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EX-31.1 - EXHIBIT 31.1 - LEVI STRAUSS & COlvis08302015ex-311.htm
EX-32 - EXHIBIT 32 - LEVI STRAUSS & COlvis08302015ex-32.htm
EX-31.2 - EXHIBIT 31.2 - LEVI STRAUSS & COlvis08302015ex-312.htm

 
 
 
 
 
 
 
 
 
 
UNITED STATES SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
_________________
Form 10-Q
(Mark One)
 þ
 
QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934
For the Quarterly Period Ended August 30, 2015
or
 ¨
 
TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934
Commission file number: 002-90139
_________________
LEVI STRAUSS & CO.
(Exact Name of Registrant as Specified in Its Charter)
DELAWARE
  
94-0905160
(State or Other Jurisdiction of
Incorporation or Organization)
  
(I.R.S. Employer
Identification No.)
1155 Battery Street, San Francisco, California 94111
(Address of Principal Executive Offices) (Zip Code)
(415) 501-6000
(Registrant’s Telephone Number, Including Area Code)
None
(Former Name, Former Address and Former Fiscal Year, if Changed Since Last Report)
_________________
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  ¨
Indicate by check mark whether the registrant has submitted electronically and posted on its corporate Web site, if any, every Interactive Data File required to be submitted and posted pursuant to Rule 405 of Regulation S-T (§232.405 of this chapter) during the preceding 12 months (or for such shorter period that the registrant was required to submit and post such files).    Yes  þ    No  ¨
Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, or a non-accelerated filer or a smaller reporting company. See definition of “Large accelerated filer,” “accelerated filer” and “smaller reporting company” in Rule 12b-2 of the Exchange Act. (Check one):
 
 
 
 
 
 
 
Large accelerated filer ¨
 
Accelerated filer ¨
 
Non-accelerated filer þ
 
Smaller reporting company ¨
 
(Do not check if a smaller reporting company)
Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Act).    Yes  ¨    No  þ
The Company is privately held. Nearly all of its common equity is owned by descendants of the family of the Company’s founder, Levi Strauss, and their relatives. There is no trading in the common equity and therefore an aggregate market value based on sales or bid and asked prices is not determinable.
Indicate the number of shares outstanding of each of the issuer’s classes of common stock, as of the latest practicable date.
Common Stock $.01 par value — 37,458,414 shares outstanding on October 8, 2015
 
 
 
 
 
 
 
 
 
 



LEVI STRAUSS & CO. AND SUBSIDIARIES
INDEX TO FORM 10-Q
FOR THE QUARTERLY PERIOD ENDED AUGUST 30, 2015
 
 
 
 
Page
Number
 
 
 
 
 
 
Item 1.
 
 
 
 
 
 
 
 
 
 
 
 
Item 2.
 
Item 3.
 
Item 4.
 
 
 
 
 
 
Item 1.
 
Item 1A.
 
Item 2.
 
Item 3.
 
Item 4.
 
Item 5.
 
Item 6.
 
 



PART I — FINANCIAL INFORMATION

Item 1.
CONSOLIDATED FINANCIAL STATEMENTS
LEVI STRAUSS & CO. AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEETS
 
(Unaudited)
 
 
 
August 30,
2015
 
November 30,
2014
 
(Dollars in thousands)
ASSETS
Current Assets:
 
 
 
Cash and cash equivalents
$
272,555

 
$
298,255

Trade receivables, net of allowance for doubtful accounts of $11,196 and $12,704
438,854

 
481,981

Inventories:
 
 
 
Raw materials
3,535

 
4,501

Work-in-process
3,030

 
5,056

Finished goods
668,327

 
591,359

Total inventories
674,892

 
600,916

Deferred tax assets, net
161,673

 
178,015

Other current assets
95,114

 
99,347

Total current assets
1,643,088

 
1,658,514

Property, plant and equipment, net of accumulated depreciation of $799,593 and $784,493
375,901

 
392,062

Goodwill
236,569

 
238,921

Other intangible assets, net
43,934

 
45,898

Non-current deferred tax assets, net
458,814

 
488,398

Other non-current assets
118,548

 
100,280

Total assets
$
2,876,854

 
$
2,924,073

 
 
 
 
LIABILITIES, TEMPORARY EQUITY AND STOCKHOLDERS’ EQUITY
Current Liabilities:
 
 
 
Short-term debt
$
144,946

 
$
131,524

Accounts payable
278,506

 
234,892

Accrued salaries, wages and employee benefits
168,689

 
178,470

Restructuring liabilities
27,501

 
57,817

Accrued interest payable
21,773

 
5,679

Accrued income taxes
7,071

 
9,432

Other accrued liabilities
234,469

 
263,182

Total current liabilities
882,955

 
880,996

Long-term debt
1,051,891

 
1,092,478

Long-term capital leases
12,423

 
11,619

Postretirement medical benefits
112,495

 
122,213

Pension liability
379,264

 
406,398

Long-term employee related benefits
71,351

 
80,066

Long-term income tax liabilities
24,293

 
35,821

Other long-term liabilities
55,156

 
62,363

Total liabilities
2,589,828

 
2,691,954

Commitments and contingencies


 


Temporary equity
87,929

 
77,664

 
 
 
 
Stockholders’ Equity:
 
 
 
Levi Strauss & Co. stockholders’ equity
 
 
 
Common stock — $.01 par value; 270,000,000 shares authorized; 37,442,139 shares and 37,430,283 shares issued and outstanding
374

 
374

Additional paid-in capital

 

Retained earnings
587,048

 
528,209

Accumulated other comprehensive loss
(389,439
)
 
(375,340
)
Total Levi Strauss & Co. stockholders’ equity
197,983

 
153,243

Noncontrolling interest
1,114

 
1,212

Total stockholders’ equity
199,097

 
154,455

Total liabilities, temporary equity and stockholders’ equity
$
2,876,854

 
$
2,924,073

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


3


LEVI STRAUSS & CO. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF INCOME
 
 
Three Months Ended
 
Nine Months Ended
 
August 30,
2015
 
August 24,
2014
 
August 30,
2015
 
August 24,
2014
 
(Dollars in thousands)
(Unaudited)
Net revenues
$
1,142,012

 
$
1,154,129

 
$
3,209,267

 
$
3,365,966

Cost of goods sold
568,655

 
591,926

 
1,598,614

 
1,697,105

Gross profit
573,357

 
562,203

 
1,610,653

 
1,668,861

Selling, general and administrative expenses
454,530

 
454,712

 
1,329,474

 
1,325,546

Restructuring, net
4,054

 
2,371

 
11,346

 
79,411

Operating income
114,773

 
105,120

 
269,833

 
263,904

Interest expense
(17,138
)
 
(27,179
)
 
(62,363
)
 
(90,318
)
Loss on early extinguishment of debt

 

 
(14,002
)
 
(11,151
)
Other expense, net
(8,316
)
 
(5,605
)
 
(26,705
)
 
(7,544
)
Income before income taxes
89,319

 
72,336

 
166,763

 
154,891

Income tax expense
30,858

 
22,536

 
58,567

 
44,479

Net income
58,461

 
49,800

 
108,196

 
110,412

Net (income) loss attributable to noncontrolling interest
(286
)
 
820

 
62

 
1,637

Net income attributable to Levi Strauss & Co.
$
58,175

 
$
50,620

 
$
108,258

 
$
112,049






























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


4


LEVI STRAUSS & CO. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF COMPREHENSIVE INCOME
 
 
Three Months Ended
 
Nine Months Ended
 
August 30,
2015
 
August 24,
2014
 
August 30,
2015
 
August 24,
2014
 
(Dollars in thousands)
(Unaudited)
Net income
$
58,461

 
$
49,800

 
$
108,196

 
$
110,412

Other comprehensive income (loss), net of related income taxes:
 
