Company Quick10K Filing
Quick10K
Levi Strauss
10-Q 2019-02-24 Quarter: 2019-02-24
S-1 2019-02-13 Public Filing
10-K 2018-11-25 Annual: 2018-11-25
10-Q 2018-08-26 Quarter: 2018-08-26
10-Q 2018-05-27 Quarter: 2018-05-27
10-Q 2018-02-25 Quarter: 2018-02-25
10-K 2017-11-26 Annual: 2017-11-26
10-Q 2017-08-27 Quarter: 2017-08-27
10-Q 2017-05-28 Quarter: 2017-05-28
10-Q 2017-02-26 Quarter: 2017-02-26
10-K 2016-11-27 Annual: 2016-11-27
10-Q 2016-08-28 Quarter: 2016-08-28
10-Q 2016-05-29 Quarter: 2016-05-29
10-Q 2016-02-28 Quarter: 2016-02-28
10-K 2015-11-29 Annual: 2015-11-29
10-Q 2015-08-30 Quarter: 2015-08-30
10-Q 2015-05-31 Quarter: 2015-05-31
10-Q 2015-03-01 Quarter: 2015-03-01
10-K 2014-11-30 Annual: 2014-11-30
10-Q 2014-08-24 Quarter: 2014-08-24
10-Q 2014-05-25 Quarter: 2014-05-25
10-Q 2014-02-23 Quarter: 2014-02-23
10-K 2013-11-24 Annual: 2013-11-24
8-K 2019-04-09 Earnings, Exhibits
8-K 2019-03-25 Amend Bylaw, Exhibits
8-K 2019-03-11 Earnings, Exhibits
8-K 2019-03-04 Enter Agreement, Shareholder Rights, Amend Bylaw
8-K 2019-02-12 Shareholder Vote
8-K 2019-02-05 Earnings, Exhibits
8-K 2018-07-27 Officers
8-K 2018-04-11 Shareholder Vote
8-K 2018-01-29 Other Events, Exhibits
BEN Franklin Resources 18,110
IFF International Flavors & Fragrances 14,430
JNPR Juniper Networks 9,740
TMCX Trinity Merger 441
NDLS Noodles 292
SMTA Spirit Mta REIT 288
ACRS Aclaris 227
SEK Swedish Export Credit 0
LOGQ Logicquest Technology 0
AWIN Altegris Winton Futures Fund 0
LVIS 2019-02-24
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: Dividend
Note 8: Accumulated Other Comprehensive Loss
Note 9: Net Revenues
Note 10: Other Income (Expense), Net
Note 11: Income Taxes
Note 12: Earnings per Share Attributable To Common Stockholders
Note 13: Related Parties
Note 14: Business Segment Information
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-31.1 lvis02242019ex-311.htm
EX-31.2 lvis02242019ex-312.htm
EX-32.1 lvis02242019ex-321.htm

Levi Strauss Earnings 2019-02-24

LVIS 10Q Quarterly Report

Balance SheetIncome StatementCash Flow

10-Q 1 a1q2019form10-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 24, 2019
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)
_________________
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  ¨  No  þ
Indicate by check mark whether the registrant has submitted electronically and posted on its corporate Web site, if any, every Interactive Data File required to be submitted and posted pursuant to Rule 405 of Regulation S-T (§232.405 of this chapter) during the preceding 12 months (or for such shorter period that the registrant was required to submit and post such files).    Yes  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 ¨
Non-accelerated filer þ
 
Smaller reporting company ¨
Emerging growth 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 4, 2019, the registrant had 42,166,667 shares of Class A common stock, $0.001 par value per share and 350,332,920 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 24, 2019
 
 
 
 
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)
 
 
 
February 24,
2019
 
November 25,
2018
 
(Dollars in thousands)
ASSETS
Current Assets:
 
 
 
Cash and cash equivalents
$
621,934


$
713,120

Short-term investments in marketable securities
100,017

 

