Company Quick10K Filing
Levi Strauss
Price18.30 EPS1
Shares414 P/E19
MCap7,570 P/FCF37
Net Debt143 EBIT591
TEV7,712 TEV/EBIT13
TTM 2019-08-25, in MM, except price, ratios
10-Q 2020-05-24 Filed 2020-07-07
10-Q 2020-02-23 Filed 2020-04-07
10-K 2019-11-24 Filed 2020-01-30
10-Q 2019-08-25 Filed 2019-10-08
8-K 2020-07-16 Officers, Regulation FD
8-K 2020-07-07 Earnings, Exit Costs, Officers, Exhibits
8-K 2020-04-14
8-K 2020-04-08
8-K 2020-04-02
8-K 2020-01-30
8-K 2020-01-28
8-K 2020-01-10
8-K 2019-10-08

LEVI 10Q Quarterly Report

Part I - Financial Information
Item 1. Consolidated Financial Statements
Note 1: Significant Accounting Policies
Note 2: Fair Value of Financial Instruments
Note 3: Derivative Instruments and Hedging Activities
Note 4: Debt
Note 5: Employee Benefit Plans
Note 6: Commitments and Contingencies
Note 7: Leases
Note 8: Dividend
Note 9: Accumulated Other Comprehensive Loss
Note 10: Net Revenues
Note 11: Other Income (Expense), Net
Note 12: Income Taxes
Note 13: Earnings per Share Attributable To Common Stockholders
Note 14: Related Parties
Note 15: Business Segment Information
Note 16: Subsequent Events
Item 2. Management's Discussion and Analysis of Financial Condition and Results of Operations
Item 3. Quantitative and Qualitative Disclosures About Market Risk
Item 4. Controls and Procedures
Part II - Other Information
Item 1. Legal Proceedings
Item 1A. Risk Factors
Item 2. Unregistered Sales of Equity Securities and Use of Proceeds
Item 3. Defaults Upon Senior Securities
Item 4. Mine Safety Disclosures
Item 5. Other Information
Item 6. Exhibits
EX-10.1 lvis02232020ex-101.htm
EX-31.1 lvis02232020ex-311.htm
EX-31.2 lvis02232020ex-312.htm
EX-32.2 lvis02232020ex-321.htm

Levi Strauss Earnings 2020-02-23

Balance SheetIncome StatementCash Flow
4.23.32.51.60.8-0.12012201420172020
Assets, Equity
1.61.30.90.60.2-0.12012201420172020
Rev, G Profit, Net Income
0.30.20.10.0-0.1-0.22012201420172020
Ops, Inv, Fin

10-Q 1 a1q2020form10-q.htm 10-Q Document

 
 
 
 
 
 
 
 
 
 
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 February 23, 2020
or
 ¨
 
TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934
Commission file number: 001-06631
_________________
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)
_________________
Securities registered pursuant to Section 12(b) of the Securities Exchange Act of 1934:
Title of each class
 
Trading symbol(s)
 
Name of each exchange on which registered
Class A Common Stock, $0.001 par value per share
 
LEVI
 
New York Stock Exchange
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 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, a non-accelerated filer, a smaller reporting company, or an emerging growth company. See definition of "Large accelerated filer," "accelerated filer," "smaller reporting company," and "emerging growth company" in Rule 12b-2 of the Exchange Act. (Check one):
Large accelerated filer ¨
Accelerated filer ¨
Emerging growth company ¨
Non-accelerated filer þ
 
Smaller reporting company ¨
If an emerging growth company, indicate by check mark if the registrant has elected not to use the extended transition period for complying with any new or revised financial accounting standards provided pursuant to Section 13(a) of the Exchange Act. ¨ 
Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Act).    Yes  ¨    No  þ
As of April 1, 2020, the registrant had 61,718,601 shares of Class A common stock, $0.001 par value per share and 334,475,655 shares of Class B common stock, $0.001 par value per share, outstanding.
 
 
 
 
 
 
 
 
 
 



LEVI STRAUSS & CO. AND SUBSIDIARIES
INDEX TO FORM 10-Q
FOR THE QUARTERLY PERIOD ENDED FEBRUARY 23, 2020
 
 
 
 
Page
Number
 
 
 
 
 
 
Item 1.
 
 
 
 
 
 
 
 
 
 
 
 
 
 
Item 2.
 
Item 3.
 
Item 4.
 
 
 
 
 
 
Item 1.
 
Item 1A.
 
Item 2.
 
Item 3.
 
Item 4.
 
Item 5.
 
Item 6.
 
 
WHERE YOU CAN FIND MORE INFORMATION
Investors and others should note that we announce material financial information to our investors using our corporate website, press releases, SEC filings and public conference calls and webcasts. We also use the following social media channels as a means of disclosing information about our company, products, planned financial and other announcements, attendance at upcoming investor and industry conferences and other matters, as well as for complying with our disclosure obligations under Regulation FD promulgated under the Securities Exchange Act of 1934, as amended:
our Investor Relations page (https://levistrauss.com/investors/financial-news);
our Twitter account (https://twitter.com/LeviStraussCo);
our company blog (https://www.levistrauss.com/unzipped-blog/);
our Facebook page (https://www.facebook.com/levistraussco/);
our LinkedIn page (https://www.linkedin.com/company/levi-strauss-&-co-);
our Instagram page (https://www.instagram.com/levistraussco/); and
our YouTube channel (https://www.youtube.com/user/levistraussvideo).
The information we post through these channels may be deemed material. Accordingly, investors should monitor these channels in addition to following our press releases, SEC filings and public conference calls and webcasts. This list may be updated from time to time. The information we post through these channels is not a part of this Quarterly Report.




PART I — FINANCIAL INFORMATION

Item 1.
CONSOLIDATED FINANCIAL STATEMENTS
LEVI STRAUSS & CO. AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEETS
 
(Unaudited)
 
 
 
February 23,
2020
 
November 24,
2019
 
(Dollars in thousands)
ASSETS
Current Assets:
 
 
 
Cash and cash equivalents
$
873,564


$
934,237

Short-term investments in marketable securities
83,978

 
80,741

Trade receivables, net of allowance for doubtful accounts of $5,835 and $6,172
709,989


782,846

Inventories:
 


Raw materials
5,152


4,929

Work-in-process
3,683


3,319

Finished goods
845,866


875,944

Total inventories
854,701


884,192

Other current assets
222,767


188,170

Total current assets
2,744,999


2,870,186

Property, plant and equipment, net of accumulated depreciation of $1,073,020 and $1,054,267
460,679


529,558

Goodwill
259,534


235,788

Other intangible assets, net
50,761


42,782

Deferred tax assets, net
416,390


407,905

Operating lease right-of-use assets, net (Note 1)
1,026,486

 

Other non-current assets
156,394


146,199

Total assets
$
5,115,243


$
4,232,418

 
 
 
 
LIABILITIES AND STOCKHOLDERS’ EQUITY
Current Liabilities:
 
 
 
Short-term debt
$
19,341


$
7,621

Accounts payable
304,207


360,324

Accrued salaries, wages and employee benefits
186,233


223,374

Accrued interest payable
15,911


5,350

Accrued income taxes
32,994


24,050

Accrued sales returns and allowances (Note 1)
185,830

 
171,113

Short-term operating lease liability (Note 1)
212,504

 

Other accrued liabilities (Note 1)
334,491


375,372

Total current liabilities
1,291,511


1,167,204

Long-term debt
994,392


1,006,745

Postretirement medical benefits
62,178


64,006

Pension liability
179,965


193,214

Long-term employee related benefits
94,597


84,957

Long-term income tax liabilities
10,823


10,486

Long-term operating lease liability (Note 1)
850,429

 

Other long-term liabilities
36,519


134,249

Total liabilities
3,520,414


2,660,861

Commitments and contingencies





 

 
 
Stockholders’ Equity:

 
 
Levi Strauss & Co. stockholders’ equity


 
 
Common stock — $.001 par value; 1,200,000,000 Class A shares authorized, 63,991,842 shares and 53,079,235 shares issued and outstanding as of February 23, 2020 and November 24, 2019, respectively; and 422,000,000 Class B shares authorized, 335,136,502 shares and 340,674,741 shares issued and outstanding, as of February 23, 2020 and November 24, 2019, respectively
399