 
 
 
 
 
 
Pension and postretirement benefits
3,083

 
2,339

 
9,912

 
6,857

Net investment hedge (losses) gains
(17
)
 
3,644

 
3,304

 
74

Foreign currency translation losses
(15,360
)
 
(7,917
)
 
(26,667
)
 
(7,856
)
Unrealized (loss) gain on marketable securities
(853
)
 
291

 
(684
)
 
783

Total other comprehensive loss
(13,147
)
 
(1,643
)
 
(14,135
)
 
(142
)
Comprehensive income
45,314

 
48,157

 
94,061

 
110,270

Comprehensive (income) loss attributable to noncontrolling interest
(331
)
 
873

 
98

 
1,713

Comprehensive income attributable to Levi Strauss & Co.
$
44,983

 
$
49,030

 
$
94,159

 
$
111,983



































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


5


LEVI STRAUSS & CO. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS
 
Nine Months Ended
 
August 30,
2015
 
August 24,
2014
 
(Dollars in thousands)
(Unaudited)
Cash Flows from Operating Activities:
 
 
 
Net income
$
108,196

 
$
110,412

Adjustments to reconcile net income to net cash provided by operating activities:
 
 
 
Depreciation and amortization
75,448

 
81,119

Asset impairments
1,912

 
3,858

Gain on disposal of assets
(8,607
)
 
(66
)
Unrealized foreign exchange losses
11,667

 
5,906

Realized gain on settlement of forward foreign exchange contracts not designated for hedge accounting
(6,107
)
 
(3,358
)
Employee benefit plans’ amortization from accumulated other comprehensive loss
12,764

 
11,192

Noncash restructuring charges
269

 
3,386

Noncash loss on early extinguishment of debt
3,448

 
3,170

Amortization of deferred debt issuance costs
2,273

 
2,960

Stock-based compensation
12,827

 
9,305

Allowance for doubtful accounts
890

 
531

Change in operating assets and liabilities:
 
 
 
Trade receivables
62,259

 
4,190

Inventories
(41,789
)
 
(119,209
)
Other current assets
3,110

 
(5,895
)
Other non-current assets
(11,874
)
 
(5,035
)
Accounts payable and other accrued liabilities
(35,209
)
 
(7,631
)
Restructuring liabilities
(31,314
)
 
39,759

Income tax liabilities
19,491

 
10,590

Accrued salaries, wages and employee benefits and long-term employee related benefits
(56,415
)
 
(61,358
)
Other long-term liabilities
(13,402
)
 
(1,435
)
Other, net
494

 
(1,102
)
Net cash provided by operating activities
110,331

 
81,289

Cash Flows from Investing Activities:
 
 
 
Purchases of property, plant and equipment
(66,405
)
 
(50,461
)
Proceeds from sales of assets
8,977

 
1,471

Proceeds on settlement of forward foreign exchange contracts not designated for hedge accounting
6,107

 
3,358

Acquisitions, net of cash acquired
(2,271
)
 
(318
)
Net cash used for investing activities
(53,592
)
 
(45,950
)
Cash Flows from Financing Activities:
 
 
 
Proceeds from issuance of long-term debt
500,000

 

Repayments of long-term debt and capital leases
(527,315
)
 
(207,789
)
Proceeds from senior revolving credit facility
295,000

 
165,000

Repayments of senior revolving credit facility
(281,000
)
 
(75,000
)
Proceeds from short-term credit facilities
20,292

 
18,776

Repayments of short-term credit facilities
(14,137
)
 
(18,793
)
Other short-term borrowings, net
(987
)
 
(2,932
)
Debt issuance costs
(4,605
)
 
(2,684
)
Restricted cash
1,381

 
617

Repurchase of common stock
(2,294
)
 
(5,188
)
Excess tax benefits from stock-based compensation
805

 
799

Dividend to stockholders
(50,000
)
 
(30,003
)
Net cash used for financing activities
(62,860
)
 
(157,197
)
Effect of exchange rate changes on cash and cash equivalents
(19,579
)
 
(40
)
Net decrease in cash and cash equivalents
(25,700
)
 
(121,898
)
Beginning cash and cash equivalents
298,255

 
489,258

Ending cash and cash equivalents
$
272,555

 
$
367,360

 
 
 
 
Noncash Investing Activity:
 
 
 
Purchases of property, plant and equipment not yet paid at end of period
$
17,779

 
$
8,124

 
 
 
 
Supplemental disclosure of cash flow information:
 
 
 
Cash paid for interest during the period
$
44,562

 
$
61,994

Cash paid for income taxes during the period, net of refunds
44,827

 
41,598

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


6


LEVI STRAUSS & CO. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
FOR THE QUARTERLY PERIOD ENDED AUGUST 30, 2015
NOTE 1: SIGNIFICANT ACCOUNTING POLICIES
Nature of Operations
Levi Strauss & Co. (the “Company”) is one of the world’s largest brand-name apparel companies. The Company designs, markets and sells – directly or through third parties and licensees – products that include jeans, casual and dress pants, tops, shorts, skirts, jackets, footwear and related accessories for men, women and children around the world under the Levi’s®, Dockers®, Signature by Levi Strauss & Co.™ and Denizen® brands. The Company operates its business through three geographic regions: Americas, Europe and Asia.
Basis of Presentation and Principles of Consolidation
The unaudited consolidated financial statements of the Company and its wholly-owned and majority-owned foreign and domestic subsidiaries are prepared in conformity with generally accepted accounting principles in the United States (“U.S. GAAP”) for interim financial information. In the opinion of management, all adjustments necessary for a fair statement of the financial position and the results of operations for the periods presented have been included. These unaudited consolidated financial statements should be read in conjunction with the audited consolidated financial statements of the Company for the year ended November 30, 2014, included in the Annual Report on Form 10-K filed by the Company with the Securities and Exchange Commission (“SEC”) on February 12, 2015.
The unaudited consolidated financial statements include the accounts of the Company and its subsidiaries. All significant intercompany transactions have been eliminated. Management believes the disclosures are adequate to make the information presented herein not misleading. The results of operations for the three and nine months ended August 30, 2015, may not be indicative of the results to be expected for any other interim period or the year ending November 29, 2015.
The Company’s fiscal year ends on the last Sunday of November in each year, although the fiscal years of certain foreign subsidiaries end on November 30. Each quarter of both fiscal years 2015 and 2014 consists of 13 weeks, with the exception of the fourth quarter of 2014, 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.
Use of Estimates
The preparation of financial statements in conformity with U.S. GAAP requires management to make estimates and assumptions that affect the amounts reported in the consolidated financial statements and the related notes to the consolidated financial statements. Estimates are based upon historical factors, current circumstances and the experience and judgment of the Company’s management. Management evaluates its estimates and assumptions on an ongoing basis and may employ outside experts to assist in its evaluations. Changes in such estimates, based on more accurate future information, or different assumptions or conditions, may affect amounts reported in future periods.


