, AND NOVEMBER 30, 2008
 
NOTE 1:   SIGNIFICANT ACCOUNTING POLICIES
 
Nature of Operations
 
Levi Strauss & Co. (the “Company”) is one of the world’s leading branded apparel companies. The Company designs and markets jeans, casual and dress pants, tops, skirts, jackets, footwear and related accessories, for men, women and children under the Levi’s®, Dockers®, Signature by Levi Strauss & Co.tm and Denizentm brands. The Company markets its products in three geographic regions: Americas, Europe and Asia Pacific.
 
Basis of Presentation and Principles of Consolidation
 
The consolidated financial statements of the Company and its wholly-owned and majority-owned foreign and domestic subsidiaries are prepared in conformity with generally accepted accounting principles in the United States (“U.S.”). All significant intercompany balances and transactions have been eliminated. The Company is privately held primarily by descendants of the family of its founder, Levi Strauss, and their relatives.
 
The Company’s fiscal year ends on the last Sunday of November in each year, although the fiscal years of certain foreign subsidiaries are fixed at November 30 due to local statutory requirements. Apart from these subsidiaries, each quarter of fiscal years 2010, 2009 and 2008 consists of 13 weeks, with the exception of the fourth quarter of 2008, which consisted of 14 weeks. All references to years relate to fiscal years rather than calendar years.
 
Subsequent events have been evaluated through the issuance date of these financial statements.
 
In 2010, the Company became subject to disclosure provisions which require that amounts attributable to noncontrolling interests (formerly referred to as “minority interests”) be clearly identified and presented separately from the Company’s interests in the consolidated financial statements. Accordingly, prior-year amounts relating to the 16.4% noncontrolling interest in Levi Strauss Japan K.K., the Company’s Japanese subsidiary, have been reclassified to conform to the new presentation.
 
Use of Estimates
 
The preparation of financial statements in conformity with accounting principles generally accepted in the United States requires management to make estimates and assumptions that affect the amounts reported in the consolidated financial statements and the related notes to consolidated financial statements. Estimates are based upon historical factors, current circumstances and the experience and judgment of the Company’s management. Management evaluates its assumptions and estimates on an ongoing basis and may employ outside experts to assist in its evaluations. Changes in such estimates, based on more accurate future information, or different assumptions or conditions, may affect amounts reported in future periods.
 
Cash and Cash Equivalents
 
The Company considers all highly liquid investments with an original maturity of three months or less to be cash equivalents. Cash equivalents are stated at fair value.
 
Restricted Cash
 
Restricted cash primarily relates to required cash deposits for customs and rental guarantees to support the Company’s international operations.


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LEVI STRAUSS & CO. AND SUBSIDIARIES
 
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS — (Continued)
 
FOR THE YEARS ENDED NOVEMBER 28, 2010, NOVEMBER 29, 2009, AND NOVEMBER 30, 2008
 
Accounts Receivable, Net
 
The Company extends credit to its wholesale customers that satisfy pre-defined credit criteria. Accounts receivable, which includes receivables related to the Company’s net sales and licensing revenues, are recorded net of an allowance for doubtful accounts. The Company estimates the allowance for doubtful accounts based upon an analysis of the aging of accounts receivable at the date of the consolidated financial statements, assessments of collectability based on historic trends, customer-specific circumstances, and an evaluation of economic conditions.
 
Inventory Valuation
 
The Company values inventories at the lower of cost or market value. Inventory cost is determined using the first-in first-out method. The Company includes product costs, labor and related overhead, sourcing costs, inbound freight, internal transfers, and the cost of operating its remaining manufacturing facilities, including the related depreciation expense, in the cost of inventories. The Company estimates quantities of slow-moving and obsolete inventory, by reviewing on-hand quantities, outstanding purchase obligations and forecasted sales. The Company determines inventory market values by estimating expected selling prices based on the Company’s historical recovery rates for slow-moving and obsolete inventory and other factors, such as market conditions, expected channel of distribution and current consumer preferences.
 
Income Tax Assets and Liabilities
 
The Company is subject to income taxes in both the 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 allowance, the Company’s management evaluates all significant available positive and negative evidence, including historical operating results, estimates of future taxable income and the existence of prudent and feasible tax planning strategies.
 
The Company does not recognize deferred taxes with respect to temporary differences between the book and tax bases in its investments in foreign subsidiaries, unless it becomes apparent that these temporary differences will reverse in the foreseeable future.
 
The Company continuously reviews issues raised in connection with all ongoing examinations and open tax years to evaluate the adequacy of its liabilities. 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.