394

Additional paid-in capital
601,976

 
657,659

Accumulated other comprehensive loss
(452,734
)

(404,986
)
Retained earnings
1,445,188


1,310,464

Total Levi Strauss & Co. stockholders’ equity
1,594,829


1,563,531

Noncontrolling interest


8,026

Total stockholders’ equity
1,594,829


1,571,557

Total liabilities and stockholders’ equity
$
5,115,243


$
4,232,418


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
 
February 23,
2020
 
February 24,
2019

(Dollars in thousands, except per share amounts)
(Unaudited)
Net revenues
$
1,506,126


$
1,434,458

Cost of goods sold
666,799


651,650

Gross profit
839,327


782,808

Selling, general and administrative expenses
660,545


581,896

Operating income
178,782


200,912

Interest expense
(16,654
)

(17,544
)
Other income (expense), net
2,700


(1,646
)
Income before income taxes
164,828


181,722

Income tax expense
12,139


35,271

Net income
152,689

 
146,451

Net loss attributable to noncontrolling interest


126

Net income attributable to Levi Strauss & Co.
$
152,689


$
146,577

Earnings per common share attributable to common stockholders:
 
 
 
Basic
$
0.39

 
$
0.39

Diluted
$
0.37

 
$
0.37

Weighted-average common shares outstanding:
 
 
 
Basic
396,216,057

 
377,077,111

Diluted
410,068,373

 
393,234,825













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
 
February 23,
2020
 
February 24,
2019
 
(Dollars in thousands)
(Unaudited)
Net income
$
152,689


$
146,451

Other comprehensive income, before related income taxes:


 
Pension and postretirement benefits
3,591


3,422

Derivative instruments
15,405


1,737

Foreign currency translation losses
(8,133
)

4,086

Unrealized gains on marketable securities
1,556

 
890

Total other comprehensive income, before related income taxes
12,419

 
10,135

Income taxes expense related to items of other comprehensive income
(5,723
)
 
(1,741
)
Comprehensive income, net of income taxes
159,385

 
154,845

Comprehensive loss (income) attributable to noncontrolling interest

 
(54
)
Comprehensive income attributable to Levi Strauss & Co.
$
159,385

 
$
154,791

































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


5


LEVI STRAUSS & CO. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF STOCKHOLDERS' EQUITY
 
Levi Strauss & Co. Stockholders
 
 
 
 
 
Class A & Class B Common Stock
 
Additional Paid-In Capital
 
Retained Earnings
 
Accumulated Other Comprehensive (Loss)/Income
 
Noncontrolling Interest
 
Total Stockholders' Equity
 
(Dollars in thousands)
(Unaudited)
Balance at November 25, 2018
$
376


$


$
1,084,321


$
(424,584
)

$
7,346

 
$
667,459

Net income (loss)




146,577




(126
)
 
146,451

Other comprehensive income, net of tax






8,214


180

 
8,394

Stock-based compensation and dividends, net


1,497







 
1,497

Reclassification to temporary equity


(506
)

(23,339
)




 
(23,845
)
Repurchase of common stock


(165
)

(2,923
)




 
(3,088
)
Shares surrendered for tax withholdings on equity award exercises

 
(826
)
 

 

 

 
(826
)
Cash dividends declared ($0.29 per share)




(110,000
)




 
(110,000
)
Balance at February 24, 2019
$
376

 
$

 
$
1,094,636

 
$
(416,370
)
 
$
7,400

 
$
686,042

 
 
 
 
 
 
 
 
 
 
 
 
Balance at November 24, 2019
$
394

 
$
657,659

 
$
1,310,464

 
$
(404,986
)
 
$
8,026

 
$
1,571,557

Net income (loss)

 

 
152,689

 

 

 
152,689

Other comprehensive income, net of tax

 

 

 
6,696

 

 
6,696

Stock-based compensation and dividends, net
5

 
17,530

 

 

 

 
17,535

Employee stock purchase plan

 
2,030

 

 

 

 
2,030

Repurchase of common stock

 

 
(37,071
)
 

 

 
(37,071
)
Shares surrendered for tax withholdings on equity award exercises

 
(75,243
)
 

 

 

 
(75,243
)
Changes in ownership of noncontrolling interest

 

 
(8,672
)
 

 
(8,026
)
 
(16,698
)
Cumulative effect of the adoption of new accounting standards

 

 
59,708

 
(54,444
)
 

 
5,264

Cash dividends declared ($0.08 per share)

 

 
(31,930
)
 

 

 
(31,930
)
Balance at February 23, 2020
$
399

 
$
601,976

 
$
1,445,188

 
$
(452,734
)
 
$

 
$
1,594,829











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


6


LEVI STRAUSS & CO. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS
 
Three Months Ended
 
February 23,
2020

February 24,
2019

(Dollars in thousands)
(Unaudited)
Cash Flows from Operating Activities:



Net income
$
152,689


$
146,451

Adjustments to reconcile net income to net cash provided by operating activities:




Depreciation and amortization
35,974


28,559

Unrealized foreign exchange (gains) losses
(2,629
)

9,046

Realized loss (gain) on settlement of forward foreign exchange contracts not designated for hedge accounting
1,988


(4,618
)
Employee benefit plans’ amortization from accumulated other comprehensive loss and settlement loss
3,591


3,422

Stock-based compensation
17,535


1,497

Other, net
2,320


(413
)
(Benefit from) provision for deferred income taxes
(15,818
)

(795
)
Change in operating assets and liabilities, net of effect of acquisition:




Trade receivables
67,767


69,672

Inventories
41,247


(48,120
)
Other current assets
(9,688
)

(6,162
)
Other non-current assets
(9,108
)

(2,251
)
Accounts payable, accrued liabilities, and operating leases, net of right-of-use assets
(51,290
)

(48,045
)
Income tax liabilities
9,115


19,496

Accrued salaries, wages and employee benefits and long-term employee related benefits
(40,527
)

(110,338
)
Other long-term liabilities
(5,283
)

(1,579
)
Net cash provided by operating activities
197,883


55,822

Cash Flows from Investing Activities:




Purchases of property, plant and equipment
(44,424
)

(36,149
)
Payments for business acquisition
(52,201
)
 

(Payments) proceeds on settlement of forward foreign exchange contracts not designated for hedge accounting
(19,326
)

55,818

Payments to acquire short-term investments
(30,121
)
 
(99,880
)
Proceeds from sale, maturity and collection of short-term investments
26,791

 

Net cash used for investing activities
(119,281
)

(80,211
)
Cash Flows from Financing Activities:




Proceeds from short-term credit facilities
3,419


13,442

Repayments of short-term credit facilities
(3,878
)

(12,556
)
Other short-term borrowings, net
12,480


(9,422
)
Proceeds from employee stock purchase plan
2,030

 

Repurchase of common stock
(30,074
)

(3,088
)
Repurchase of shares surrendered for tax withholdings on equity award exercises
(75,242
)
 
(826
)
Payments to noncontrolling interests
(14,825
)
 

Dividend to stockholders
(31,930
)

(55,000
)
Other financing, net


(296
)
Net cash used for financing activities
(138,020
)

(67,746
)
Effect of exchange rate changes on cash and cash equivalents and restricted cash
(1,270
)

952

Net decrease in cash and cash equivalents and restricted cash
(60,688
)

(91,183
)
Beginning cash and cash equivalents, and restricted cash
934,753


713,698

Ending cash and cash equivalents, and restricted cash
874,065


622,515

Less: Ending restricted cash
(501
)

(581
)
Ending cash and cash equivalents
$
873,564


$
621,934





Noncash Investing and Financing Activity:



Property, plant and equipment acquired and not yet paid at end of period
$
12,089


$
10,513

Property, plant and equipment additions due to build-to-suit lease transactions


7,842

Realized (gain) loss on foreign currency contracts not yet settled at end of period
(17,338
)

51,200

Repurchase of common stock not yet settled at end of period
6,997

 

Supplemental disclosure of cash flow information:



Cash paid for interest during the period
$
818


$
2,778

Cash paid for income taxes during the period, net of refunds
19,636


17,157

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


7


LEVI STRAUSS & CO. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
FOR THE QUARTERLY PERIOD ENDED FEBRUARY 23, 2020
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.
In March 2019, the Company completed an initial public offering ("IPO") of its Class A common stock, as a result of which its Class A common stock began trading on the New York Stock Exchange under the symbol "LEVI".
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. The unaudited consolidated financial statements should be read in conjunction with the audited consolidated financial statements of the Company for the year ended November 24, 2019, included in the Company's 2019 Annual Report on Form 10-K.
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 in the unaudited consolidated financial statements not misleading. The results of operations for the three months ended February 23, 2020 may not be indicative of the results to be expected for any other interim period or the year ending November 24, 2019.
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 2020 and 2019 consists of 13 weeks, with the exception of the fourth quarter of 2020, which will consist of 14 weeks. All references to years and quarters relate to fiscal years and quarters rather than calendar years and quarters.
Reclassification
Certain insignificant amounts on the consolidated balance sheets and consolidated statements of cash flow have been conformed to the February 23, 2020 presentation.
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.
The Jeans Company Acquisition
In December 2019, the Company completed an acquisition of all operating assets related to Levi’s® and Dockers® brands from The Jeans Company ("TJC"), LS&Co's distributor in Chile, Peru and Bolivia, for $52.2 million in cash, plus transaction costs. This includes 78 Levi’s® and Dockers® retail stores and one e-commerce site, distribution with the region’s leading multi-brand retailers, and the logistical operations within these markets.
The total fair value of assets acquired was $52.2 million and include goodwill, inventory, intangible and fixed assets. The goodwill and intangibles recognized as a result of the acquisition were $22.8 million and $9.2 million, respectively.


8


LEVI STRAUSS & CO. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS — (continued)
FOR THE QUARTERLY PERIOD ENDED FEBRUARY 23, 2020


Share Repurchases
In January 2020, the Company's Board of Directors approved a share repurchase program that authorizes the repurchase of up to $100 million of the Company's Class A common stock. During the three months ended February 23, 2020, 1.9 million shares were repurchased for $37.0 million, plus broker's commissions, in the open market.
The Company accounts for share repurchases by charging the excess of repurchase price over the repurchased Class A common stock's par value entirely to retained earnings. All repurchased shares are retired and become authorized but unissued shares. The Company accrues for the shares purchased under the share repurchase plan based on the trade date. The Company may terminate or limit the share repurchase program at any time.
Subsequent to February 23, 2020, the Company repurchased 1.1 million shares for $19.2 million, plus broker's commissions, in the open market, bringing year-to-date shares repurchased to 3.0 million for a total of $56.2 million, equating to an average repurchase price of approximately $18.73 per share.  The Company has suspended its share buyback program until further notice.
Noncontrolling Interest
Noncontrolling interest includes a 16.4% minority interest of third parties in Levi Strauss Japan K.K., the Company's Japanese subsidiary.
On January 9, 2020, the Company completed an all cash tender offer for the acquisition of the remaining 16.4% minority interest shares of Levi Strauss Japan K.K.'s common stock for a total purchase price of $13.6 million, plus transaction costs. As a result, Levi Strauss Japan K.K. has become a wholly owned subsidiary.
Changes in Accounting Principles
In February 2016, the Financial Accounting Standards Board ("FASB") issued Accounting Standards Update ("ASU") 2016-02, Leases (Topic 842), which requires the identification of arrangements that should be accounted for as leases by lessees. In general, for operating or financing lease arrangements exceeding a 12-month term, a right-of-use asset and a lease obligation will be recognized on the balance sheet of the lessee while the income statement will reflect lease expense for operating leases and amortization and interest expense for financing leases. The Company has identified leases for real estate, personal property and other arrangements. The new standard is required to be applied using a modified retrospective approach with two adoption methods permissible. The Company elected the transition method that applies the new lease standard at the adoption date instead of the earliest period presented. The Company elected the practical expedient to not separate lease components from nonlease components for all leases. Additionally, the Company made an accounting policy election to keep leases with an initial 12-month term or less off of the balance sheet and recognize these lease payments within the consolidated statements of income on a straight-line basis over the term of the lease. The Company elected the package of transition practical expedients which allowed the Company to carry forward prior conclusions related to: (i) whether any expired or existing contracts contain leases, (ii) the lease classification for any expired or existing leases and (iii) initial direct costs for existing leases. The Company adopted this standard in the first quarter of fiscal 2020. Upon adoption, the Company recognized $1.0 billion of total operating lease liabilities and $1.0 billion of operating lease ROU assets, as well as removed $61 million of existing deferred rent liabilities, which was recorded as an offset against the ROU assets. In addition, the Company removed $43 million and $53 million of existing assets and liabilities related to build-to-suit lease arrangements, respectively. The difference of $9 million was recognize in retained earnings as of the date of initial application. The adoption of the standard did not have a material impact on the Unaudited Consolidated Statements of Income or Unaudited Consolidated Statements of Cash Flows. Refer to Note 7 for more information on the Company's lease arrangements.
In February 2018, the FASB issued ASU 2018-02, Income Statement - Reporting Comprehensive Income (Topic 220). ASU 2018-02 addresses certain stranded income tax effects in accumulated other comprehensive income (loss) resulting from the Tax Act enacted on December 22, 2017. The Company adopted this standard in the first quarter of fiscal 2020. As a result of the adoption, a $54.4 million adjustment was included in retained earnings with an offsetting adjustment to accumulated other comprehensive income (loss).


9


LEVI STRAUSS & CO. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS — (continued)
FOR THE QUARTERLY PERIOD ENDED FEBRUARY 23, 2020


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 and footnote disclosures, from those disclosed in the 2019 Annual Report on Form 10-K, except for the following:
First Quarter 2022
In December 2019, the FASB issued ASU 2019-12, Simplifying the Accounting for Income Taxes. The ASU is intended to enhance and simplify aspects of the income tax accounting guidance in ASC 740 as part of the FASB's simplification initiative. This guidance is effective for fiscal years and interim periods within those years beginning after December 15, 2020 with early adoption permitted. The Company is currently evaluating the impact this guidance may have on its consolidated financial statements and related disclosures.
First Quarter 2023
In March 2020, FASB issued ASU 2020-04, Facilitation of the Effects of Reference Rate Reform on Financial Reporting. The ASU is intended to provide temporary optional expedients and exceptions to the US GAAP guidance on contract modifications and hedge accounting to ease the financial reporting burdens related to the expected market transition from the London Interbank Offered Rate (LIBOR) and other interbank offered rates to alternative reference rates. This guidance is effective beginning on March 12, 2020, and the Company may elect to apply the amendments prospectively through December 31, 2022. The Company is currently evaluating the impact this guidance may have on its consolidated financial statements and related disclosures.


10


LEVI STRAUSS & CO. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS — (continued)
FOR THE QUARTERLY PERIOD ENDED FEBRUARY 23, 2020


NOTE 2: FAIR VALUE OF FINANCIAL INSTRUMENTS
The following table presents the Company’s financial instruments that are carried at fair value:
 
February 23, 2020
 
November 24, 2019
 
 
 
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
$
51,495

 
$
51,495

 
$

 
$
49,207

 
$
49,207

 
$

Short-term investments in marketable securities
83,978

 


 
83,978

 
80,741

 

 
80,741

Derivative instruments(3)
22,293

 

 
22,293

 
16,323

 

 
16,323

Total
$
157,766

 
$
51,495

 
$
106,271

 
$
146,271

 
$
49,207

 
$
97,064

Financial liabilities carried at fair value
 
 
 
 
 
 
 
 
 
 
 
Derivative instruments(3)
10,848

 

 
10,848

 
8,123

 

 
8,123

Total
$
10,848

 
$

 
$
10,848

 
$
8,123

 
$

 
$
8,123

_____________
 
(1)
Fair values estimated using Level 1 inputs are inputs that 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. Short-term investments in marketable securities consist of fixed income securities. For forward foreign exchange contracts, inputs include foreign currency exchange and interest rates and, where applicable, credit default swap prices.