7




LEVI STRAUSS & CO. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS — (continued)
FOR THE QUARTERLY PERIOD ENDED AUGUST 30, 2015

Recently Issued Accounting Standards
There have been no developments to recently issued accounting standards, including the expected dates of adoption and estimated effects on the Company’s consolidated financial statements, from those disclosed in the Company’s 2014 Annual Report on Form 10-K, except for the following, which have been grouped by their effective dates for the Company:
First Quarter of 2017
In April 2015, the FASB issued Accounting Standards Update No. 2015-03, "Interest – Imputation of Interest (Subtopic 835-30): Simplifying the Presentation of Debt Issuance Costs," ("ASU 2015-03"). ASU 2015-03 requires that debt issuance costs related to a recognized debt liability be presented in the balance sheet as a direct deduction from the carrying amount of that debt liability, consistent with debt discounts. In August 2015, the FASB issued Accounting Standards Update No. 2015-15, "Interest – Imputation of Interest (Subtopic 835-30): Presentation and Subsequent Measurement of Debt Issuance Costs Associated with Line-of-Credit Arrangements," ("ASU 2015-15"). ASU 2015-15 provides additional guidance to ASU 2015-03, which did not address presentation or subsequent measurement of debt issuance costs related to line-of-credit arrangements. ASU 2015-15 noted that the SEC staff would not object to an entity deferring and presenting debt issuance costs as an asset and subsequently amortizing the deferred debt issuance costs ratably over the term of the line-of-credit arrangement, regardless of whether there are any outstanding borrowings on the line-of-credit arrangement. The Company does not anticipate that the adoption of these standards will have a material impact on its consolidated financial statements and footnote disclosures.
In April 2015, the FASB issued Accounting Standards Update No. 2015-04, "Compensation – Retirement Benefits (Topic 715): Practical Expedient for the Measurement Date of an Employer's Defined Benefit Obligation and Plan Assets," ("ASU 2015-04"). ASU 2015-04 provides the use of a practical expedient that permits the entity to measure defined benefit plans assets and obligations using the month-end that is closest to the entity's fiscal year-end and apply that practical expedient consistently from year to year. Further, if a contribution or significant event occurs between the month-end date used to measure defined benefit plan asset and obligations and an entity's fiscal year-end, the entity should adjust the measurement of defined plan assets and obligations to reflect of those contributions of significant events. However, an entity should not adjust the measurement of defined benefit plan asset and obligations for other events that occur between the month-end measurement and the entity's fiscal year-end that are not caused by the entity. The Company is currently assessing whether to adopt this standard. Should the Company elect to adopt this standard, it does not anticipate that the adoption of this standard will have a material impact on its consolidated financial statements and footnote disclosures.
In April 2015, the FASB issued Accounting Standards Update No. 2015-05, "Intangibles – Goodwill and Other – Internal-Use Software (Subtopic 350-40): Customer's Accounting for Fees Paid in a Cloud Computing Arrangement," ("ASU 2015-05"). ASU 2015-05 provides guidance to customers about whether a cloud computing arrangement includes a software license. If a cloud computing arrangement includes a software license, then the customer should account for the software license element of the arrangement consistent with the acquisition of other software license. If a cloud computing arrangement does not include a software license, the customer should account for the arrangement as a service contract. The guidance will not change GAAP for a customer's accounting for service contracts. The Company is currently assessing the impact that adopting this new accounting standard will have on its consolidated financial statements and footnote disclosures.
In June 2015, the FASB issued Accounting Standards Update No. 2015-10, "Technical Corrections and Improvements," ("ASU 2015-10"). ASU 2015-10 covers a wide range of Topics in the Codification. The amendments in this Update represent changes to clarify the Codification, correct unintended application of guidance, or make minor improvements to the Codification that are not expected to have a significant effect on current accounting practice or create a significant administrative cost on most entities. The Company does not anticipate that the adoption of this standard will have a material impact on its consolidated financial statements and footnote disclosures.


8




LEVI STRAUSS & CO. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS — (continued)
FOR THE QUARTERLY PERIOD ENDED AUGUST 30, 2015

First Quarter of 2018
In July 2015, the FASB issued Accounting Standards Update No. 2015-11, "Inventory (Topic 330): Simplifying the Measurement of Inventory," ("ASU 2015-11"). An entity using an inventory method other than last-in, first out ("LIFO") or the retail inventory method should measure inventory at the lower of cost and net realizable value. The new guidance clarifies that net realizable value is the estimated selling prices in the ordinary course of business, less reasonably predictable costs of completion, disposal, and transportation. The Company is currently assessing the impact that adopting this new accounting standard will have on its consolidated financial statements and footnote disclosures.
First Quarter of 2019
In May 2014, the FASB issued Accounting Standards Update No. 2014-09, "Revenue from Contracts with Customers (Topic 606)," ("ASU 2014-09"). ASU 2014-09 outlines a new, single comprehensive model for entities to use in accounting for revenue arising from contracts with customers and supersedes most current revenue recognition guidance, including industry specific guidance. This new revenue recognition model provides a five-step analysis in determining when and how revenue is recognized. The new model will require revenue recognition to depict the transfer of promised goods or services to customers in an amount that reflects the consideration a company expects to receive in exchange for those goods or services. In August 2015, the FASB issued Accounting Standards Update No. 2015-14, "Revenue from Contracts with Customers (Topic 606): Deferral of the Effective Date," ("ASU 2015-14"). The amendment in this update defers the effective date of ASU 2014-09 for all entities by one year. The Company is currently assessing the impact that adopting these new accounting standards will have on its consolidated financial statements and footnote disclosures.



9




LEVI STRAUSS & CO. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS — (continued)
FOR THE QUARTERLY PERIOD ENDED AUGUST 30, 2015

NOTE 2: FAIR VALUE OF FINANCIAL INSTRUMENTS
The following table presents the Company’s financial instruments that are carried at fair value:
 
August 30, 2015
 
November 30, 2014
 
 
 
Fair Value Estimated
Using
 
 
 
Fair Value Estimated
Using
 
Fair Value
 
Level 1 Inputs(1)
 
Level 2 Inputs(2)
 
Fair Value
 
Level 1 Inputs(1)
 
Level 2 Inputs(2)
 
(Dollars in thousands)
Financial assets carried at fair value
 
 
 
 
 
 
 
 
 
 
 
Rabbi trust assets
$
25,473

 
$
25,473

 
$

 
$
25,891

 
$
25,891

 
$

Forward foreign exchange contracts, net(3)
27,012

 

 
27,012

 
10,511

 

 
10,511

Total
$
52,485

 
$
25,473

 
$
27,012

 
$
36,402

 
$
25,891

 
$
10,511

Financial liabilities carried at fair value
 
 
 
 
 
 
 
 
 
 
 
Forward foreign exchange contracts, net(3)
$
8,200

 
$

 
$
8,200

 
$
10,353

 
$

 
$
10,353

_____________
 
(1)
Fair values estimated using Level 1 inputs are inputs which consist of quoted prices in active markets for identical assets or liabilities that the Company has the ability to access at the measurement date. Rabbi trust assets consist of a diversified portfolio of equity, fixed income and other securities.

(2)
Fair values estimated using Level 2 inputs are inputs, other than quoted prices, that are observable for the asset or liability, either directly or indirectly and include among other things, quoted prices for similar assets or liabilities in markets that are active or inactive as well as inputs other than quoted prices that are observable. For forward foreign exchange contracts, inputs include foreign currency exchange and interest rates and, where applicable, credit default swap prices.

(3)
The Company’s over-the-counter forward foreign exchange contracts are subject to International Swaps and Derivatives Association, Inc. master agreements. These agreements permit the net-settlement of these contracts on a per-institution basis.
The following table presents the carrying value – including related accrued interest – and estimated fair value of the Company’s financial instruments that are carried at adjusted historical cost:
 
August 30, 2015
 
November 30, 2014
 
Carrying
Value
 
Estimated Fair Value
 
Carrying
Value
 
Estimated Fair Value
 
(Dollars in thousands)
Financial liabilities carried at adjusted historical cost
 
 
 
 
 
 
 
Senior revolving credit facility
$
114,022

 
$
114,022

 
$
100,098

 
$
100,098

4.25% Yen-denominated Eurobonds due 2016(1)
33,514

 
34,506

 
34,108

 
35,383

7.625% senior notes due 2020(1)

 

 
526,779

 
556,967

6.875% senior notes due 2022(1)
544,438

 
585,034

 
536,501

 
583,848

5.00% senior notes due 2025(1)
495,043

 
480,450

 

 

Short-term borrowings
31,119

 
31,119

 
31,742

 
31,742

Total
$
1,218,136

 
$
1,245,131

 
$
1,229,228

 
$
1,308,038

_____________
 
(1)
Fair values are estimated using Level 1 inputs and incorporate mid-market price quotes. Level 1 inputs are inputs which consist of quoted prices in active markets for identical assets or liabilities that the Company has the ability to access at the measurement date.