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LEVI STRAUSS & CO. AND SUBSIDIARIES
 
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS — (Continued)
 
FOR THE YEARS ENDED NOVEMBER 28, 2010, NOVEMBER 29, 2009, AND NOVEMBER 30, 2008
 
Property, Plant and Equipment
 
Property, plant and equipment are carried at cost, less accumulated depreciation. The cost is depreciated on a straight-line basis over the estimated useful lives of the related assets. Certain costs relating to internal-use software development are capitalized when incurred during the application development phase. Buildings are depreciated over 20 to 40 years, and leasehold improvements are depreciated over the lesser of the life of the improvement or the initial lease term. Machinery and equipment includes furniture and fixtures, automobiles and trucks, and networking communication equipment, and is depreciated over a range from three to 20 years. Capitalized internal-use software is depreciated over periods ranging from three to seven years.
 
Goodwill and Other Intangible Assets
 
Goodwill resulted primarily from a 1985 acquisition of the Company by Levi Strauss Associates Inc., a former parent company that was subsequently merged into the Company in 1996, and the Company’s 2009 acquisitions. Goodwill is not amortized; intangible assets are comprised of owned trademarks with indefinite useful lives which are not being amortized and acquired contractual rights and customers lists with finite lives which are being amortized over periods ranging from two to eight years.
 
Impairment
 
The Company reviews its goodwill and other non-amortized intangible assets for impairment annually in the fourth quarter of its fiscal year, or more frequently as warranted by events or changes in circumstances which indicate that the carrying amount may not be recoverable. In the Company’s impairment tests, the Company uses a two-step approach. In the first step, the Company compares the carrying value of the applicable asset or reporting unit to its fair value, which the Company estimates using a discounted cash flow analysis or by comparison with the market values of similar assets. If the carrying amount of the asset or reporting unit exceeds its estimated fair value, the Company performs the second step, and determines the impairment loss, if any, as the excess of the carrying value of the goodwill or intangible asset over its fair value.
 
The Company reviews its other long-lived assets for impairment whenever events or changes in circumstances indicate the carrying amount of an asset may not be recoverable. If the carrying amount of an asset exceeds the expected future undiscounted cash flows, the Company measures and records an impairment loss for the excess of the carrying value of the asset over its fair value.
 
To determine the fair value of impaired assets, the Company utilizes the valuation technique or techniques deemed most appropriate based on the nature of the impaired asset and the data available, which may include the use of quoted market prices, prices for similar assets or other valuation techniques such as discounted future cash flows or earnings.
 
Debt Issuance Costs
 
The Company capitalizes debt issuance costs, which are included in “Other assets” in the Company’s consolidated balance sheets. These costs are amortized using the effective interest method. Amortization of debt issuance costs is included in “Interest expense” in the consolidated statements of income.
 
Deferred Rent
 
The Company is obligated under operating leases of property for manufacturing, finishing and distribution facilities, office space, retail stores and equipment. Rental expense relating to operating leases are recognized on a straight-line basis over the lease term after consideration of lease incentives and scheduled rent escalations beginning as of the date the Company takes physical possession or control of the property. Differences between


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LEVI STRAUSS & CO. AND SUBSIDIARIES
 
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS — (Continued)
 
FOR THE YEARS ENDED NOVEMBER 28, 2010, NOVEMBER 29, 2009, AND NOVEMBER 30, 2008
 
rental expense and actual rental payments are recorded as deferred rent liabilities included in “Other accrued liabilities” and “Other long-term liabilities” on the consolidated balance sheets.
 
Fair Value of Financial Instruments
 
The fair values of the Company’s financial instruments reflect the amounts that would be received to sell an asset or paid to transfer a liability in an orderly transaction between market participants at the measurement date (exit price). The fair value estimates presented in this report are based on information available to the Company as of November 28, 2010, and November 29, 2009.
 
The carrying values of cash and cash equivalents, trade receivables and short-term borrowings approximate fair value. The Company has estimated the fair value of its other financial instruments using the market and income approaches. Rabbi trust assets, forward foreign exchange contracts and the interest rate swap contract are carried at their fair values. Notes, loans and borrowings under the Company’s credit facilities are carried at historical cost and adjusted for amortization of premiums or discounts, foreign currency fluctuations and principal payments.
 
Pension and Postretirement Benefits
 
The Company has several non-contributory defined benefit retirement plans covering eligible employees. The Company also provides certain health care benefits for U.S. employees who meet age, participation and length of service requirements at retirement. In addition, the Company sponsors other retirement or post-employment plans for its foreign employees in accordance with local government programs and requirements. The Company retains the right to amend, curtail or discontinue any aspect of the plans, subject to local regulations.
 