Trade receivables, net of allowance for doubtful accounts of $8,332 and $10,037
633,534


534,164

Inventories:
 


Raw materials
5,900


3,681

Work-in-process
2,889


2,977

Finished goods
905,488


877,115

Total inventories
914,277


883,773

Other current assets
177,540


157,002

Total current assets
2,447,302


2,288,059

Property, plant and equipment, net of accumulated depreciation of $998,131 and $974,206
463,840


460,613

Goodwill
236,127


236,246

Other intangible assets, net
42,822


42,835

Deferred tax assets, net
398,008


397,791

Other non-current assets
120,269


117,116

Total assets
$
3,708,368


$
3,542,660

 
 
 
 
LIABILITIES, TEMPORARY EQUITY AND STOCKHOLDERS’ EQUITY
Current Liabilities:
 
 
 
Short-term debt
$
23,477


$
31,935

Accounts payable
329,913


351,329

Accrued salaries, wages and employee benefits
215,811


298,990

Accrued interest payable
16,648


6,089

Accrued income taxes
34,624


15,466

Accrued sales allowances (Note 1)
109,663

 

Other accrued liabilities
474,256


348,390

Total current liabilities
1,204,392


1,052,199

Long-term debt
1,017,660


1,020,219

Postretirement medical benefits
72,752


74,181

Pension liability
193,297


195,639

Long-term employee related benefits
84,607


107,556

Long-term income tax liabilities
10,281


9,805

Other long-term liabilities
116,353


116,462

Total liabilities
2,699,342


2,576,061

Commitments and contingencies





Temporary equity
322,984


299,140

 

 
 
Stockholders’ Equity:

 
 
Levi Strauss & Co. stockholders’ equity


 
 
Common stock — $.001 par value; 1,200,000,000 shares authorized; 375,874,600 shares and 376,028,430 shares issued and outstanding
376


376

Additional paid-in capital

 

Accumulated other comprehensive loss
(416,370
)

(424,584
)
Retained earnings
1,094,636


1,084,321

Total Levi Strauss & Co. stockholders’ equity
678,642


660,113

Noncontrolling interest
7,400


7,346

Total stockholders’ equity
686,042


667,459

Total liabilities, temporary equity and stockholders’ equity
$
3,708,368


$
3,542,660


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


3


LEVI STRAUSS & CO. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF INCOME (LOSS)
 
 
Three Months Ended
 
February 24,
2019
 
February 25,
2018

(Dollars in thousands, except per share amounts)
(Unaudited)
Net revenues
$
1,434,458


$
1,343,685

Cost of goods sold
651,650


605,561

Gross profit
782,808


738,124

Selling, general and administrative expenses
581,896


563,202

Operating income
200,912


174,922

Interest expense
(17,544
)

(15,497
)
Other income (expense), net
(1,646
)

(10,400
)
Income before income taxes
181,722


149,025

Income tax expense
35,271


167,654

Net income (loss)
146,451

 
(18,629
)
Net loss (income) attributable to noncontrolling interest
126


(383
)
Net income (loss) attributable to Levi Strauss & Co.
$
146,577


$
(19,012
)
Earnings (loss) per common share attributable to common stockholders:
 
 
 
Basic
$
0.39

 
$
(0.05
)
Diluted
$
0.37

 
$
(0.05
)
Weighted-average common shares outstanding:
 
 
 
Basic
377,077,111

 
376,165,783

Diluted
393,234,825

 
376,165,783














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


4


LEVI STRAUSS & CO. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF COMPREHENSIVE INCOME (LOSS)
 
 
Three Months Ended
 
February 24,
2019
 
February 25,
2018
 
(Dollars in thousands)
(Unaudited)
Net income (loss)
$
146,451


$
(18,629
)
Other comprehensive income (loss), before related income taxes:


 
Pension and postretirement benefits
3,422


3,360

Derivative instruments
1,737


(22,848
)
Foreign currency translation gains
4,086


19,781

Unrealized gains on marketable securities
890

 
290

Total other comprehensive income, before related income taxes
10,135

 
583

Income taxes (expense) benefit related to items of other comprehensive income
(1,741
)
 
4,846

Comprehensive income, net of income taxes
154,845

 
(13,200
)
Comprehensive income attributable to noncontrolling interest
(54
)
 
(644
)
Comprehensive income (loss) attributable to Levi Strauss & Co.
$
154,791

 
$
(13,844
)
































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


5


LEVI STRAUSS & CO. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS
 
Three Months Ended
 
February 24,
2019

February 25,
2018

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



Net income (loss)
$
146,451


$
(18,629
)
Adjustments to reconcile net income to net cash provided by operating activities:




Depreciation and amortization
28,559


32,821

Unrealized foreign exchange losses
9,046


10,022

Realized (gain) loss on settlement of forward foreign exchange contracts not designated for hedge accounting
(4,618
)

10,303

Employee benefit plans’ amortization from accumulated other comprehensive loss and settlement loss
3,422


3,360

Stock-based compensation
1,497


5,256

Other, net
(413
)

1,624

(Benefit from) provision for deferred income taxes
(795
)

129,542

Change in operating assets and liabilities:




Trade receivables
69,672


59,497

Inventories
(48,120
)

(61,867
)
Other current assets
(6,162
)

(16,100
)
Other non-current assets
(2,251
)

(3,405
)
Accounts payable and other accrued liabilities
(48,041
)

14,659

Restructuring liabilities
(4
)

(44
)
Income tax liabilities
19,496


26,194

Accrued salaries, wages and employee benefits and long-term employee related benefits
(110,338
)

(126,939
)
Other long-term liabilities
(1,579
)

(124
)
Net cash provided by operating activities
55,822


66,170

Cash Flows from Investing Activities:




Purchases of property, plant and equipment
(36,149
)

(30,996
)
Proceeds (Payments) on settlement of forward foreign exchange contracts not designated for hedge accounting
55,818


(10,303
)
Payments to acquire short-term investments
(99,880
)
 

Net cash used for investing activities
(80,211
)

(41,299
)
Cash Flows from Financing Activities:




Proceeds from short-term credit facilities
13,442


17,511

Repayments of short-term credit facilities
(12,556
)

(16,944
)
Other short-term borrowings, net
(9,422
)

(14,537
)
Repurchase of common stock, including shares surrendered for tax withholdings on equity award exercises
(3,914
)

(14,844
)
Dividend to stockholders
(55,000
)

(45,000
)
Other financing, net
(296
)

(386
)
Net cash used for financing activities
(67,746
)

(74,200
)
Effect of exchange rate changes on cash and cash equivalents and restricted cash
952


5,597

Net decrease in cash and cash equivalents and restricted cash
(91,183
)

(43,732
)
Beginning cash and cash equivalents, and restricted cash
713,698


634,691

Ending cash and cash equivalents, and restricted cash
622,515


590,959

Less: Ending restricted cash
(581
)

(729
)
Ending cash and cash equivalents
$
621,934


$
590,230





Noncash Investing Activity:



Property, plant and equipment acquired and not yet paid at end of period
$
10,513


$
10,574

Property, plant and equipment additions due to build-to-suit lease transactions
7,842


723

Realized loss on foreign currency contracts not yet paid at end of period
51,200



Supplemental disclosure of cash flow information:



Cash paid for interest during the period
$
2,778


$
1,628

Cash paid for income taxes during the period, net of refunds
17,157


11,939






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 FEBRUARY 24, 2019
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 25, 2018, included in the Company's final prospectus related to its initial public offering ("IPO"), dated March 20, 2019 (File No. 333-229630) (the "Prospectus"), filed with the Securities and Exchange Commission ("SEC") pursuant to Rule 424(b) under the Securities Act of 1933, as amended.
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 months ended February 24, 2019 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 2019 and 2018 consists of 13 weeks. All references to years and quarters relate to fiscal years and quarters rather than calendar years and quarters.
Subsequent events have been evaluated through the issuance date of these financial statements.
Reclassification
Certain insignificant amounts on the consolidated consolidated statements of cash flows have been conformed to the February 24, 2019 presentation.
Stock Split
On February 12, 2019, the Company’s stockholders approved an amendment to the Company’s certificate of incorporation (the "Amendment") to effect a ten-for-one stock split of shares of the Company’s outstanding common stock, such that each share of common stock, $0.01 par value becomes ten shares of common stock, $0.001 par value per share. In addition, the Amendment increased the number of authorized shares of the Company's common stock by 930,000,000 to 1,200,000,000. The Amendment became effective on March 4, 2019 when filed with the Secretary of State of the State of Delaware. All share and per-share data in the consolidated financial statements and notes has been retroactively adjusted to reflect the stock split for all periods presented.
Initial Public Offering
In March 2019, the Company completed its IPO in which it issued and sold 14,960,557 shares of Class A common stock at a public offering price of $17.00 per share. The Company received net proceeds of $215.8 million after deducting underwriting discounts and commissions of $38.5 million (including $24.9 million in underwriting discounts and commissions paid by the Company on behalf of the selling stockholders) and before estimated other offering expenses of approximately $7 million. The Company agreed to pay all underwriting discounts and commissions applicable to the sales of shares of Class A common stock by the selling stockholders. This amount, $24.9 million, was paid at completion of the IPO in March 2019 and will be recorded as non-operating expense in the second quarter of 2019.


7



LEVI STRAUSS & CO. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS — (continued)
FOR THE QUARTERLY PERIOD ENDED FEBRUARY 24, 2019

In connection with the IPO, on March 19, 2019, the Company's Board of Directors approved the cancellation of the majority of the outstanding unvested cash-settled restricted stock units and the concurrent replacement with similar equity-settled restricted stock units, pursuant to the Company's 2016 Equity Incentive Plan. Other than the form of settlement, all other terms of the award (including its vesting schedule) are the same. Prior to this modification, the cash-settled awards were classified as liabilities and stock-based compensation expense was measured using the fair value at the end of each reporting period. After the modification, the stock-based compensation expense for these awards will be measured using the modification date fair value. As a result of the modification, accrued stock-based compensation expense of approximately $50 million and $9 million will be reclassified on the Company's consolidated balance sheets from accrued salaries, wages and employee benefits and other long-term liabilities, respectively, to additional paid in capital.