10




LEVI STRAUSS & CO. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS — (continued)
FOR THE QUARTERLY PERIOD ENDED AUGUST 30, 2015

NOTE 3: DERIVATIVE INSTRUMENTS AND HEDGING ACTIVITIES
As of August 30, 2015, the Company had forward foreign exchange contracts to buy $757.1 million and to sell $452.8 million against various foreign currencies. These contracts are at various exchange rates and expire at various dates through February 2017.
The table below provides data about the carrying values of derivative instruments and non-derivative instruments: 
 
August 30, 2015
 
November 30, 2014
 
Assets
 
(Liabilities)
 
Derivative Net Carrying Value
 
Assets
 
(Liabilities)
 
Derivative Net Carrying Value
 
Carrying
Value
 
Carrying
Value
 
 
Carrying
Value
 
Carrying
Value
 
 
(Dollars in thousands)
Derivatives not designated as hedging instruments
 
 
 
 
 
 
 
 
 
 
 
Forward foreign exchange contracts(1)
$
31,549

 
$
(4,537
)
 
$
27,012

 
$
15,587

 
$
(5,076
)
 
$
10,511

Forward foreign exchange contracts(2)
230

 
(8,430
)
 
(8,200
)
 
1,833

 
(12,186
)
 
(10,353
)
Total
$
31,779

 
$
(12,967
)
 
 
 
$
17,420

 
$
(17,262
)
 
 
Non-derivatives designated as hedging instruments
 
 
 
 
 
 
 
 
 
 
 
Yen-denominated Eurobonds
$

 
$
(7,933
)
 
 
 
$

 
$
(10,195
)
 
 
_____________
 
(1)
Included in “Other current assets” or “Other non-current assets” on the Company’s consolidated balance sheets.
(2)
Included in “Other accrued liabilities” on the Company’s consolidated balance sheets.
The Company's over-the-counter forward foreign exchange contracts are subject to International Swaps and Derivatives Association, Inc. master agreements. These agreements permit the net settlement of these contracts on a per-institution basis. The table below presents, by type of financial instrument, the gross amounts of the Company's derivative instruments, amounts offset due to master netting arrangements with the Company's various counterparties, and the net amounts recognized on the Company's consolidated balance sheets:
 
August 30, 2015
 
November 30, 2014
 
Gross Amounts of Recognized Assets / (Liabilities)
 
Gross Amounts Offset in the Statement of Financial Position
 
Net Amounts of Assets / (Liabilities) Presented in the Statement of Financial Position
 
Gross Amounts of Recognized Assets / (Liabilities)
 
Gross Amounts Offset in the Statement of Financial Position
 
Net Amounts of Assets / (Liabilities) Presented in the Statement of Financial Position
 
 
 
 
 
 
(Dollars in thousands)
Over-the-counter forward foreign exchange contracts
 
 
 
 
 
 
 
 
 
 
 
Financial assets
$
31,199

 
$
(4,767
)
 
$
26,432

 
$
15,555

 
$
(6,908
)
 
$
8,647

Financial liabilities
(4,877
)
 
4,767

 
(110
)
 
(9,587
)
 
6,908

 
(2,679
)
Total
 
 
 
 
$
26,322

 
 
 
 
 
$
5,968

Embedded derivative contracts
 
 
 
 
 
 
 
 
 
 
 
Financial assets
$
580

 
$

 
$
580

 
$
1,865

 
$

 
$
1,865

Financial liabilities
(8,090
)
 

 
(8,090
)
 
(7,675
)
 

 
(7,675
)
Total
 
 
 
 
$
(7,510
)
 
 
 
 
 
$
(5,810
)



11




LEVI STRAUSS & CO. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS — (continued)
FOR THE QUARTERLY PERIOD ENDED AUGUST 30, 2015

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 expense, net” in the Company’s consolidated statements of income:
 
Gain or (Loss)
Recognized in AOCI
(Effective Portion)
 
Gain or (Loss) Recognized in Other expense, net (Ineffective Portion and Amount Excluded from Effectiveness Testing)
 
As of
 
As of
 
Three Months Ended
 
Nine Months Ended
August 30,
2015
November 30,
2014
August 30,
2015
 
August 24,
2014
 
August 30,
2015
 
August 24,
2014
 
(Dollars in thousands)
Forward foreign exchange contracts
$
4,637

 
$
4,637

 

 


 


 


Yen-denominated Eurobonds
(19,082
)
 
(19,367
)
 
$
(949
)
 
$
490

 
$
647

 
$
594

Euro senior notes
(15,751
)
 
(15,751
)
 

 

 

 

Cumulative income taxes
11,779

 
8,760

 
 
 
 
 
 
 
 
Total
$
(18,417
)
 
$
(21,721
)
 
 
 
 
 
 
 
 
The table below provides data about the amount of gains and losses related to derivatives not designated as hedging instruments included in “Other expense, net” in the Company’s consolidated statements of income:
 
Gain or (Loss)
 
Three Months Ended
 
Nine Months Ended
 
August 30,
2015
 
August 24,
2014
 
August 30,
2015
 
August 24,
2014
 
(Dollars in thousands)
Forward foreign exchange contracts:
 
 
 
 
 
 
 
Realized
$
7,475

 
$
(3,411
)
 
$
6,107

 
$
3,358

Unrealized
(4,373
)
 
1,882

 
18,850

 
(10,461
)
Total
$
3,102

 
$
(1,529
)
 
$
24,957

 
$
(7,103
)



12




LEVI STRAUSS & CO. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS — (continued)
FOR THE QUARTERLY PERIOD ENDED AUGUST 30, 2015

NOTE 4: DEBT 
 
August 30,
2015
 
November 30,
2014
 
(Dollars in thousands)
 
 
Long-term debt
 
 
 
Unsecured:
 
 
 
4.25% Yen-denominated Eurobonds due 2016
$
33,052

 
$
33,985

7.625% senior notes due 2020

 
525,000

6.875% senior notes due 2022
532,407

 
533,493

5.00% senior notes due 2025
486,432

 

Total unsecured
1,051,891

 
1,092,478

Total long-term debt
$
1,051,891

 
$
1,092,478

Short-term debt
 
 
 
Secured:
 
 
 
Senior revolving credit facility
$
114,000

 
$
100,000

Unsecured:
 
 
 
Short-term borrowings
30,946

 
31,524

Total short-term debt
$
144,946

 
$
131,524

Total long-term and short-term debt
$
1,196,837

 
$
1,224,002

Issuance of Senior Notes due 2025 and Tender and Redemption of Senior Notes due 2020

Senior Notes due 2025. On April 27, 2015, the Company issued $500.0 million in aggregate principal amount of 5.00% senior notes due 2025 (the “Senior Notes due 2025”) to qualified institutional buyers and to purchasers outside the United States in compliance with the Securities Act of 1933, as amended (the “Securities Act”). The notes are unsecured obligations that rank equally with all of the Company’s other existing and future unsecured and unsubordinated debt. The Senior Notes due 2025 will mature on May 1, 2025. Interest on the notes is payable semi-annually in arrears on May 1 and November 1, commencing on November 1, 2015. The Company may redeem some or all of the Senior Notes due 2025 prior to May 1, 2020, at a price equal to 100% of the principal amount, plus accrued and unpaid interest, if any, to the date of redemption, and a “make-whole” premium; on or after this date, the Company may redeem all or any portion of the notes, at once or over time, at redemption prices specified in the indenture governing the notes, plus accrued and unpaid interest, if any, to the date of redemption. In addition, at any time prior to May 1, 2018, the Company may redeem up to a maximum of 40% of the original aggregate principal amount of the Senior Notes due 2025 with the proceeds of certain equity offerings at a redemption price of 105.00% of the principal amount of the Senior Notes due 2025, plus accrued and unpaid interest, if any, to the date of redemption. The Company recorded a discount of $13.9 million in conjunction with the issuance of the Senior Notes due 2025, related to tender and redemption premiums paid to certain holders of the 7.625% Senior Notes due 2020 (the “Senior Notes due 2020”) who participated in the issuance of the Senior Notes due 2025, which will be amortized to interest expense over the term of the notes. Costs of approximately $6.9 million associated with the issuance of the notes, representing underwriting fees and other expenses, were capitalized and will be amortized to interest expense over the term of the notes.