The Company recognizes either an asset or a liability for any plan’s funded status in its consolidated balance sheets. The Company measures changes in funded status using actuarial models which use an attribution approach that generally spreads individual events over the estimated service lives of the employees in the plan. The attribution approach assumes that employees render service over their service lives on a relatively smooth basis and as such, presumes that the income statement effects of pension or postretirement benefit plans should follow the same pattern. The Company’s policy is to fund its retirement plans based upon actuarial recommendations and in accordance with applicable laws, income tax regulations and credit agreements. Net pension and postretirement benefit income or expense is generally determined using assumptions which include expected long-term rates of return on plan assets, discount rates, compensation rate increases and medical trend rates. The Company considers several factors including actual historical rates, expected rates and external data to determine the assumptions used in the actuarial models.
 
Pension benefits are primarily paid through trusts funded by the Company. The Company pays postretirement benefits to the healthcare service providers on behalf of the plan’s participants.
 
Employee Incentive Compensation
 
The Company maintains short-term and long-term employee incentive compensation plans. These plans are intended to reward eligible employees for their contributions to the Company’s short-term and long-term success. Provisions for employee incentive compensation are recorded in “Accrued salaries, wages and employee benefits” and “Long-term employee related benefits” in the Company’s consolidated balance sheets. The Company accrues the related compensation expense over the period of the plan and changes in the liabilities for these incentive plans generally correlate with the Company’s financial results and projected future financial performance.


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LEVI STRAUSS & CO. AND SUBSIDIARIES
 
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS — (Continued)
 
FOR THE YEARS ENDED NOVEMBER 28, 2010, NOVEMBER 29, 2009, AND NOVEMBER 30, 2008
 
Stock-Based Compensation
 
The Company has stock-based incentive plans which reward certain employees and directors with cash or equity. Compensation cost for these awards is estimated based on the number of awards that are expected to vest. Compensation cost for equity awards is measured based on the fair value at the grant date, while liability award expense is measured and adjusted based on the fair value at the end of each quarter. No compensation cost is ultimately recognized for awards which are unvested and forfeited at an employees’ termination date or for liability awards which are out-of-the-money at the award expiration date. Compensation cost is recognized on a straight-line basis over the period that an employee provides service for that award, which generally is the vesting period.
 
The Company’s common stock is not listed on any established stock exchange. Accordingly, the stock’s fair market value is determined by the Board based upon a valuation performed by an independent third-party, Evercore Group LLC (“Evercore”). Determining the fair value of the Company’s stock requires complex and subjective judgments. The valuation process includes comparison of the Company’s historical and estimated future financial results with selected publicly-traded companies and application of an appropriate discount for the illiquidity of the stock to derive the fair value of the stock. The Company uses this valuation for, among other things, making determinations under its stock-based compensation plans, such as the grant date fair value of awards.
 
The fair value of equity awards granted to employees is estimated on the date of grant using the Black-Scholes option pricing model. The Black-Scholes option pricing model requires the input of highly subjective assumptions including volatility. Due to the fact that the Company’s common stock is not publicly traded, the computation of expected volatility is based on the average of the historical and implied volatilities, over the expected life of the awards, of comparable companies from a representative peer group of publicly traded entities, selected based on industry and financial attributes. Other assumptions include expected life, risk-free rate of interest and dividend yield. Expected life is computed using the simplified method. The risk-free interest rate is based on zero coupon U.S. Treasury bond rates corresponding to the expected life of the awards. Dividend assumptions are based on historical experience.
 
The fair value of equity awards granted to directors is based on the fair value of the common stock at the date of grant. The fair value of liability awards granted to employees is also based on the Black-Scholes option pricing model and is calculated based on the current common stock value and assumptions at each quarter end.
 
Due to the job function of the award recipients, the Company has included stock-based compensation cost in “Selling, general and administrative expenses” in the consolidated statements of income.
 
Self-Insurance
 
The Company self-insures, up to certain limits, workers’ compensation risk and employee and eligible retiree medical health benefits. The Company carries insurance policies covering claim exposures which exceed predefined amounts, both per occurrence and in the aggregate, for all workers’ compensation claims and for the medical claims of active employees as well as those salaried retirees who retired after June 1, 2001. Accruals for losses are made based on the Company’s claims experience and actuarial assumptions followed in the insurance industry, including provisions for incurred but not reported losses.
 