(3)
The Company’s cash flow hedges 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. Refer to Note 3 for more information.
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:
 
February 23, 2020
 
November 24, 2019
 
Carrying
Value
 
Estimated Fair Value
 
Carrying
Value
 
Estimated Fair Value
 
(Dollars in thousands)
Financial liabilities carried at adjusted historical cost
 
 
 
 
 
 
 
5.00% senior notes due 2025(1)
$
495,999

 
$
508,203

 
$
489,299

 
$
505,757

3.375% senior notes due 2027(1)
514,032

 
545,039

 
522,524

 
556,266

Short-term borrowings
19,371

 
19,371

 
7,621

 
7,621

Total
$
1,029,402

 
$
1,072,613

 
$
1,019,444

 
$
1,069,644

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


11


LEVI STRAUSS & CO. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS — (continued)
FOR THE QUARTERLY PERIOD ENDED FEBRUARY 23, 2020


NOTE 3: DERIVATIVE INSTRUMENTS AND HEDGING ACTIVITIES
Designated Cash Flow Hedges
The Company actively manages the risk of changes in functional currency equivalent cash flows resulting from anticipated non-functional currency denominated purchases and sales. The Company’s global sourcing organization uses the U.S. dollar as its functional currency and is primarily exposed to changes in functional currency equivalent cash flows from anticipated inventory purchases, as it procures inventory on behalf of subsidiaries with Euro functional currencies. Additionally, a European subsidiary uses Euros as its functional currency and is exposed to anticipated non-functional currency denominated sales. The Company manages these risks by using currency forward contracts formally designated and effective as cash flow hedges. Hedge effectiveness is generally determined by evaluating the ability of a hedging instrument's cumulative change in fair value to offset the cumulative change in the present value of expected cash flows on the underlying exposures. For forward contracts, forward points are excluded from the determination of hedge effectiveness and are included in current Cost of sales for hedges of anticipated inventory purchases and in Net Revenues for hedges of anticipated sales on a straight-line basis over the life of the contract. In each accounting period, differences between the change in fair value of the forward points and the amount recognized on a straight-line basis is recognized in other comprehensive income. There was no hedge ineffectiveness for the quarter ended February 23, 2020.
Net Investment Hedges
The Company has designated a portion of its outstanding Euro-denominated senior notes as a net investment hedge to manage foreign currency exposures in its foreign operations.
Non-designated Cash Flow Hedges
The Company enters into derivative instruments not designated as hedges. These derivative instruments are not speculative and are used to manage the Company’s exposure to certain product sourcing activities, some intercompany sales, foreign subsidiaries' royalty payments, interest payments, earnings repatriations, net investment in foreign operations and funding activities but the Company has not elected to apply hedge accounting. Changes in the fair value of derivatives not designated in hedging relationships are recorded directly in "Other income (expense), net" in the Company’s consolidated statements of income.


12


LEVI STRAUSS & CO. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS — (continued)
FOR THE QUARTERLY PERIOD ENDED FEBRUARY 23, 2020



As of February 23, 2020, the Company had forward foreign exchange contracts derivatives that were not designated as hedges in qualifying hedging relationships, of which $865.5 million were contracts to buy and $93.1 million were contracts to sell various foreign currencies. These contracts are at various exchange rates and expire at various dates through May 2021. The table below provides data about the carrying values of derivative instruments and non-derivative instruments: 
 
February 23, 2020
 
November 24, 2019
 
Assets
 
(Liabilities)
 
Derivative Net Carrying Value
 
Assets
 
(Liabilities)
 
Derivative Net Carrying Value
 
Carrying
Value
 
Carrying
Value
 
 
Carrying
Value
 
Carrying
Value
 
 
(Dollars in thousands)
Derivatives designated as hedging instruments
 
 
 
 
 
 
 
 
 
 
 
Foreign exchange risk cash flow hedges(1)
$
13,636

 
$

 
$
13,636

 
$
6,149

 
$

 
$
6,149

Foreign exchange risk cash flow hedges(2)

 
(6,440
)
 
(6,440
)
 

 
(3,809
)
 
(3,809
)
Total
$
13,636

 
$
(6,440
)
 
 
 
$
6,149

 
$
(3,809
)
 
 
Derivatives not designated as hedging instruments
 
 
 
 
 
 
 
 
 
 
 
Forward foreign exchange contracts(1)
$
22,293

 
$
(13,636
)
 
$
8,657

 
$
16,323

 
$
(6,149
)
 
$
10,174

Forward foreign exchange contracts(2)
6,452

 
(10,860
)
 
(4,408
)
 
3,813

 
(8,127
)
 
(4,314
)
Total
$
28,745

 
$
(24,496
)
 
 
 
$
20,136

 
$
(14,276
)
 
 
Non-derivatives designated as hedging instruments
 
 
 
 
 
 
 
 
 
 
 
Euro senior notes
$

 
$
(512,193
)
 
 
 
$

 
$
(525,255
)
 
 
_____________
 
(1)
Included in "Other current assets" or "Other non-current assets" on the Company’s consolidated balance sheets.
(2)
Included in "Other accrued liabilities" or "Other long-term liabilities" on the Company’s consolidated balance sheets.


13


LEVI STRAUSS & CO. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS — (continued)
FOR THE QUARTERLY PERIOD ENDED FEBRUARY 23, 2020


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; however, the Company records the fair value on a gross basis on its consolidated balance sheets based on maturity dates, including those subject to master netting arrangements. The table below presents the gross and net amounts of these contracts recognized on the Company's consolidated balance sheets by type of financial instrument:
 
February 23, 2020
 
November 24, 2019
 
Gross Amounts of Assets / (Liabilities) Presented in the Balance Sheet
 
Gross Amounts Not Offset in the Balance Sheet
 
Net Amounts of Assets / (Liabilities)
 
Gross Amounts of Assets / (Liabilities) Presented in the Balance Sheet
 
Gross Amounts Not Offset in the Balance Sheet
 
Net Amounts of Assets / (Liabilities)
 
 
 
 
 
 
(Dollars in thousands)
Foreign exchange risk contracts and forward foreign exchange contracts
 
 
 
 
 
 
 
 
 
 
 
Financial assets
$
42,382

 
$
(10,685
)
 
$
31,697

 
$
21,839

 
$
(10,142
)
 
$
11,697

Financial liabilities
(30,937
)
 
10,685

 
(20,252
)
 
(16,290
)
 
10,142

 
(6,148
)
Total
 
 
 
 
$
11,445

 
 
 
 
 
$
5,549

Embedded derivative contracts
 
 
 
 
 
 
 
 
 
 
 
Financial assets
$

 
$

 
$

 
$
4,446

 
$

 
$
4,446

Financial liabilities

 

 

 
(1,795
)
 

 
(1,795
)
Total
 
 
 
 
$

 
 
 
 
 
$
2,651

The table below provides data about the amount of gains and losses related to derivative instruments designated as cash flow hedges and non-derivative instruments designated as net investment hedges included in "Accumulated other comprehensive loss" ("AOCI") on the Company’s consolidated balance sheets:
 
Amount of Gain (Loss)
Recognized in OCI
(Effective Portion)
 
Amount of Gain (Loss) Reclassified from AOCI into Net Income(1)
 
As of
 
As of
 
Three Months Ended
February 23,
2020
November 24,
2019
February 23,
2020
 
February 24,
2019
 
(Dollars in thousands)
Foreign exchange risk contracts
$
5,124

 
$
2,781

 
$
3,065

 
$
880

Realized forward foreign exchange swaps (2)
4,637

 
4,637

 

 

Yen-denominated Eurobonds
(19,811
)
 
(19,811
)
 

 

Euro-denominated senior notes
(25,108
)
 
(38,171
)
 

 

Cumulative income taxes
14,335

 
25,606

 

 

Total
$
(20,823
)
 
$
(24,958
)
 
 
 
 
_____________
(1)    Amounts reclassified from AOCI were classified as net revenues and costs of goods sold on the consolidated statements of income.
(2)
Prior to and during 2005, the Company used foreign exchange currency swaps to hedge the net investment in its foreign operations. For hedges that qualified for hedge accounting, the net gains were included in AOCI and are not reclassified to earnings until the related net investment position has been liquidated.