Exchange offer. In accordance with a registration rights agreement, the Company conducted an exchange offer to allow holders of the Senior Notes due 2025 to exchange the notes for new notes in the same principal amount with substantially identical terms, except that the new notes were registered under the Securities Act.

Covenants. The indenture contains covenants that limit, among other things, the Company’s and certain of the Company’s subsidiaries’ ability to incur additional debt, make certain restricted payments, consummate specified asset sales, enter into transactions with affiliates, incur liens, impose restrictions on the ability of its subsidiaries to pay dividends or make payments to


13




LEVI STRAUSS & CO. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS — (continued)
FOR THE QUARTERLY PERIOD ENDED AUGUST 30, 2015

the Company and its restricted subsidiaries, merge or consolidate with another person, and dispose of all or substantially all of the Company’s assets. The indenture provides for customary events of default (subject in certain cases to customary grace and cure periods), which include nonpayment, breach of covenants in the indenture, payment defaults or acceleration of other indebtedness, a failure to pay certain judgments and certain events of bankruptcy and insolvency. Generally, if an event of default occurs, the trustee under the indenture or holders of at least 25% in principal amount of the then outstanding Senior Notes due 2025 may declare all the Senior Notes due 2025 to be due and payable immediately. Upon the occurrence of a change in control (as defined in the indenture), each holder of notes may require the Company to repurchase all or a portion of the notes in cash at a price equal to 101% of the principal amount of notes to be repurchased, plus accrued and unpaid interest, if any, thereon to the date of purchase.

Use of Proceeds and Loss on Early Extinguishment of Debt. On April 20, 2015, the Company commenced a cash tender offer for the outstanding amount of its Senior Notes due 2020. The tender offer expired April 24, 2015, and the Company redeemed all the remaining notes that were not tendered in the offer on May 27, 2015.

The tender offer and redemption, as well as underwriting fees associated with the new issuance, were primarily funded with the proceeds from the issuance of the Senior Notes due 2025, as well as borrowings under the Company's senior secured revolving credit facility. The Company recorded a $14.0 million loss on early extinguishment of debt, comprised of tender and redemption premiums of $7.5 million, the write-off of $3.5 million of unamortized debt issuance costs, and $3.0 million of other costs.
Senior Revolving Credit Facility
The Company’s unused availability under its senior secured revolving credit facility was $549.3 million at August 30, 2015, as the Company’s total availability of $610.4 million was reduced by $61.1 million of letters of credit and other credit usage allocated under the credit facility.
Interest Rates on Borrowings
The Company’s weighted-average interest rate on average borrowings outstanding during the three and nine months ended August 30, 2015, was 6.17% and 6.85%, respectively, as compared to 7.40% and 7.74%, respectively, in the same periods of 2014.



14




LEVI STRAUSS & CO. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS — (continued)
FOR THE QUARTERLY PERIOD ENDED AUGUST 30, 2015

NOTE 5: EMPLOYEE BENEFIT PLANS
The following table summarizes the components of net periodic benefit cost and the changes recognized in “Accumulated other comprehensive loss” for the Company’s defined benefit pension plans and postretirement benefit plans: 
 
 
 
 
 
 
 
 
 
Pension Benefits
 
Postretirement Benefits
 
Three Months Ended
 
Three Months Ended
 
August 30,
2015
 
August 24,
2014
 
August 30,
2015
 
August 24,
2014
 
(Dollars in thousands)
Net periodic benefit cost:
 
 
 
 
 
 
 
Service cost
$
2,092

 
$
2,106

 
$
63

 
$
63

Interest cost
11,796

 
13,775

 
1,147

 
1,292

Expected return on plan assets
(12,715
)
 
(13,909
)
 

 

Amortization of prior service benefit
(15
)
 

 

 
(1
)
Amortization of actuarial loss
3,149

 
2,692

 
1,127

 
1,063

Curtailment gain
(118
)
 
(1,790
)
 

 

Net settlement gain
(45
)
 

 

 

Net periodic benefit cost
4,144

 
2,874

 
2,337

 
2,417

Changes in accumulated other comprehensive loss:
 
 
 
 
 
 
 
Actuarial loss
(579
)
 

 

 

Amortization of prior service benefit
15

 

 

 
1

Amortization of actuarial loss
(3,149
)
 
(2,692
)
 
(1,127
)
 
(1,063
)
Curtailment gain (loss)
118

 
(1
)
 

 

Net settlement gain
45

 

 

 

Total recognized in accumulated other comprehensive loss
(3,550
)
 
(2,693
)
 
(1,127
)
 
(1,062
)
Total recognized in net periodic benefit cost and accumulated other comprehensive loss
$
594

 
$
181

 
$
1,210

 
$
1,355



15




LEVI STRAUSS & CO. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS — (continued)
FOR THE QUARTERLY PERIOD ENDED AUGUST 30, 2015

 
Pension Benefits
 
Postretirement Benefits
 
Nine Months Ended
 
Nine Months Ended
 
August 30,
2015
 
August 24,
2014
 
August 30,
2015
 
August 24,
2014
 
(Dollars in thousands)
Net periodic benefit cost:
 
 
 
 
 
 
 
Service cost
$
6,310

 
$
6,431

 
$
188

 
$
192

Interest cost
35,426

 
41,312

 
3,441

 
3,907

Expected return on plan assets
(38,148
)
 
(41,788
)
 

 

Amortization of prior service benefit
(46
)
 
(36
)
 

 
(4
)
Amortization of actuarial loss
9,472

 
8,097

 
3,383

 
3,139

Curtailment loss
269

 
2,653

 

 
733

Net settlement gain
(45
)
 
(73
)
 

 

Net periodic benefit cost
13,238

 
16,596

 
7,012

 
7,967

Changes in accumulated other comprehensive loss:
 
 
 
 
 
 
 
Actuarial loss
(579
)
 

 

 

Amortization of prior service benefit
46

 
36

 

 
4

Amortization of actuarial loss
(9,472
)
 
(8,097
)
 
(3,383
)
 
(3,139
)
Curtailment (loss) gain
(269
)
 
114

 

 

Net settlement gain
45

 
4

 

 

Total recognized in accumulated other comprehensive loss
(10,229
)
 
(7,943
)
 
(3,383
)
 
(3,135
)
Total recognized in net periodic benefit cost and accumulated other comprehensive loss
$
3,009

 
$
8,653

 
$
3,629

 
$
4,832



16




LEVI STRAUSS & CO. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS — (continued)
FOR THE QUARTERLY PERIOD ENDED AUGUST 30, 2015