Derivative Financial Instruments and Hedging Activities
 
The Company recognizes all derivatives as assets and liabilities at their fair values. The Company may use derivatives and establish programs from time to time to manage foreign currency and interest rate exposures that are sensitive to changes in market conditions. The instruments that we designate or that qualify for hedge accounting treatment hedge the Company’s net investment position in certain of its foreign subsidiaries. For these instruments, the Company documents the hedge designation by identifying the hedging instrument, the nature of the risk being


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LEVI STRAUSS & CO. AND SUBSIDIARIES
 
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS — (Continued)
 
FOR THE YEARS ENDED NOVEMBER 28, 2010, NOVEMBER 29, 2009, AND NOVEMBER 30, 2008
 
hedged and the approach for measuring hedge ineffectiveness. The ineffective portions of hedges are recorded in “Other income (expense), net” in the Company’s consolidated statements of income. The gains and losses on the instruments that we designate and that qualify for hedge accounting treatment are recorded in “Accumulated other comprehensive loss” in the Company’s consolidated balance sheets until the underlying has been settled and is then reclassified to earnings. Changes in the fair values of the derivative instruments that we do not designate or that do not qualify for hedge accounting are recorded in “Other income (expense), net” or “Interest expense” in the Company’s consolidated statements of income to reflect the economic risk being mitigated.
 
Foreign Currency
 
The functional currency for most of the Company’s foreign operations is the applicable local currency. For those operations, assets and liabilities are translated into U.S. Dollars using period-end exchange rates, income and expenses are translated at average monthly exchange rates, and equity accounts are translated at historical rates. Net changes resulting from such translations are recorded as a component of translation adjustments in “Accumulated other comprehensive income (loss)” in the Company’s consolidated balance sheets.
 
The U.S. Dollar is the functional currency for foreign operations in countries with highly inflationary economies. The translation adjustments for these entities, as applicable, are included in “Other income (expense), net” in the Company’s consolidated statements of income.
 
Foreign currency transactions are transactions denominated in a currency other than the entity’s functional currency. At each balance sheet date, each entity remeasures the recorded balances related to foreign-currency transactions using the period-end exchange rate. Gains or losses arising from the remeasurement of these balances are recorded in “Other income (expense), net” in the Company’s consolidated statements of income. In addition, at the settlement date of foreign currency transactions, foreign currency gains and losses are recorded in “Other income (expense), net” in the Company’s consolidated statements of income to reflect the difference between the rate effective at the settlement date and the historical rate at which the transaction was originally recorded.
 
Noncontrolling Interest
 
Noncontrolling interest includes a 16.4% minority interest of third parties in Levi Strauss Japan K.K., the Company’s Japanese subsidiary.
 
Stockholders’ Deficit
 
The accumulated deficit component of stockholders’ deficit at November 29, 2009, and prior, primarily resulted from a 1996 recapitalization transaction in which the Company’s stockholders created new long-term governance arrangements, including a voting trust and stockholders’ agreement. As a result, shares of stock of a former parent company, Levi Strauss Associates Inc., including shares held under several employee benefit and compensation plans, were converted into the right to receive cash. The funding for the cash payments in this transaction was provided in part by cash on hand and in part from proceeds of approximately $3.3 billion of borrowings under bank credit facilities.
 
Revenue Recognition
 
Net sales is primarily comprised of sales of products to wholesale customers, including franchised stores, and direct sales to consumers at the Company’s company-operated and online stores and at the Company’s company-operated shop-in-shops located within department stores. The Company recognizes revenue on sale of product when the goods are shipped or delivered and title to the goods passes to the customer provided that: there are no uncertainties regarding customer acceptance; persuasive evidence of an arrangement exists; the sales price is fixed or determinable; and collectability is reasonably assured. The revenue is recorded net of an allowance for estimated


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LEVI STRAUSS & CO. AND SUBSIDIARIES
 
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS — (Continued)
 
FOR THE YEARS ENDED NOVEMBER 28, 2010, NOVEMBER 29, 2009, AND NOVEMBER 30, 2008
 
returns, discounts and retailer promotions and other similar incentives. Licensing revenues from the use of the Company’s trademarks in connection with the manufacturing, advertising, and distribution of trademarked products by third-party licensees are earned and recognized as products are sold by licensees based on royalty rates as set forth in the licensing agreements.
 
The Company recognizes allowances for estimated returns in the period in which the related sale is recorded. The Company recognizes allowances for estimated discounts, retailer promotions and other similar incentives at the later of the period in which the related sale is recorded or the period in which the sales incentive is offered to the customer. The Company estimates non-volume based allowances based on historical rates as well as customer and product-specific circumstances. Sales and value-added taxes collected from customers and remitted to governmental authorities are presented on a net basis in the consolidated statements of income.
 