Prior to the IPO, the holders of shares issued under the 2016 Equity Incentive Plan could require the Company to repurchase such shares at the then-current market value pursuant to a contractual put right. Equity-classified stock-based awards that may be settled in cash at the option of the holder are presented on the Company's consolidated balance sheets outside of permanent equity. Accordingly, temporary equity on the Company's consolidated balance sheets includes the redemption value of these awards generally related to the elapsed service period since the grant date reflecting patterns of compensation cost recognition, as well as the fair value of the Company's common stock issued pursuant to the 2016 Equity Incentive Plan. Upon the completion of the IPO in the second quarter of 2019, this contractual put right was terminated and these awards will no longer be presented as temporary equity. As a result, the balance in temporary equity as of immediately prior to the IPO of approximately $350 million will be reclassified to additional paid in capital.
On February 12, 2019, the Company’s stockholders also approved the adoption of an amended and restated certificate of incorporation (the "IPO Certificate") and amended and restated bylaws. The IPO Certificate provides for two classes of common stock; Class A common stock and Class B common stock. All common stock outstanding at the time of the IPO converted automatically into Class B common stock, par value $0.001, each having ten votes per share. Shares of Class A common stock, par value $0.001, each having one vote per share, were sold in the IPO. Shares of Class B common stock sold by selling stockholders in the IPO automatically converted into shares of Class A common stock in connection with such sale. Holders of Class B common stock can voluntarily convert their shares into Class A common stock if and when they wish to do so in order to sell their shares to the public.
On February 12, 2019, the Company’s stockholders approved the 2019 Equity Incentive Plan (the "2019 Plan") which became effective on March 20, 2019, the effective date of the initial public offering registration statement. The maximum number of shares of the Company’s Class A common stock that may be issued under the Company’s 2019 Equity Incentive Plan is 40,000,000.
On February 12, 2019, the Company’s stockholders approved the 2019 Employee Stock Purchase Plan (the "2019 ESPP") which became effective on March 20, 2019, the effective date of the initial public offering registration statement. The 2019 ESPP authorizes the issuance of 12,000,000 shares of the Company’s Class A common stock and is subject to automatic annual increases.
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.
Changes in Accounting Principle
In May 2014, the Financial Accounting Standards Board ("FASB") issued Accounting Standard Update ("ASU") 2014-09, Revenue from Contracts with Customers (Topic 606). ASU 2014-09 outlines a single comprehensive model for entities to use in accounting for revenue arising from contracts with customers. Under the new standard and its related amendments (collectively known as Accounting Standards Codification 606 ("ASC 606")), an entity recognizes revenue when its customer obtains control of promised goods or services, in an amount that reflects the consideration which the entity expects to receive in exchange for those goods or services. Enhanced disclosures are required regarding the nature, amount, timing and uncertainty of revenue and cash flows arising from contracts with customers.