NOTE 6: RESTRUCTURING
In 2014, the Company announced and began to implement a global productivity initiative designed to streamline operations and fuel long-term profitable growth. The Company expects that the majority of the actions related to the global productivity initiative will be implemented by the end of 2016, with a focus on redesigning business processes and identifying opportunities to reduce costs, increase efficiencies and further streamline processes in supporting functions, supply chain and planning.
For the three and nine months ended August 30, 2015, the Company recognized restructuring charges, net, of $4.1 million and $11.4 million, respectively, as compared to $2.4 million and $79.4 million for the same periods in 2014. These restructuring charges were recorded in "Restructuring, net" in the Company's consolidated statements of income. Related charges of $7.7 million and $28.1 million for the three and nine months ended August 30, 2015, respectively, as compared to $7.6 million and $23.3 million for the same periods in 2014, consist primarily of consulting fees for the Company's centrally-led cost-savings and productivity projects, as well as transition costs associated with the Company's decision to outsource certain global business service activities. These related charges represent costs incurred associated with ongoing operations which will benefit future periods and thus were recorded in "Selling, general and administrative expenses" in the Company's consolidated statements of income. Cash payments for charges recognized to date are expected to continue through 2016.
The table below summarizes the components of charges included in “Restructuring, net” in the Company’s consolidated statements of income:
 
Three Months Ended
 
Nine Months Ended
 
August 30,
2015
 
August 24,
2014
 
August 30,
2015
 
August 24,
2014
 
(Dollars in thousands)
Restructuring, net:
 
 
 
 
 
 
 
Severance and employee-related benefits(1)
$
4,989

 
$
2,817

 
$
12,745

 
$
67,566

Adjustments to severance and employee-related benefits
(1,652
)
 
(1,765
)
 
(3,415
)
 
(4,810
)
Lease and other contract termination costs
516

 

 
516

 

Other(2)
319

 
3,108

 
1,698

 
13,269

Adjustments to other

 

 
(467
)
 

Noncash pension and postretirement curtailment (gains) losses, net(3)
(118
)
 
(1,789
)
 
269

 
3,386

Total
$
4,054

 
$
2,371

 
$
11,346

 
$
79,411

_____________

(1)
Severance and employee-related benefits relate to items such as severance, based on separation benefits provided by Company policy or statutory benefit plans, out-placement services and career counseling for employees affected by the global productivity initiative.

(2)
Other restructuring costs are expensed as incurred and primarily relate to consulting fees and legal expenses associated with the execution of the restructuring initiative.

(3)
Noncash pension and postretirement curtailment gains or losses resulting from the global productivity initiative are included in restructuring charges, with the associated liabilities included in "Pension liability" and "Postretirement medical benefits" in the Company's consolidated balance sheets.
The Company is unable at this time to make a good faith determination of cost estimates, or ranges of cost estimates, for additional actions associated with the global productivity initiative. Final estimates for headcount, timing and charges in certain areas of the international business are subject to completion of applicable local works council and other consultative processes.


17




LEVI STRAUSS & CO. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS — (continued)
FOR THE QUARTERLY PERIOD ENDED AUGUST 30, 2015

The following table summarizes the activities associated with restructuring liabilities for the three and nine months ended August 30, 2015, and August 24, 2014. In the table below, "Charges" represents the initial charge related to the restructuring activity. "Adjustments" includes revisions of estimates related to severance, employee-related benefits, lease and other contract termination costs, and other restructuring costs. "Payments" consists of cash payments for severance, employee-related benefits, lease and other contract termination costs, and other restructuring costs.
 
Three Months Ended August 30, 2015
 
Liabilities
 
 
 
Adjustments
 
 
 
Foreign Currency Fluctuation
 
Liabilities
 
May 31, 2015
 
Charges
 
 
Payments
 
 
August 30, 2015
 
(Dollars in thousands)
 
 
 
 
 
 
 
 
 
 
 
 
Severance and employee-related benefits
$
33,127

 
$
4,989

 
$
(1,652
)
 
$
(9,287
)
 
$
420

 
$
27,597

Lease and other contract termination costs

 
516

 

 

 
5

 
521

Other

 
319

 

 
(319
)
 

 

Total
$
33,127

 
$
5,824

 
$
(1,652
)
 
$
(9,606
)
 
$
425

 
$
28,118

 
 
 
 
 
 
 
 
 
 
 
 
Current portion
$
32,472

 
 
 
 
 
 
 
 
 
$
27,501

Long-term portion
655

 
 
 
 
 
 
 
 
 
617

Total
$
33,127

 
 
 
 
 
 
 
 
 
$
28,118

 
 
 
 
 
 
 
 
 
 
 
 
 
Three Months Ended August 24, 2014
 
Liabilities
 
 
 
Adjustments
 
 
 
Foreign Currency Fluctuation
 
Liabilities
 
May 25, 2014
 
Charges
 
 
Payments
 
 
August 24, 2014
 
(Dollars in thousands)
 
 
 
 
 
 
 
 
 
 
 
 
Severance and employee-related benefits
$
47,376

 
$
2,817

 
$
(1,765
)
 
$
(12,135
)
 
$
(725
)
 
$
35,568

Lease and other contract termination costs

 

 

 

 

 

Other
2,373

 
3,108

 

 
(2,865
)
 

 
2,616

Total
$
49,749

 
$
5,925

 
$
(1,765
)
 
$
(15,000
)
 
$
(725
)
 
$
38,184

 
 
 
 
 
 
 
 
 
 
 
 
Current portion
$
49,749

 
 
 
 
 
 
 
 
 
$
37,834

Long-term portion

 
 
 
 
 
 
 
 
 
350

Total
$
49,749

 
 
 
 
 
 
 
 
 
$
38,184



18




LEVI STRAUSS & CO. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS — (continued)
FOR THE QUARTERLY PERIOD ENDED AUGUST 30, 2015

 
Nine Months Ended August 30, 2015
 
Liabilities
 
 
 
Adjustments
 
 
 
Foreign Currency Fluctuation
 
Liabilities
 
November 30, 2014
 
Charges
 
 
Payments
 
 
August 30, 2015
 
(Dollars in thousands)
 
 
 
 
 
 
 
 
 
 
 
 
Severance and employee-related benefits
$
56,963

 
$
12,745

 
$
(3,415
)
 
$
(34,760
)
 
$
(3,936
)
 
$
27,597

Lease and other contract termination costs

 
516

 

 

 
5

 
521

Other
6,400

 
1,698

 
(467
)
 
(7,631
)
 

 

Total
$
63,363

 
$
14,959

 
$
(3,882
)
 
$
(42,391
)
 
$
(3,931
)
 
$
28,118

 
 
 
 
 
 
 
 
 
 
 
 
Current portion
$
57,817

 
 
 
 
 
 
 
 
 
$
27,501

Long-term portion
5,546

 
 
 
 
 
 
 
 
 
617

Total
$
63,363

 
 
 
 
 
 
 
 
 
$
28,118

 
 
 
 
 
 
 
 
 
 
 
 
 
Nine Months Ended August 24, 2014
 
Liabilities
 
 
 
Adjustments
 
 
 
Foreign Currency Fluctuation
 
Liabilities
 
November 24, 2013
 
Charges
 
 
Payments
 
 
August 24, 2014
 
(Dollars in thousands)
 
 
 
 
 
 
 
 
 
 
 
 
Severance and employee-related benefits
$

 
$
67,566

 
$
(4,810
)
 
$
(25,613
)
 
$
(1,575
)
 
$
35,568

Lease and other contract termination costs

 

 

 

 

 

Other

 
13,269

 

 
(10,653
)
 

 
2,616

Total
$

 
$
80,835

 
$
(4,810
)
 
$
(36,266
)
 
$
(1,575
)
 
$
38,184

 
 
 
 
 
 
 
 
 
 
 
 
Current portion
$

 
 
 
 
 
 
 
 
 
$
37,834

Long-term portion

 
 
 
 
 
 
 
 
 
350

Total
$

 
 
 
 
 
 
 
 
 
$
38,184


NOTE 7: COMMITMENTS AND CONTINGENCIES
Forward Foreign Exchange Contracts
The Company uses over-the-counter derivative instruments to manage its exposure to foreign currencies. The Company is exposed to credit loss in the event of nonperformance by the counterparties to the forward foreign exchange contracts. However, the Company believes that its exposures are appropriately diversified across counterparties and that these counterparties are creditworthy financial institutions. Please see Note 3 for additional information.
Other Contingencies
Litigation.  There have been no material developments with respect to the information previously reported in the Company’s 2014 Annual Report on Form 10-K related to legal proceedings.