Net sales to the Company’s ten largest customers totaled approximately 33%, 36% and 37% of net revenues for 2010, 2009 and 2008, respectively. No customer represented 10% or more of net revenues in any of these years.
 
Cost of Goods Sold
 
Cost of goods sold includes the expenses incurred to acquire and produce inventory for sale, including product costs, labor and related overhead, sourcing costs, inbound freight, internal transfers, and the cost of operating the Company’s remaining manufacturing facilities, including the related depreciation expense. Costs relating to the Company’s licensing activities are included in “Selling, general and administrative expenses” in the consolidated statements of income.
 
Selling, General and Administrative Expenses
 
Selling, general and administrative expenses are primarily comprised of costs relating to advertising, marketing, selling, distribution, information technology and other corporate functions. Selling costs include all occupancy costs associated with company-operated stores and with the Company’s company-operated shop-in-shops located within department stores. The Company expenses advertising costs as incurred. For 2010, 2009 and 2008, total advertising expense was $327.8 million, $266.1 million and $297.9 million, respectively. Distribution costs include costs related to receiving and inspection at distribution centers, warehousing, shipping to the Company’s customers, handling and certain other activities associated with the Company’s distribution network. These expenses totaled $185.1 million, $185.7 million and $215.8 million for 2010, 2009 and 2008, respectively.
 
Recently Issued Accounting Standards
 
The following recently issued accounting standards have been grouped by their required effective dates for the Company:
 
First Quarter of 2011
 
  •  In October 2009 the FASB issued Accounting Standards Update 2009-13, “Revenue Recognition (Topic 605): Multiple Deliverable Revenue Arrangements (a consensus of the FASB Emerging Issues Task Force),” (“ASU 2009-13”). ASU 2009-13 provides principles and application guidance on whether multiple deliverables exist, how the arrangement should be separated and the consideration allocation. Additionally, ASU 2009-13 requires an entity to allocate revenue in an arrangement using estimated selling prices of deliverables if a vendor does not have vendor-specific objective evidence or third-party evidence of selling price, eliminates the residual method and requires an entity to allocate revenue using the relative selling price method. ASU 2009-13 may be applied retrospectively or prospectively for new or materially modified


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LEVI STRAUSS & CO. AND SUBSIDIARIES
 
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS — (Continued)
 
FOR THE YEARS ENDED NOVEMBER 28, 2010, NOVEMBER 29, 2009, AND NOVEMBER 30, 2008
 
  arrangements and early adoption is permitted. The Company does not anticipate that the adoption of this statement will have a material impact on its consolidated financial statements.
 
NOTE 2:   PROPERTY, PLANT AND EQUIPMENT
 
The components of property, plant and equipment (“PP&E”) were as follows:
 
                 
    November 28,
    November 29,
 
    2010     2009  
    (Dollars in thousands)  
 
Land
  $ 29,728     $ 30,118  
Buildings and leasehold improvements
    406,644       380,601  
Machinery and equipment
    493,325       493,152  
Capitalized internal-use software
    186,905       158,630  
Construction in progress
    55,259       32,460  
                 
Subtotal
    1,171,861       1,094,961  
Accumulated depreciation
    (683,258 )     (664,891 )
                 
PP&E, net
  $ 488,603     $ 430,070  
                 
 
Depreciation expense for the years ended November 28, 2010, November 29, 2009, and November 30, 2008, was $88.9 million, $76.8 million and $78.0 million, respectively.
 
Construction in progress at November 28, 2010, and November 29, 2009, primarily related to the installation of various information technology systems and leasehold improvements.
 
Impairment charges in 2010 were not material; the Company recorded impairment charges of $11.5 million and $16.1 million in 2009 and 2008, respectively, to reduce the carrying values of certain long-lived assets, primarily in the Americas for leasehold improvements in company-operated stores, to their estimated fair values. The impairment charges were recorded as “Selling, general and administrative expenses” in the Company’s consolidated statements of income. The remaining fair values of the impaired stores at November 28, 2010, were not material.
 