8



LEVI STRAUSS & CO. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS — (continued)
FOR THE QUARTERLY PERIOD ENDED FEBRUARY 24, 2019

The Company has identified certain changes in balance sheet classification under ASC 606. Allowances for estimated returns, discounts and retailer promotions and other similar incentives are presented as other accrued liabilities rather than netted within accounts receivable and the estimated cost of inventory associated with allowances for estimated returns are included as other current assets rather than inventories. The Company adopted the standard as of November 26, 2018 using the modified retrospective approach and determined there is no impact to retained earnings upon adoption. Refer to Note 9 for more information.
The following table presents the related effect of the adoption of Topic 606 on the Consolidated Balance Sheet:
 
February 24, 2019
 
As Reported
 
Remove Effect of Adoption
 
Balances Without Adoption of Topic 606
 
(Dollars in thousands)
Trade receivables, net of allowance for doubtful accounts
$
633,534

 
$
166,009

 
$
467,525

Inventories: Finished goods
905,488

 
(20,083
)
 
925,571

Other current assets
177,540

 
20,083

 
157,457

Total current assets
2,447,302

 
166,009

 
2,281,293

Total assets
3,708,368

 
166,009

 
3,542,359

Accrued sales allowances
109,663

 
109,663

 

Other accrued liabilities
474,256

 
56,346

 
417,910

Total current liabilities
1,204,392

 
166,009

 
1,038,383

Total liabilities, temporary equity and stockholders' equity
$
3,708,368

 
$
166,009

 
$
3,542,359

In November 2016, the FASB issued ASU No. 2016-18, Statement of Cash Flows (Topic 230): Restricted Cash, which requires that restricted cash be included with cash and cash equivalents when reconciling the beginning-of-period and end-of-period total amounts shown in the statement of cash flows. Restricted cash is reported in Other non-current assets in the Company's Consolidated Balance Sheets. The Company adopted this standard in the first quarter of 2019, and other than the change in presentation within the Consolidated Statements of Cash Flows, the adoption of ASU 2016-18 did not have an impact on the Company's consolidated financial statements.
In March 2017, the FASB issued ASU 2017-07, Compensation-Retirement Benefits (Topic 715) Improving the Presentation of Net Periodic Cost and Net Periodic Postretirement Benefit Cost. ASU 2017-07 changes the income statement presentation of net periodic benefit costs requiring separation between operating expense (service cost component) and non-operating expense (all other components, including interest cost, expected return on plan assets, amortization of prior service costs or credits, curtailments and settlements, actuarial gains and losses, etc.). Accordingly, the Company determined this impacts the Company's Consolidated Statements of Income, as the service cost components of net periodic benefit costs are reported within operating income and the other components of net periodic benefit costs are reported in the Other Income (Expense), Net line item. The presentation change in the Consolidated Statements of Income requires application on a retrospective basis. A practical expedient is permitted under the guidance which allows the Company to use information previously disclosed in the pension and other postretirement benefit plans footnote as the basis to apply the retrospective presentation requirements. As a result of the Company's adoption of this standard, other components of net periodic benefit costs, primarily interest costs and investment earnings, of $4.0 million and $0.8 million for the three months ended February 24, 2019 and February 25, 2018, respectively, were included in Other Income (Expense), Net line item rather than selling, general and administrative expenses in the Company's Consolidated Statements of Income.
In August 2017, the FASB issued ASU 2017-12, Derivatives and Hedging (Topic 815) Targeted Improvements to Accounting for Hedging Activities. ASU 2017-12 refines and expands hedge accounting for both financial and commodity risks. This ASU creates more transparency around how economic results are presented, both on the face of the financial statements and in the footnotes. In addition, this ASU makes certain targeted improvements to simplify the application of hedge accounting guidance. The Company adopted this standard during the quarter upon entering into foreign exchange risk contracts designated as hedges.


9



LEVI STRAUSS & CO. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS — (continued)
FOR THE QUARTERLY PERIOD ENDED FEBRUARY 24, 2019

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 Prospectus.
NOTE 2: FAIR VALUE OF FINANCIAL INSTRUMENTS
Beginning the first quarter of 2019, the Company invested in short term investments. These short term investments are classified as available-for-sale securities and are carried at their fair values. Short term investments are included in "Other current assets" or "Other non-current assets" on the Company's consolidated balance sheets. Changes in the fair value of these marketable securities are recognized in accumulated other comprehensive income or loss.
The following table presents the Company’s financial instruments that are carried at fair value:
 
February 24, 2019
 
November 25, 2018
 
 
 
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
$
36,283

 
$
36,283

 
$

 
$
34,385

 
$
34,385

 
$

Short term investments in marketable securities
100,017

 

 
100,017

 

 

 

Derivative instruments(3)
15,397

 

 
15,397

 
18,372

 

 
18,372

Total
$
151,697

 
$
36,283

 
$
115,414

 
$
52,757

 
$
34,385

 
$
18,372

Financial liabilities carried at fair value
 
 
 
 
 
 
 
 
 
 
 
Derivative instruments(3)
12,802

 

 
12,802

 
4,447

 

 
4,447

Total
$
12,802

 
$

 
$
12,802

 
$
4,447

 
$

 
$
4,447

_____________
 
(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. 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.


10



LEVI STRAUSS & CO. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS — (continued)
FOR THE QUARTERLY PERIOD ENDED FEBRUARY 24, 2019