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



19




LEVI STRAUSS & CO. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS — (continued)
FOR THE QUARTERLY PERIOD ENDED AUGUST 30, 2015

NOTE 8: DIVIDEND
The Company paid a cash dividend of $50.0 million in the second quarter of 2015. The Company does not have an established annual dividend policy. The Company will continue to review its ability to pay cash dividends at least annually, and dividends may be declared at the discretion of the Company's Board of Directors depending upon, among other factors, the Company's financial condition and compliance with the terms of the Company's debt agreements.

NOTE 9: ACCUMULATED OTHER COMPREHENSIVE LOSS
The following is a summary of the components of “Accumulated other comprehensive loss,” net of related income taxes: 
 
August 30,
2015
 
November 30,
2014
 
(Dollars in thousands)
Pension and postretirement benefits
$
(251,542
)
 
$
(261,454
)
Net investment hedge losses
(18,417
)
 
(21,721
)
Foreign currency translation losses
(112,029
)
 
(85,362
)
Unrealized gain on marketable securities
1,550

 
2,234

Accumulated other comprehensive loss
(380,438
)
 
(366,303
)
Accumulated other comprehensive income attributable to noncontrolling interest
9,001

 
9,037

Accumulated other comprehensive loss attributable to Levi Strauss & Co.
$
(389,439
)
 
$
(375,340
)

No amounts were reclassified out of "Accumulated other comprehensive loss" into net income other than those that pertain to the Company's pension and postretirement benefit plans. Please see Note 5 for additional information. These amounts are included in "Selling, general and administrative expenses" in the consolidated statements of income.

NOTE 10: OTHER EXPENSE, NET
The following table summarizes significant components of “Other expense, net”: 
 
Three Months Ended
 
Nine Months Ended
 
August 30,
2015
 
August 24,
2014
 
August 30,
2015
 
August 24,
2014
 
(Dollars in thousands)
Foreign exchange management gains (losses)(1)
$
3,102

 
$
(1,529
)
 
$
24,957

 
$
(7,103
)
Foreign currency transaction losses(2)
(13,805
)
 
(5,314
)
 
(57,089
)
 
(4,389
)
Interest income
400

 
506

 
1,059

 
1,534

Investment income
258

 
255

 
697

 
562

Other
1,729

 
477

 
3,671

 
1,852

Total other expense, net
$
(8,316
)
 
$
(5,605
)
 
$
(26,705
)
 
$
(7,544
)
_____________
 
(1)
Gains and losses on forward foreign exchange contracts primarily result from currency fluctuations relative to negotiated contract rates. Gains in 2015 were primarily due to favorable currency fluctuations relative to negotiated contract rates on positions to sell the Mexican Peso, partially offset in the three-month period by losses on embedded foreign currency derivatives.

(2)
Foreign currency transaction gains and losses reflect the impact of foreign currency fluctuation on the Company's foreign currency denominated balances. Losses in 2015 were primarily due to the weakening of various foreign currencies against the U.S. Dollar, particularly the Euro in the nine-month period.
  


20




LEVI STRAUSS & CO. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS — (continued)
FOR THE QUARTERLY PERIOD ENDED AUGUST 30, 2015

NOTE 11: INCOME TAXES
The effective income tax rate was 35.1% for the nine months ended August 30, 2015, compared to 28.7% for the same period ended August 24, 2014.
The increase in the effective tax rate in 2015 as compared to 2014 primarily reflected a shift in the mix of earnings to jurisdictions where the Company is subject to higher tax rates.
The effective tax rate in 2014 also included a tax benefit that the Company recorded as a result of reversing a deferred tax liability associated with the change in assertion during the period to indefinitely reinvest certain undistributed foreign earnings, partially offset by a correction recorded in the third quarter of 2014 associated with errors identified on previously-filed tax returns related to temporary differences. The Company determined that the amounts were not material to its previously issued financial statements.

NOTE 12: RELATED PARTIES
Robert D. Haas, Chairman Emeritus of the Company, Charles V. Bergh, President and Chief Executive Officer, Peter E. Haas Jr., a director of the Company, and Kelly McGinnis, Senior Vice President of Corporate Affairs and Chief Communications Officer, are board members of the Levi Strauss Foundation, which is not a consolidated entity of the Company. Seth R. Jaffe, Senior Vice President and General Counsel, is Vice President of the Levi Strauss Foundation. During the three- and nine-month periods ended August 30, 2015, the Company donated $0.3 million and $6.7 million, respectively, to the Levi Strauss Foundation as compared to $0.2 million and $6.2 million, respectively, for the same prior-year periods.



21




LEVI STRAUSS & CO. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS — (continued)
FOR THE QUARTERLY PERIOD ENDED AUGUST 30, 2015

NOTE 13: BUSINESS SEGMENT INFORMATION
The Company manages its business according to three regional segments: the Americas, Europe and Asia. The Company considers its chief executive officer to be the Company’s chief operating decision maker. The Company’s chief operating decision maker manages business operations, evaluates performance and allocates resources based on the regional segments’ net revenues and operating income.
Effective as of the beginning of 2015, the Company's regional licensing revenue, previously recorded centrally in the Company's Americas region, was revised to be recorded in the Company's respective regions. Regional licensing revenues are not significant to any of the Company's regional segments individually in any of the periods presented herein, and accordingly, business segment information for the prior-year periods have not been revised.
Business segment information for the Company is as follows: 
 
Three Months Ended
 
Nine Months Ended
 
August 30,
2015
 
August 24,
2014
 
August 30,
2015
 
August 24,
2014
 
(Dollars in thousands)
Net revenues:
 
 
 
 
 
 
 
Americas
$
713,148

 
$
697,467

 
$
1,909,011

 
$
1,969,030

Europe
258,486

 
285,983

 
758,124

 
847,403

Asia
170,378

 
170,679

 
542,132

 
549,533

Total net revenues
$
1,142,012

 
$
1,154,129

 
$
3,209,267

 
$
3,365,966

Operating income:
 
 
 
 
 
 
 
Americas
$
144,241

 
$
122,210

 
$
349,859

 
$
342,687

Europe(1)
50,502

 
49,587

 
142,173

 
159,181

Asia
25,666

 
17,366

 
88,037

 
88,550

Regional operating income
220,409

 
189,163

 
580,069

 
590,418

Corporate:
 
 
 
 
 
 
 
Restructuring, net
4,054

 
2,371

 
11,346

 
79,411

Restructuring-related charges
7,723

 
7,564

 
28,096

 
23,316

Other corporate staff costs and expenses
93,859

 
74,108

 
270,794

 
223,787

Corporate expenses
105,636

 
84,043

 
310,236

 
326,514

Total operating income
114,773

 
105,120

 
269,833

 
263,904

Interest expense
(17,138
)
 
(27,179
)
 
(62,363
)
 
(90,318
)
Loss on early extinguishment of debt

 

 
(14,002
)
 
(11,151
)
Other expense, net
(8,316
)
 
(5,605
)
 
(26,705
)
 
(7,544
)
Income before income taxes
$
89,319

 
$
72,336

 
$
166,763

 
$
154,891

_____________
 
(1)
Included in Europe's operating income for the nine-month period ended August 30, 2015, is a gain of $7.5 million related to the sale of the Company's finishing and distribution facility in Turkey in the second quarter of 2015.