NOTE 3:   GOODWILL AND OTHER INTANGIBLE ASSETS
 
The changes in the carrying amount of goodwill by business segment for the years ended November 28, 2010, and November 29, 2009, were as follows:
 
                                 
                Asia
       
    Americas     Europe     Pacific     Total  
    (Dollars in thousands)  
 
Balance, November 30, 2008
  $ 199,905     $ 3,038     $ 1,720     $ 204,663  
Additions
    7,513       24,427             31,940  
Foreign currency fluctuation
    5       4,615       545       5,165  
                                 
Balance, November 29, 2009
  $ 207,423     $ 32,080     $ 2,265     $ 241,768  
Additions
          2,115             2,115  
Foreign currency fluctuation
    4       (2,592 )     177       (2,411 )
                                 
Balance, November 28, 2010
  $ 207,427     $ 31,603     $ 2,442     $ 241,472  
                                 


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LEVI STRAUSS & CO. AND SUBSIDIARIES
 
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS — (Continued)
 
FOR THE YEARS ENDED NOVEMBER 28, 2010, NOVEMBER 29, 2009, AND NOVEMBER 30, 2008
 
The increase in goodwill in Europe in 2009 primarily resulted from the Company’s acquisition of a former distributor, which distributes and markets Levi’s® products within the Russian Federation. The Company acquired a 51% ownership interest in the business venture in December 2008, and acquired the remaining 49% in September 2009. Total purchase consideration for the acquisition was approximately $32 million. The Company allocated the purchase price to the fair values of the tangible assets and intangible contractual rights acquired and the liabilities assumed at the acquisition date, with the difference of approximately $20 million recorded as goodwill. Cash paid for the acquisition, net of cash acquired, was $20 million.
 
The increase in goodwill in Europe in 2009 also reflects the Company’s July 1, 2009, acquisition of a former licensee for a base purchase price of $21 million, plus a purchase price adjustment for the acquired net asset value based on the final balance sheet of the acquired business, estimated at $16 million. The Company initially allocated the purchase price to the fair values of the tangible assets, intangible customer lists and contractual rights acquired, and the liabilities assumed at the acquisition date, with the difference of approximately $4 million recorded as goodwill. During 2009, the Company made payments totaling $16 million, net of cash acquired, in partial payment for this acquisition. The remaining purchase consideration was paid in the second quarter of 2010 after the finalization of the purchase price, resulting in additional goodwill of approximately $2 million.
 
The increase in goodwill in the Americas resulted from the Company’s July 13, 2009, acquisition of the operating rights to 73 Levi’s® and Dockers® outlet stores from Anchor Blue Retail Group, Inc., who previously operated the stores under a license agreement with the Company. The Company allocated the $62 million cost of the acquisition to the fair values of the tangible assets and intangible contractual rights acquired and the liabilities assumed at the acquisition date, with the difference of approximately $7 million recorded as goodwill.
 
The impact of the Company’s acquisitions during 2009 on the Company’s results of operations, as if the acquisitions had been completed as of the beginning of the periods presented, is not significant.
 
Other intangible assets, net, were as follows:
 
                                                 
    November 28, 2010     November 29, 2009  
    Gross
                Gross
             
    Carrying
    Accumulated
          Carrying
    Accumulated
       
    Value     Amortization     Total     Value     Amortization     Total  
    (Dollars in thousands)  
 
Non-amortized intangible assets:
                                               
Trademarks
  $ 42,743     $     $ 42,743     $ 42,743     $     $ 42,743  
Amortized intangible assets:
                                               
Acquired contractual rights
    45,712       (17,765 )     27,947       46,529       (6,019 )     40,510  
Customer lists
    20,037       (6,075 )     13,962       22,340       (2,395 )     19,945  
                                                 
    $ 108,492     $ (23,840 )   $ 84,652     $ 111,612     $ (8,414 )   $ 103,198  
                                                 
 
The estimated useful lives of the Company’s amortized intangible assets range from two to eight years. For the year ended November 28, 2010, amortization of these intangible assets was $14.8 million, compared to $7.8 million in 2009. The amortization of these intangible assets, which is included in “Selling, general and administrative expenses” in the Company’s consolidated statements of income, in each of the five succeeding fiscal years is approximately $12.8 million in 2011, $12.2 million in 2012, $11.0 million in 2013, $2.8 million in 2014, and $2.5 million in 2015.
 
As of November 28, 2010, there was no impairment to the carrying value of the Company’s goodwill or non-amortized intangible assets.


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LEVI STRAUSS & CO. AND SUBSIDIARIES
 
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS — (Continued)
 
FOR THE YEARS ENDED NOVEMBER 28, 2010, NOVEMBER 29, 2009, AND NOVEMBER 30, 2008
 
 
NOTE 4:   FAIR VALUE OF FINANCIAL INSTRUMENTS
 
The following table presents the Company’s financial instruments that are carried at fair value.
 