14


LEVI STRAUSS & CO. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS — (continued)
FOR THE QUARTERLY PERIOD ENDED FEBRUARY 23, 2020


Within the next 12 months, a $4.1 million gain from cash flow hedges is expected to be reclassified from AOCI into net income.
The table below presents the effects of the Company's cash flow hedges of foreign exchange risk contracts on the Consolidated Statements of Income for the three months ended February 23, 2020:
 
Three Months Ended
 
February 23,
2020
 
February 24,
2019
Amount of (Loss) Gain on Cash Flow Hedge Activity:
(Dollars in thousands)
Revenues
$
(1,245
)
 
$
(459
)
Cost of goods sold
$
4,310

 
$
1,339

The table below provides data about the amount of gains and losses related to derivatives instruments included in "Other expense, net" in the Company's consolidated statements of income:
 
Three Months Ended
 
February 23,
2020
 
February 24,
2019
 
(Dollars in thousands)
Realized (loss) gain
$
(3,433
)
 
$
4,618

Unrealized gain (loss)
1,712

 
(10,756
)
Total
$
(1,721
)
 
$
(6,138
)

NOTE 4: DEBT 
The following table presents the Company's debt: 
 
February 23,
2020
 
November 24,
2019
 
(Dollars in thousands)
Long-term debt
 
 
 
5.00% senior notes due 2025
$
488,152

 
$
487,632

3.375% senior notes due 2027
506,240

 
519,113

Total long-term debt
$
994,392


$
1,006,745

Short-term debt
 
 
 
Short-term borrowings
$
19,341

 
$
7,621

Total debt
$
1,013,733

 
$
1,014,366

Senior Revolving Credit Facility
The Company's unused availability under its senior secured revolving credit facility (the "Credit Facility") was $819.5 million at February 23, 2020, as the Company's total availability of $850.0 million was reduced by $30.5 million of letters of credit and other credit usage allocated under the Credit Facility.
In early April, 2020, the Company drew down $300 million on its Credit Facility, leaving it with unused availability of approximately $520 million. As detailed in the Credit Facility, additional draws from the Credit Facility, to the extent they exceed certain levels based on the Company’s borrowing base, could create additional restrictions on the Company, including limitations on (i) certain investment activities, (ii) payment of dividends and (iii) prepayment of certain other indebtedness, in each case without the prior written consent of the lenders. 


15


LEVI STRAUSS & CO. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS — (continued)
FOR THE QUARTERLY PERIOD ENDED FEBRUARY 23, 2020


Interest Rates on Borrowings
The Company’s weighted-average interest rate on average borrowings outstanding during the three months ended February 23, 2020 was 4.88%, as compared to 5.22% during the same period of 2019.
NOTE 5: EMPLOYEE BENEFIT PLANS
The following table summarizes the total net periodic benefit cost for the Company's defined pension plans and postretirement benefit plans:
 
Three Months Ended
 
February 23,
2020
 
February 24,
2019
 
(Dollars in thousands)
Net periodic benefit cost:
 
 
 
Pension benefits
$
1,704

 
$
3,977

Postretirement benefits
509

 
893

Net periodic benefit cost
$
2,213

 
$
4,870


For the three months ended February 23, 2020, total pension plan contributions were $10.5 million.
NOTE 6: COMMITMENTS AND CONTINGENCIES
Forward Foreign Exchange Contracts
The Company uses cash flow hedge 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. See Note 3 for additional information.
Other Contingencies
Litigation.  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.
Customs Duty Audits. The Company imports both raw materials and finished garments into all of its operating regions and as such, is subject to numerous countries' complex customs laws and regulations with respect to its import and export activity. The Company has various pending audit assessments in connection with these activities. While the Company is vigorously defending its position and does not believe any of the claims for customs duty and related charges have merit, the ultimate resolution of these assessments and legal proceedings are subject to risk and uncertainty.


16


LEVI STRAUSS & CO. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS — (continued)
FOR THE QUARTERLY PERIOD ENDED FEBRUARY 23, 2020


NOTE 7: LEASES
The Company primarily leases retail store space, certain distribution and warehouse facilities, office space, equipment and other non-real estate assets. The Company determines if an arrangement is a lease at inception and begins recording lease activity at the commencement date, which is generally the date on which the Company takes possession of or controls the physical use of the asset. Right-of-use assets and lease liabilities are recognized based on the present value of lease payments over the lease term with lease expense recognized on a straight-line basis. The Company's incremental borrowing rates, which are based on the information available at commencement date, are used to determine the present value of future lease payments unless the implicit rate is readily determinable. As of and for the three months ended February 23, 2020, finance leases were not a material component of the Company's lease portfolio. Lease agreements may contain rent escalation clauses, renewal or termination options, rent holidays or certain landlord incentives, including tenant improvement allowances. Right-of-use assets include amounts for scheduled rent increases and are reduced by the amount of lease incentives. The lease term includes the non-cancelable period of the lease and may include options to extend or terminate the lease when it is reasonably certain the Company will exercise the option. Certain lease agreements include variable lease payments, which are based on a percent of retail sales over specified levels or adjust periodically for inflation.
Lease expense is recognized in Selling, general and administrative expenses within the Company's consolidated statements of income, based on the underlying nature of the leased asset. For the three months ended February 23, 2020, lease expense primarily consisted of operating lease costs of $87.1 million, including $21.8 million primarily related to variable lease costs and an immaterial amount of short-term lease costs.
Amounts of future undiscounted cash flows related to operating lease payments over the lease term are as follows and are reconciled to the present value of the operating lease liabilities as recorded on the Company's consolidated balance sheets.
 
February 23, 2020(1)
 
(Dollars in thousands)
2020
$
188,290

2021
216,259

2022
183,395

2023
147,155

2024
118,315

Thereafter
284,609

Total undiscounted future cash flows related to lease payments
1,138,023

Less: Interest
75,090

Present value of lease liabilities
$
1,062,933

_____________
(1) Excludes $5.5 million of future operating lease payments for lease agreements signed but not yet commenced.
The following table includes the weighted average remaining lease terms, in years, and the weighted average discount rate used to calculate the present value of operating lease liabilities:
 
February 23, 2020
Weighted-average remaining lease term (years)
6.1

Weighted-average discount rate
2.38
%


17


LEVI STRAUSS & CO. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS — (continued)
FOR THE QUARTERLY PERIOD ENDED FEBRUARY 23, 2020


The table below includes supplemental cash and non-cash information related to operating leases:
 
February 23, 2020
Cash paid for amounts included in the measurement of lease liabilities:
(Dollars in thousands)
Operating cash outflows from operating leases
$
53,378

Operating lease right-of-use assets obtained in exchange for new operating lease liabilities (1)
$
25,368

_____________
(1) Excludes the amount initially capitalized in conjunction with the adoption of Topic 842.
Amounts of minimum future annual commitments under non-cancelable operating leases and lease financing obligations in accordance with Topic 840 were as follows:
 
November 24, 2019
 
(Dollars in thousands)
2020
$
234,092

2021
203,483

2022
174,536

2023
140,278

2024
111,176

Thereafter
284,114

Total undiscounted future cash flows related to lease payments
$
1,147,679

NOTE 8: DIVIDEND
In January 2020, the Company's Board of Directors declared a cash dividend of $0.08 per share to holders of record of its Class A and Class B common stock, at the close of business of February 12, 2020. The first dividend of $31.9 million in total was paid in the first quarter of 2020.
In April 2020, the Company's Board of Directors declared a cash dividend of $0.08 per share to holders of record of its Class A and Class B common stock, at the close of business on April 24, 2020, which is payable on or about May 8, 2020.
The Company does not have an established dividend policy. The Company will continue to review its ability to pay cash dividends on an ongoing basis 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.


18


LEVI STRAUSS & CO. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS — (continued)
FOR THE QUARTERLY PERIOD ENDED FEBRUARY 23, 2020


NOTE 9: ACCUMULATED OTHER COMPREHENSIVE LOSS
The following is a summary of the components of "Accumulated other comprehensive loss," net of related income taxes: 
 
February 23,
2020
 
November 24,
2019
 
February 24,
2019
 
(Dollars in thousands)
Pension and postretirement benefits
$
(265,433
)
 
$
(220,859
)
 
$
(226,480
)
Derivative instruments
(20,823
)
 
(24,958
)
 
(38,271
)
Foreign currency translation losses
(174,810
)
 
(155,841
)
 
(145,752
)
Unrealized gains on marketable securities
8,332

 
6,288

 
3,617

Accumulated other comprehensive loss
(452,734
)
 
(395,370
)
 
(406,886
)
Accumulated other comprehensive income attributable to noncontrolling interest(1)

 
9,616

 
9,484

Accumulated other comprehensive loss attributable to Levi Strauss & Co.
$
(452,734
)
 
$
(404,986
)
 
$
(416,370
)

_____________
(1)
On January 9, 2020, Company completed an all cash tender offer for the acquisition of the remaining minority interest shares of Levi Strauss Japan K.K. Refer to Note 1 for additional information.
No material amounts were reclassified out of "Accumulated other comprehensive loss" into net income other than those that pertain to the Company's derivative instruments and pension and post retirement benefit plans. Refer to Note 3 and Note 5 for additional information.