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Item 2.
MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS 
Overview
We design, market and sell – directly or through third parties and licensees – products that include jeans, casual and dress pants, tops, shorts, skirts, jackets, footwear and related accessories for men, women and children around the world under our Levi’s®, Dockers®, Signature by Levi Strauss & Co.™ (“Signature”) and Denizen® brands.
Our business is operated through three geographic regions: Americas, Europe and Asia. Our products are sold in approximately 50,000 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 approximately 2,100 franchised or other brand-dedicated stores and shop-in-shops outside of the United States. We also distribute our Levi’s® and Dockers® products through 629 company-operated stores located in 32 countries, including the United States, and through the ecommerce sites we operate. Our company-operated stores and ecommerce sites generated approximately 26% of our net revenues in the first nine months of 2015, as compared to 25% in the same period in 2014, with our ecommerce sites representing approximately 12% of this revenue in 2015, as compared to 11% in the same period in 2014. In addition, we distribute our Levi’s® and Dockers® products through ecommerce sites operated by certain of our key wholesale customers and other third parties. We distribute products under our Signature and Denizen® brands primarily through mass channel retailers in the Americas.
Our Europe and Asia businesses, collectively, contributed approximately 41% of our net revenues and 40% of our regional operating income in the nine-month period in 2015, as compared to 42% of both our net revenues and our regional operating income in the same period in 2014. Sales of Levi’s® brand products represented approximately 85% of our total net sales in the nine-month period in 2015, as compared to 84% in the same period in 2014.
Global Productivity Initiative
In 2014, we announced and began to implement a global productivity initiative designed to streamline operations and fuel long-term profitable growth. We expect the majority of the actions related to our global productivity initiative will be implemented by the end of 2016, with a focus on redesigning business processes and identifying opportunities to reduce costs, increase efficiencies and further streamline processes in supporting functions, supply chain and planning. We believe this initiative, when completed, will generate net annualized benefits of $175 – $200 million, relative to the cost structure and profitability of the Company and foreign currency exchange rates prior to the commencement of this initiative.
For the three and nine months ended August 30, 2015, we recognized restructuring charges, net, of $4.1 million and $11.4 million, respectively, as compared to $2.4 million and $79.4 million for the same periods in 2014, which consist primarily of severance benefits, consulting fees and noncash pension and postretirement curtailment gains or losses. Related charges of $7.7 million and $28.1 million, for the three and nine months ended August 30, 2015, respectively, as compared to $7.6 million and $23.3 million for the same periods in 2014, consist primarily of consulting fees for our centrally-led cost-savings and productivity projects, as well as transition costs associated with our decision to outsource certain global business service activities. These related charges represent costs incurred associated with ongoing operations which will benefit future periods and thus were recorded in selling, general and administrative expenses ("SG&A"). Cash payments for charges recognized to date are expected to continue through 2016. Actions taken to date for the global productivity initiative are expected to deliver approximately $125 – $150 million in net annualized savings, relative to the cost structure of the Company and foreign currency exchange rates prior to the commencement of this initiative.
We are unable at this time to make a good faith determination of cost estimates, or ranges of cost estimates, for additional actions associated with the global productivity initiative. Final estimates for headcount, timing and charges in certain areas of the international business are subject to completion of applicable local works council and other consultative processes. We expect additional savings in future periods to come from streamlining our planning and go-to-market strategies, implementing efficiencies across our retail, supply chain and distribution network, and continuing to pursue improved procurement practices. Additional restructuring charges will be recorded for these efforts as they become estimable and probable.
Trends Affecting Our Business
Our key long-term objectives are to strengthen our brands globally in order to deliver sustainable profitable growth, generate strong cash flow and reduce our debt. Critical strategies to achieve these objectives include driving our profitable core business; expanding the reach of our global brands and building a more balanced product portfolio; elevating the performance of our retail channel, including ecommerce; and leveraging our global scale to improve our cost structure.


23


Consumer discretionary spending, which remains mixed globally, continues to result in a challenging retail environment for us and our customers, characterized by declining traffic patterns and contributing to a generally promotional environment.  Slow real wage growth in developed economies and a shift in consumer spending to interest-rate sensitive durable goods and other non-apparel categories also continue to pressure global discretionary spending.  Given consumers’ increasing focus on value pricing amid the slowly recovering economy, the off-price retail channel remains strong, partially to the detriment of traditional broadline retailers, particularly at the mid-tier.  Both our wholesale and retail channels continue to face competition from vertically-integrated specialty stores, fast-fashion retailers, and, increasingly, ecommerce shopping enabled by the proliferation of online technologies, which constitutes an increasing proportion of global apparel sales, particularly around key selling seasons.  Our domestic and multi-national competitors also continue to expand their global footprints in both brick-and-mortar retail and online.  While currency values are in constant flux, the recent appreciation of the U.S. Dollar against various foreign currencies, particularly the Euro, will continue to impact our financial results in the near-term, affecting translation, margins, as well as traffic in stores located in or near major domestic tourist attractions.
Our Third Quarter 2015 Results
 
Net revenues. Compared to the third quarter of 2014, consolidated net revenues decreased on a reported basis by 1% but increased on a constant-currency basis by 7%, primarily reflecting higher sales to wholesale customers related to product introductions in the Americas as well as increased retail sales reflecting the expansion of the retail network in Europe and Asia.
Operating income. Compared to the third quarter of 2014, consolidated operating income increased by 9% and operating margin improved to 10%, primarily reflecting an improvement in our constant-currency gross margin and higher constant-currency revenues, partially offset by the effects of currency.
Cash flows. Cash flows provided by operating activities were approximately $110 million for the nine-month period in 2015 as compared to $81 million for the same period in 2014; the increase reflected higher trade receivable collections and lower inventory levels, partially offset by higher payments to vendors.
Financial Information Presentation
Fiscal year.    Our fiscal year ends on the last Sunday of November in each year, although the fiscal years of certain foreign subsidiaries end on November 30. Each quarter of fiscal years 2015 and 2014 consists of 13 weeks, with the exception of the fourth quarter of 2014, which consisted of 14 weeks. Due to our fiscal calendar, the first quarter of fiscal year 2014 included the last calendar week of November 2013, while the first quarter of fiscal year 2015 included the last calendar week of February 2015.
Segments.    We manage our business according to three regional segments: the Americas, Europe and Asia. Effective as of the beginning of 2015, our regional licensing revenue, previously recorded centrally in our Americas region, was revised to be recorded in our respective regions. Regional licensing revenues are not significant to any of our regional segments individually in any of the periods presented herein, and accordingly, business segment information for the prior-year period has not been revised.
Classification.    Our classification of certain significant revenues and expenses reflects the following:
 
Net revenues is primarily comprised of sales of products to wholesale customers, including franchised stores, and direct sales to consumers at our company-operated and ecommerce stores and at our company-operated shop-in-shops located within department stores. It includes discounts, allowances for estimated returns and incentives. Net revenues also includes 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 commissions associated with our company-operated shop-in-shops, as well as costs associated with our ecommerce operations.
We reflect substantially all distribution costs in selling, general and administrative expenses, including costs related to receiving and inspection at distribution centers, warehousing, shipping to our customers, handling, and certain other activities associated with our distribution network.
Gross margins may not be comparable to those of other companies in our industry since some companies may include costs related to their distribution network and occupancy costs associated with company-operated stores in cost of goods sold.


24


Constant currency.    Constant-currency comparisons are based on translating local currency amounts in the prior-year period at actual foreign exchange rates 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.