                                                 
    November 28, 2010     November 29, 2009  
          Fair Value Estimated
          Fair Value Estimated
 
          Using           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
  $ 18,316     $ 18,316     $     $ 16,855     $ 16,855     $  
Forward foreign exchange contracts, net(3)
    1,385             1,385       721             721  
                                                 
Total financial assets carried at fair value
  $ 19,701     $ 18,316     $ 1,385     $ 17,576     $ 16,855     $ 721  
                                                 
Financial liabilities carried at fair value
                                               
Forward foreign exchange contracts, net(3)
  $ 5,003     $     $ 5,003     $ 14,519     $     $ 14,519  
Interest rate contracts, net
                      1,451             1,451  
                                                 
Total financial liabilities carried at fair value
  $ 5,003     $     $ 5,003     $ 15,970     $     $ 15,970  
                                                 
 
 
(1) Fair values estimated using Level 1 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. See Note 12 for more information on rabbi trust assets.
 
(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 credit default swap prices. For the interest rate swap, for which the Company’s fair value estimate incorporates discounted future cash flows using a forward curve mid-market pricing convention, inputs include LIBOR forward rates and credit default swap prices.
 
(3) The Company’s forward foreign exchange contracts are subject to International Swaps and Derivatives Association, Inc. (“ISDA”) master agreements. These agreements are signed between the Company and each respective financial institution, and permit the net-settlement of forward foreign exchange contracts on a per institution basis.


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LEVI STRAUSS & CO. AND SUBSIDIARIES
 
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS — (Continued)
 
FOR THE YEARS ENDED NOVEMBER 28, 2010, NOVEMBER 29, 2009, AND NOVEMBER 30, 2008
 
 
The following table presents the carrying value — including accrued interest as applicable — and estimated fair value of the Company’s financial instruments that are carried at adjusted historical cost.
 
                                 
    November 28, 2010     November 29, 2009  
    Carrying
    Estimated
    Carrying
    Estimated
 
    Value     Fair Value(1)     Value     Fair Value(1)  
    (Dollars in thousands)  
 
Financial liabilities carried at adjusted historical cost
                               
Senior revolving credit facility
  $ 108,482     $ 107,129     $ 108,489     $ 103,618  
8.625% Euro senior notes due 2013(2)
                379,935       379,935  
Senior term loan due 2014
    324,423       311,476       323,497       291,163  
9.75% senior notes due 2015(2)
                462,704       485,572  
8.875% senior notes due 2016
    355,004       373,379       355,120       366,495  
4.25% Yen-denominated Eurobonds due 2016(2)
    109,429       98,063       232,494       197,448  
7.75% Euro senior notes due 2018(2)
    401,982       407,993              
7.625% senior notes due 2020(2)
    526,557       542,307              
Short-term borrowings
    46,722       46,722       19,027       19,027  
                                 
Total financial liabilities carried at adjusted historical cost
  $ 1,872,599     $ 1,887,069     $ 1,881,266     $ 1,843,258  
                                 
 
 
(1) Fair value estimate incorporates mid-market price quotes.
 
(2) Reflects the Company’s refinancing activities during the second quarter of 2010. Please see Note 6 for additional information.
 
NOTE 5:   DERIVATIVE INSTRUMENTS AND HEDGING ACTIVITIES
 
The Company’s foreign currency management objective is to minimize the effect of fluctuations in foreign exchange rates on nonfunctional currency cash flows of the Company and its subsidiaries and selected assets or liabilities of the Company and its subsidiaries without exposing the Company to additional risk associated with transactions that could be regarded as speculative. Forward exchange contracts on various currencies are entered into to manage foreign currency exposures associated with certain product sourcing activities, some intercompany sales, foreign subsidiaries’ royalty payments, interest payments, earnings repatriations, net investment in foreign operations and funding activities. The Company manages certain forecasted foreign currency exposures and uses a centralized currency management operation to take advantage of potential opportunities to naturally offset foreign currency exposures against each other. The Company manages the currency risk associated with certain forecasted cash flows periodically and only partially manages the timing mismatch between its forecasted exposures and the related financial instruments used to mitigate the currency risk. The Company designates its outstanding Euro senior notes and a portion of its outstanding Yen-denominated Eurobonds as net investment hedges to manage foreign currency exposures in its foreign operations. The Company does not apply hedge accounting to its derivative transactions. As of November 28, 2010, the Company had forward foreign exchange contracts to buy $623.7 million and to sell $392.5 million against various foreign currencies. These contracts are at various exchange rates and expire at various dates through February 2012.