19


LEVI STRAUSS & CO. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS — (continued)
FOR THE QUARTERLY PERIOD ENDED FEBRUARY 23, 2020


NOTE 10: NET REVENUES
Disaggregated Revenue
The table below provides the Company's revenues disaggregated by segment and channel.
 
Three Months Ended February 23, 2020
 
Americas
 
Europe
 
Asia
 
Total
 
(Dollars in thousands)
Net revenues by channel:
 
 
 
 
 
 
 
Wholesale
$
460,866

 
$
276,955

 
$
138,503

 
$
876,324

Direct-to-consumer
284,714

 
235,988

 
109,100

 
629,802

Total net revenues
$
745,580

 
$
512,943

 
$
247,603

 
$
1,506,126


 
Three Months Ended February 24, 2019
 
Americas
 
Europe
 
Asia
 
Total
 
(Dollars in thousands)
Net revenues by channel:
 
 
 
 
 
 
 
Wholesale
$
483,801

 
$
252,933

 
$
132,575

 
$
869,309

Direct-to-consumer
233,463

 
211,743

 
119,943

 
565,149

Total net revenues
$
717,264

 
$
464,676

 
$
252,518

 
$
1,434,458

The Company did not have any material contract assets and or contract liabilities recorded in the consolidated balance sheets as of February 23, 2020 and November 24, 2019.
NOTE 11: OTHER INCOME (EXPENSE), NET
The following table summarizes significant components of "Other income (expense), net": 
 
Three Months Ended
 
February 23,
2020
 
February 24,
2019
 
(Dollars in thousands)
Foreign exchange management losses(1)
$
(1,721
)
 
$
(6,138
)
Foreign currency transaction gains
694

 
2,621

Interest income
4,211

 
4,011

Investment income
741

 
1,007

Other, net
(1,225
)
 
(3,147
)
Total other income (expense), net
$
2,700

 
$
(1,646
)
_____________
 
(1)
Gains and losses on forward foreign exchange contracts primarily resulted from currency fluctuations relative to negotiated contract rates. Losses in the three-month periods ended February 23, 2020 and February 24, 2019 were primarily due to unfavorable currency fluctuations relative to negotiated contract rates on positions to sell the Mexican Peso.


20


LEVI STRAUSS & CO. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS — (continued)
FOR THE QUARTERLY PERIOD ENDED FEBRUARY 23, 2020


NOTE 12: INCOME TAXES
The effective income tax rate was 7.4% for the three months ended February 23, 2020, compared to 19.4% for the same prior-year period. The decrease in the effective tax rate was primarily driven by 12.8% ($21.0 million) in discrete tax benefits attributable to employees exercising stock-based equity awards in 2020.
NOTE 13: EARNINGS PER SHARE ATTRIBUTABLE TO COMMON STOCKHOLDERS
The following table sets forth the computation of the Company's basic and diluted earnings per share:
 
Three Months Ended
 
February 23,
2020
 
February 24,
2019
 
(Dollars in thousands, except per share amounts)
Numerator:
 
 
 
Net income attributable to Levi Strauss & Co.
$
152,689

 
$
146,577

Denominator:
 
 
 
Weighted-average common shares outstanding - basic
396,216,057

 
377,077,111

Dilutive effect of stock awards
13,852,316

 
16,157,714

Weighted-average common shares outstanding - diluted
410,068,373

 
393,234,825

Earnings per common share attributable to common stockholders:
 
 
 
Basic
$
0.39

 
$
0.39

Diluted
$
0.37

 
$
0.37

Anti-dilutive securities excluded from calculation of diluted earnings per share attributable to common stockholders
787,917

 
974,070

NOTE 14: RELATED PARTIES
Charles V. Bergh, President and Chief Executive Officer, and Marc Rosen, Executive Vice President and President of Levi Strauss Americas, are members of the Board of Directors of the Levi Strauss Foundation, which is not a consolidated entity of the Company. Seth R. Jaffe, Executive Vice President and General Counsel, is Vice President of the Levi Strauss Foundation. During the three months ended February 23, 2020, the Company donated $8.7 million to the Levi Strauss Foundation as compared to $8.5 million for the same prior-year period.


21


LEVI STRAUSS & CO. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS — (continued)
FOR THE QUARTERLY PERIOD ENDED FEBRUARY 23, 2020


NOTE 15: 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.
Business segment information for the Company is as follows: 
 
Three Months Ended
 
February 23,
2020
 
February 24,
2019
 
(Dollars in thousands)
Net revenues:
 
 
 
Americas
$
745,580

 
$
717,264

Europe
512,943

 
464,676

Asia
247,603

 
252,518

Total net revenues
$
1,506,126

 
$
1,434,458

Operating income:
 
 
 
Americas
$
124,039

 
$
123,656

Europe
132,436

 
121,624

Asia
32,668

 
42,965

Regional operating income
289,143

 
288,245

Corporate expenses
110,361

 
87,333

Total operating income
178,782

 
200,912

Interest expense
(16,654
)
 
(17,544
)
Other income (expense), net
2,700

 
(1,646
)
Income before income taxes
$
164,828

 
$
181,722

NOTE 16: SUBSEQUENT EVENTS
On March 11, 2020, the World Health Organization declared the novel strain of coronavirus (COVID-19) a global pandemic and recommended containment and mitigation measures worldwide. As of the date of this filing, many of our company-operated, shop in shops, and franchise stores globally have been impacted by temporary closures, reduced store hours or reduced traffic. While this is expected to be temporary, the current circumstances are dynamic and the impacts of COVID-19 on the Company's business operations, including the duration and impact on overall customer demand, cannot be reasonably estimated at this time. As a result, the Company could experience material impacts including, but not limited to, charges from potential adjustments of the carrying amount of inventory and receivables, asset impairment charges, deferred tax valuation allowances and changes in the effectiveness of the Company’s hedging instruments. The Company anticipates this may have a material impact on the business, results of operations and cash flows in 2020.
In April, 2020, as a precautionary measure to maximize liquidity and to increase available cash on hand, the Company drew down $300 million on its senior secured revolving credit facility. The proceeds will be available to be used for working capital, general corporate or other purposes. In addition, the Company is reducing discretionary spending, revisiting investment strategies, suspending the share buyback program until further notice, and reducing payroll costs, including through employee furloughs and pay cuts.