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LEVI STRAUSS & CO. AND SUBSIDIARIES
 
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS — (Continued)
 
FOR THE YEARS ENDED NOVEMBER 28, 2010, NOVEMBER 29, 2009, AND NOVEMBER 30, 2008
 
The table below provides data about the carrying values of derivative and non-derivative instruments:
 
                                                 
    November 28, 2010     November 29, 2009  
    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)
  $ 7,717     $ (6,332 )   $ 1,385     $ 1,189     $ (468 )   $ 721  
Forward foreign exchange contracts(2)
    4,266       (9,269 )     (5,003 )     5,675       (20,194 )     (14,519 )
Interest rate contracts(2)
                            (1,451 )     (1,451 )
                                                 
Total derivatives not designated as hedging instruments
  $ 11,983     $ (15,601 )           $ 6,864     $ (22,113 )        
                                                 
Non-derivatives designated as hedging instruments
                                               
4.25% Yen-denominated Eurobonds due 2016
  $     $ (61,075 )           $     $ (92,684 )        
7.75% Euro senior notes due 2018
          (400,740 )                   (374,641 )        
                                                 
Total non-derivatives designated as hedging instruments
  $     $ (461,815 )           $     $ (467,325 )        
                                                 
 
 
(1) Included in “Other current assets” on the Company’s consolidated balance sheets.
 
(2) Included in “Other accrued liabilities” on the Company’s consolidated balance sheets.


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LEVI STRAUSS & CO. AND SUBSIDIARIES
 
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS — (Continued)
 
FOR THE YEARS ENDED NOVEMBER 28, 2010, NOVEMBER 29, 2009, AND NOVEMBER 30, 2008
 
 
The table below provides data about the amount of gains and losses related to derivative instruments and non-derivative instruments designated as net investment hedges included in “Accumulated other comprehensive loss” (“AOCI”) on the Company’s consolidated balance sheets, and in “Other income (expense), net” in the Company’s consolidated statements of income:
 
                                         
                Gain (Loss)
 
    Gain (Loss)
    Recognized in Other Income (Expense), net
 
    Recognized in AOCI
    (Ineffective Portion and Amount
 
    (Effective Portion)     Excluded from Effectiveness Testing)  
    As of
    As of
    Year Ended  
    November 28,
    November 29,
    November 28,
    November 29,
    November 30,
 
    2010     2009     2010     2009     2008  
    (Dollars in thousands)  
 
Forward foreign exchange contracts
  $ 4,637     $ 4,637     $     $     $  
4.25% Yen-denominated Eurobonds due 2016
    (24,377 )     (23,621 )     2,254       (13,094 )     (14,815 )
7.75% Euro senior notes due 2018
    (23,671 )     (61,570 )                  
Cumulative income taxes
    17,022       31,237                          
                                         
Total
  $ (26,389 )   $ (49,317 )                        
                                         
 
The table below provides data about the amount of gains and losses related to derivatives not designated as hedging instruments included in “Other income (expense), net” in the Company’s consolidated statements of income:
 
                         
    Gain (Loss) During  
    Year Ended  
    November 28,
    November 29,
    November 30,
 
    2010     2009     2008  
    (Dollars in thousands)  
 
Forward foreign exchange contracts:
                       
Realized
  $ (16,342 )   $ (50,760 )   $ 53,499  
Unrealized
    10,163       (18,794 )     10,944  
                         
Total
  $ (6,179 )   $ (69,554 )   $ 64,443  
                         


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Table of Contents

LEVI STRAUSS & CO. AND SUBSIDIARIES
 
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS — (Continued)
 
FOR THE YEARS ENDED NOVEMBER 28, 2010, NOVEMBER 29, 2009, AND NOVEMBER 30, 2008
 
 
NOTE 6:   DEBT
 
                 
    November 28,
    November 29,
 
    2010     2009  
    (Dollars in thousands)  
 
Long-term debt
               
Secured:
               
Senior revolving credit facility
  $ 108,250     $ 108,250  
                 
Total secured
    108,250       108,250  
                 
Unsecured:
               
8.625% Euro senior notes due 2013
          374,641  
Senior term loan due 2014
    323,676       323,340  
9.75% senior notes due 2015
          446,210  
8.875% senior notes due 2016
    350,000       350,000  
4.25% Yen-denominated Eurobonds due 2016
    109,062       231,710  
7.75% Euro senior notes due 2018
    400,740        
7.625% senior notes due 2020
    525,000        
                 
Total unsecured
    1,708,478       1,725,901