22


Item 2.
MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS 
You should read the following discussion and analysis of our financial condition and results of operations together with our unaudited consolidated financial statements and related notes thereto included in Part I, Item 1 of this Quarterly Report and with our audited financial statements and related notes in our Annual Report on Form 10-K for the year ended November 24, 2019, filed with the Securities and Exchange Commission on January 30, 2020. We use a 52- or 53-week fiscal year, with each fiscal year ending on the Sunday in November that is closest to November 30 of that year. See "-Financial Information Presentation - Fiscal Year."
Non-GAAP Financial Measures
To supplement our consolidated financial statements prepared and presented in accordance with generally accepted accounting principles in the United States ("GAAP"), we use certain non-GAAP financial measures throughout this Quarterly Report, as described further below, to provide investors with additional useful information about our financial performance, to enhance the overall understanding of our past performance and future prospects and to allow for greater transparency with respect to important metrics used by our management for financial and operational decision-making. We are presenting these non-GAAP financial measures to assist investors in seeing our financial performance from management’s view and because we believe they provide an additional tool for investors to use in comparing our core financial performance over multiple periods with other companies in our industry.
However, non-GAAP financial measures have limitations in their usefulness to investors because they have no standardized meaning prescribed by GAAP and are not prepared under any comprehensive set of accounting rules or principles. In addition, non-GAAP financial measures may be calculated differently from, and therefore may not be directly comparable to, similarly titled measures used by other companies. As a result, non-GAAP financial measures should be viewed as supplementing, and not as an alternative or substitute for, our consolidated financial statements prepared and presented in accordance with GAAP.
Overview
We are an iconic American company with a rich history of profitable growth, quality, innovation and corporate citizenship. Our story began in San Francisco, California, in 1853 as a wholesale dry goods business. We invented the blue jean 20 years later. Today we design, market and sell 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. and Denizen brands.
Our business is operated through three geographic regions that comprise our three reporting segments: Americas, Europe and Asia (which includes the Middle East and Africa). We service consumers through our global infrastructure, developing, sourcing and marketing our products around the world.
Our iconic, enduring brands are brought to life every day around the world by our talented and creative employees and partners. The Levi’s brand epitomizes classic, authentic American style and effortless cool. We have cultivated Levi’s as a lifestyle brand that is inclusive and democratic in the eyes of consumers while offering products that feel exclusive, personalized and original. This approach has enabled the Levi’s brand to evolve with the times and continually reach a new, younger audience, while our rich heritage continues to drive relevance and appeal across demographics. The Dockers brand helped drive "Casual Friday" in the 1990s and has been a cornerstone of casual menswear for more than 30 years. The Signature by Levi Strauss & Co. and Denizen brands, which we developed for value-conscious consumers, offer quality craftsmanship and great fit and style at affordable prices.
We recognize wholesale revenue from sales of our products through third-party retailers such as department stores, specialty retailers, third-party e-commerce sites and franchise locations dedicated to our brands. We also sell our products directly to consumers ("direct-to-consumer" or "DTC") through a variety of formats, including our own company-operated mainline and outlet stores, company-operated e-commerce sites and select shop-in-shops that we operate within department stores and other third-party retail locations. As of February 23, 2020, our products were sold in over 50,000 retail locations in more than 110 countries, including approximately 3,200 brand-dedicated stores and shop-in-shops. As of February 23, 2020, we had 977 company-operated stores located in 34 countries and approximately 500 company-operated shop-in-shops. The remainder of our brand-dedicated stores and shop-in-shops were operated by franchisees and other partners.
Our Europe and Asia businesses, collectively, contributed 50% of our net revenues and 57% of our regional operating income in the first three months of both 2020 and 2019. Sales of Levi’s brand products represented 88% of our total net sales in the first three months of both 2020 and 2019.


23


Our wholesale channel generated 58% and 61% of our net revenues in the first three months of 2020 and 2019, respectively. Our DTC channel generated 42% and 39% of our net revenues in the first three months of 2020 and 2019, respectively, with sales through our company operated e-commerce sites representing 16% of DTC channel net revenues in the first three months of both 2020 and 2019 and 7% and 6% of total net revenues in the first three months of 2020 and 2019, respectively.
Impact of COVID-19 on Our Business
Our global operations expose us to risks associated with public health crises, such as pandemics and epidemics, which could harm our business and cause operational results to suffer. The recent COVID-19 pandemic has impacted our business operations and results of operations for the first quarter of 2020 as described in more detail under “Results of Operations for Three Months Ended February 23, 2020, as Compared to Comparable Period in 2019” below, in particular due to decreased foot traffic and mid-quarter store closures in mainland China. We expect the evolving COVID-19 pandemic to continue to have an adverse impact on our results of operations, due to further spread of the disease in other regions and potential disruption from any supply chain impacts. While the ultimate health and economic impact of the COVID-19 pandemic is highly uncertain, we expect that our business operations and results of operations, including our net revenues, earnings and cash flows, will be materially adversely impacted for at least the balance of 2020, including as a result of:
Temporary closure of a significant number of our owned and operated retail stores, which started in mainland China midway through the first fiscal quarter, and which has expanded globally;
Decreased foot traffic in retail stores;
Consumer confidence and consumer spending habits, including spending for the merchandise that we sell and negative trends in consumer purchasing patterns due to consumers’ disposable income, credit availability and debt levels;
Decreased discretionary DTC channel spending independent of store closures;
Decreased wholesale channel spending and increased likelihood of wholesale customer failure;
Possible disruption to the supply chain caused by distribution and other logistical issues;
Decreased productivity due to travel ban, work-from-home policies or shelter-in-place orders;
A slowdown in the U.S. economy, and uncertain global economic outlook or a credit crisis.
We are focused on navigating these recent challenges presented by COVID-19 through preserving our liquidity and managing our cash flow through taking preemptive action to enhance our ability to meet our short-term liquidity needs. Such actions include, but are not limited to, reducing our discretionary spending, revisiting our investment strategies, suspending our share buyback program until further notice, and reducing payroll costs, including through employee furloughs and pay cuts.
Other Factors Affecting Our Business
We believe the other key business and marketplace factors, independent of the health and economic impact of the COVID-19 pandemic, that are impacting our business include the following:
Other factors that impact consumer discretionary spending continue to create a complex and challenging retail environment for us and our customers, characterized by unpredictable traffic patterns and a general promotional environment. In developed economies, mixed real wage growth and shifting consumer spending also continue to pressure global discretionary spending. Consumers continue to focus on value pricing and convenience with the off-price retail channel remaining strong and increased expectations for real-time delivery.
The diversification of our business model across regions, channels, brands and categories affects our gross margin. For example, if our sales in higher gross margin business regions, channels, brands and categories grow at a faster rate than in our lower gross margin business regions, channels, brands and categories, we would expect a favorable impact to aggregate gross margin over time. Gross margin in Europe is generally higher than in our other two regional operating segments. DTC sales generally have higher gross margins than sales through third parties, although DTC sales also typically have higher selling expenses. Value brands, which are focused on the value-conscious consumer, generally generate lower gross margin. Enhancements to our existing product offerings, or our expansion into new products categories, may also impact our future gross margin.
More competitors are seeking growth globally, thereby increasing competition across regions. Some of these competitors are entering markets where we already have a mature business such as the United States, Mexico, Western Europe and Japan, and may provide consumers discretionary purchase alternatives or lower-priced apparel offerings.
Wholesaler/retailer dynamics and wholesale channels remain challenged by mixed growth prospects due to increased competition from e-commerce shopping, pricing transparency enabled by the proliferation of online technologies, and


24


vertically-integrated specialty stores. Retailers, including our top customers, have in the past and may in the future decide to consolidate, undergo restructurings or rationalize their stores, which could result in a reduction in the number of stores that carry our products.
Many apparel companies that have traditionally relied on wholesale distribution channels have invested in expanding their own retail store and e-commerce distribution and consumer-facing technologies, which has increased competition in the retail market.
Competition for, and price volatility of, resources throughout the supply chain have 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 lower-cost sourcing alternatives, resulting in reduced barriers to entry for new competitors, and the impact of fluctuating prices of labor and raw materials as well as the consolidation of suppliers. Trends such as these can bring additional pressure on us and other wholesalers and retailers to shorten lead-times, reduce costs and raise product prices.
Foreign currencies continue to be volatile. Significant fluctuations of the U.S. Dollar against various foreign currencies, including the Euro, British Pound and Mexican Peso, will impact our financial results, affecting translation, revenue, operating margins and net income.
The current environment has introduced greater uncertainty with respect to potential tax and trade regulations. The current domestic and international political environment, including changes to other U.S. policies related to global trade and tariffs, have resulted in uncertainty surrounding the future state of the global economy. Such changes may require us to modify our current sourcing practices, which may impact our product costs, and, if not mitigated, could have a material adverse effect on our business and results of operations.
These factors contribute to a global market environment of intense competition, constant product innovation and continuing cost pressure, and combine with the continuing global economic conditions to create a challenging commercial and economic environment. We evaluate these factors as we develop and execute our strategies.
Effects of Inflation
We believe inflation in the regions where most of our sales occur has not had a significant effect on our net revenues or profitability.
Our First Quarter 2020 Results
 
Net revenues. Consolidated net revenues increased 5.0% on a reported basis and 5.8% on a constant-currency basis compared to the first quarter of 2019. The increase was primarily driven by an increase in DTC net revenues; as the benefit of a Black Friday week was included in the first quarter of 2020, and expansion and performance of the retail network and e-commerce, drove further growth. Revenue growth was partially offset by an estimated $20.0 million adverse impact from store closures and reduced traffic resulting from the COVID-19 outbreak in Asia.
Operating income. Compared to the first quarter of 2019, consolidated operating income decreased 11.0% and operating margin decreased to 11.9%, as higher net revenues and gross margin expansion were offset by higher selling, general and administrative expenses ("SG&A") associated with expansion of our company-operated retail network, higher advertising and other administration expenses.
Net income. Compared to the first quarter of 2019, consolidated net income increased to $152.7 million from $146.5 million, primarily due to a decrease in income tax expense driven by a $21.0 million discrete tax benefit attributable to employees exercising stock-based equity awards in 2020, offset by the decrease in operating income described above.
Adjusted EBIT. Compared to the first quarter of 2019, adjusted EBIT decreased 8.2% as a result of higher SG&A expenses in the 2020 quarter associated with expansion of our company-operated retail network. As a result, adjusted EBIT margin was 12.6%, 180 basis points lower than the first quarter of 2019 on a reported basis, and 170 basis points lower than the first quarter of 2019 on a constant-currency basis.
Adjusted Net Income. Compared to the first quarter of 2019, adjusted net income increased 7.6%, primarily due to a decrease in income tax expense driven by a $21.0 million discrete tax benefit attributable to employees exercising stock-based equity awards in 2020, offset by the decrease in operating income described above.
Diluted earnings per share. Compared to the first quarter of 2019, diluted earnings per share were flat at $0.37 as higher net income was offset by an increase in shares outstanding that was primarily a result of our initial public offering of Class A common stock in March 2019 (our "IPO").


25


Adjusted diluted earnings per share. Compared to the first quarter of 2019, adjusted diluted earnings per share increased from $0.38 to $0.40 due to an increase in adjusted net income partially offset by an increase in shares outstanding that was primarily a result of our IPO.
Financial Information Presentation
Fiscal year.    We use a 52- or 53- week fiscal year, with each fiscal year ending on the Sunday in November that is closest to November 30 of that year. Certain of our foreign subsidiaries have fiscal years ending November 30. Each fiscal year generally consists of four 13-week quarters, with each quarter ending on the last Sunday of the last month of that quarter. Each quarter of fiscal years 2020 and 2019 consists of 13 weeks, with the exception of the fourth quarter of 2020, which consists of 14 weeks.
Segments.    We manage our business according to three regional segments: the Americas, Europe and Asia. Our Asia segment includes the Middle East and Africa.
Classification.    Our classification of certain significant revenues and expenses reflects the following:
 
Net revenues comprise net sales and licensing revenues. Net sales include sales of products to wholesale customers, including franchised stores, and direct sales to consumers at our company-operated stores and shop-in-shops located within department stores and other third-party locations, as well as company-operated e-commerce sites. Net revenues include discounts, allowances for estimated returns and incentives. Licensing revenues, which include 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 applicable licensing agreements.
Cost of goods sold primarily comprises 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. On both a reported and constant-currency basis, cost of goods sold reflects the transactional currency impact resulting from the purchase of products in a currency other than the functional currency.
Selling expenses 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 e-commerce operations.
We reflect substantially all distribution costs in SG&A, 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.



26


Results of Operations for Three Months Ended February 23, 2020, as Compared to Comparable Period in 2019
The following table presents, for the periods indicated, our consolidated statements of income, the changes in these items from period to period and these items expressed as a percentage of net revenues:
 
 
Three Months Ended
 
February 23,
2020
 
February 24,
2019
 
%
Increase
(Decrease)
 
February 23,
2020
 
February 24,
2019
 
 
 
% of Net
Revenues
 
% of Net
Revenues
 
(Dollars and shares in millions, except per share amounts)
Net revenues
$
1,506.1

 
$
1,434.5

 
5.0
 %
 
100.0
 %
 
100.0
 %
Cost of goods sold
666.8

 
651.7

 
2.3
 %
 
44.3
 %
 
45.4
 %
Gross profit
839.3

 
782.8

 
7.2
 %
 
55.7
 %
 
54.6
 %
Selling, general and administrative expenses
660.5

 
581.9

 
13.5
 %
 
43.9
 %
 
40.6
 %
Operating income
178.8

 
200.9

 
(11.0
)%
 
11.9
 %
 
14.0
 %
Interest expense
(16.7
)
 
(17.5
)
 
(4.6
)%
 
(1.1
)%
 
(1.2
)%
Other income (expense), net
2.7

 
(1.6
)
 
*

 
0.2
 %
 
(0.1
)%
Income before income taxes
164.8

 
181.8

 
(9.4
)%
 
10.9
 %
 
12.7
 %
Income tax expense
12.1

 
35.3

 
(65.7
)%
 
0.8
 %
 
2.5
 %
Net income
152.7

 
146.5

 
4.2
 %
 
10.1
 %
 
10.2
 %
Net loss attributable to noncontrolling interest

 
0.1

 
(100.0
)%
 

 

Net income attributable to Levi Strauss & Co.
$
152.7

 
$
146.6

 
4.2
 %
 
10.1
 %
 
10.2
 %
Earnings per common share attributable to common stockholders:
 
 
 
 
 
 
 
 
 
Basic
$
0.39

 
$
0.39

 
 %
 
*

 
*

Diluted
$
0.37

 
$
0.37

 
 %
 
*

 
*

Weighted-average common shares outstanding:
 
 
 
 
 
 
 
 
 
Basic
396.2

 
377.1

 
5.1
 %
 
*

 
*

Diluted
410.1


393.2

 
4.3
 %
 
*

 
*

_____________
* Not meaningful



27


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 basis from period to period.
 
 
Three Months Ended
 
 
 
 
 
% Increase (Decrease)
 
February 23,
2020
 
February 24,
2019
 
As
Reported
 
Constant
Currency
 
(Dollars in millions)
Net revenues:
 
 
 
 
 
 
 
Americas
$
745.6

 
$
717.3

 
3.9
 %
 
3.7
 %
Europe
512.9

 
464.7

 
10.4
 %
 
12.9
 %
Asia
247.6

 
252.5

 
(1.9
)%
 
(1.2
)%
Total net revenues
$
1,506.1

 
$
1,434.5

 
5.0
 %
 
5.8
 %
Total net revenues increased on both a reported and constant-currency basis for the three-month period ended February 23, 2020, as compared to the same period in 2019.
Americas.    On both a reported and constant-currency basis, net revenues in our Americas region increased for the three-month period ended February 23, 2020, with currency translation affecting net revenues favorably by approximately $2 million.
The increase in net revenues for the three-month period ended February 23, 2020 was primarily driven by the inclusion of non-comparable Black Friday week results in the 2020 period and revenues from our newly acquired South American distributor. DTC net revenues, which includes both same store and new store sales, grew as compared to the 2019 period, as we benefited from 78 more stores at the end of the first quarter of 2020 versus the first quarter of 2019. This growth was more than offset by a decline in wholesale revenue, primarily within the U.S. and across our Levi's and Docker's brands, as a result of the continued softening of the overall wholesale environment, including the impact of financially troubled retailers and increased door closures since a year ago.
Europe.    Net revenues in Europe increased on both a reported and constant-currency basis for the three-month period ended February 23, 2020, with currency translation affecting net revenues unfavorably by approximately $10 million.
Constant-currency net revenues increased for the three-month period ended February 23, 2020 due to growth in net revenues in both the DTC and wholesale channels. Revenue growth was broad-based across genders and product categories. Additionally, growth in DTC revenue was driven by growth and expansion of our retail network and outlets, including the benefit of a Black Friday week, as we benefited from 25 more stores in operation at the end of the first quarter of 2020 versus the first quarter of 2019.
Asia.    Net revenues in Asia decreased on both a reported and constant-currency basis for the three-month period ended February 23, 2020, with currency affecting net revenues unfavorably by approximately $2 million.
Excluding the effects of currency, the decrease in net revenues for the three-month periods ended February 23, 2020 was due to an estimated $20.0 million adverse impact of the recent COVID-19 outbreak that impacted our China business as well as neighboring countries, as we had to temporarily close many of our stores midway through the quarter. This more than offset growth in our wholesale business as well as the expansion within our company-operated retail network, as we benefited from 42 more stores at the end of the first quarter of 2020 versus the first quarter of 2019.


28


Gross profit
The following table shows consolidated gross profit and gross margin for the periods indicated and the changes in these items from period to period: 
 
Three Months Ended
 
February 23,
2020
 
February 24,
2019
 
%
Increase
 
(Dollars in millions)
Net revenues
$
1,506.1

 
$
1,434.5

 
5.0
%
Cost of goods sold
666.8

 
651.7

 
2.3
%
Gross profit
$
839.3

 
$
782.8

 
7.2
%
Gross margin
55.7
%