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 24, 2019
 
November 25, 2018
 
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)
$
493,940

 
$
506,092

 
$
487,272

 
$
478,774

3.375% senior notes due 2027(1)
539,682

 
561,609

 
538,219

 
546,238

Short-term borrowings
23,912

 
23,912

 
32,470

 
32,470

Total
$
1,057,534

 
$
1,091,613

 
$
1,057,961

 
$
1,057,482

_____________
 
(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.
NOTE 3: DERIVATIVE INSTRUMENTS AND HEDGING ACTIVITIES
Accounting Policy
Financial Statement Presentation
The Company records all derivatives on the balance sheet at fair value, which are included in "Other current assets", "Other non-current assets", "Other accrued liabilities" or "Other long-term liabilities" on the Company’s consolidated balance sheets. The portion of the fair value that represents cash flow occurring within one year are classified as current and the portion related to cash flows occurring beyond one year are classified as non-current. The cash flows from the designated derivative instruments used as hedges are classified in the Company's consolidated statements of cash flows in the same section as the cash flows of the hedged item.
Cash Flow Hedges
The Company's cash flow hedges are recorded in "Other comprehensive loss" and are not reclassified to earnings until the related net investment position has been liquidated. As a result of ASU 2017-12, for foreign exchange forward contracts accounted for as cash flow hedges, the ineffective portion (if any) will not be separately recorded. The classification of effective hedge results on the Company's consolidated statement of income (loss) is the same as that of the underlying exposure. For foreign exchange risk cash flow hedges, forward points are excluded from the assessment of hedge effectiveness and are recognized in Revenue or Costs of goods sold 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.
Net Investment Hedges
The Company designates certain non-derivative instruments as net investment hedges and hedge the Company's net investment position in certain of its foreign subsidiaries. For these instruments, the Company documents the hedge designation by identifying the hedging instrument, the nature of the risk being hedged and the approach for measuring hedge effectiveness. The ineffective portions of these hedges are recorded in "Other income (expense), net" in the Company's consolidated statements of income. The effective portions of these hedges are recorded in "Accumulated other comprehensive loss" on the Company's consolidated balance sheets and are not reclassified to earnings until the related net investment position has been liquidated.


11



LEVI STRAUSS & CO. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS — (continued)
FOR THE QUARTERLY PERIOD ENDED FEBRUARY 24, 2019

No Hedging Designation
The Company may also enter into derivative instruments that are not designated as hedges and do not qualify for hedge accounting. For derivatives not designated for hedge accounting, changes in the fair value are recorded in "Other income (expense), net" in the Company’s consolidated statements of income.
The Company's foreign currency management objective is to minimize the effect of fluctuations in foreign exchange rates on nonfunctional currency cash flows and selected assets or liabilities without exposing the Company to additional risk associated with transactions that could be regarded as speculative. The Company manages certain forecasted foreign currency exposures and uses a centralized currency management operation to take advantage of potential opportunities to naturally offset foreign currency exposures against each other.
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 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 Euros 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 three-months ended February 24, 2019.
Net Investment Hedges
The Company had 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.
As of February 24, 2019, the Company had forward foreign exchange contracts derivatives that were not designated as hedges in qualifying hedging relationships.


12



LEVI STRAUSS & CO. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS — (continued)
FOR THE QUARTERLY PERIOD ENDED FEBRUARY 24, 2019

As of February 24, 2019, the Company had forward foreign exchange contracts to buy $1,273.0 million and to sell $621.1 million against various foreign currencies. These contracts are at various exchange rates and expire at various dates through February 2020. The table below provides data about the carrying values of derivative instruments and non-derivative instruments: 
 
February 24, 2019
 
November 25, 2018
 
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)
$
3,738

 
$

 
$
3,738

 
$

 
$

 
$

Foreign exchange risk cash flow hedges(2)

 
(5,291
)
 
(5,291
)
 

 

 

Total
$
3,738

 
$
(5,291
)
 
 
 
$

 
$

 
 
Derivatives not designated as hedging instruments
 
 
 
 
 
 
 
 
 
 
 
Forward foreign exchange contracts(1)
12,716

 
(1,057
)
 
11,659

 
18,372

 

 
18,372

Forward foreign exchange contracts(2)
2,629

 
(10,140
)
 
(7,511
)
 

 
(4,447
)
 
(4,447
)
Total
$
15,345

 
$
(11,197
)
 
 
 
$
18,372

 
$
(4,447
)
 
 
Non-derivatives designated as hedging instruments
 
 
 
 
 
 
 
 
 
 
 
Euro senior notes
$

 
$
(538,270
)
 
 
 
$

 
$
(541,500
)
 
 
_____________
 
(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 24, 2019

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 24, 2019
 
November 25, 2018
 
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
$
17,240

 
$
(3,026
)
 
$
14,214

 
$
16,417

 
$
(1,756
)
 
$
14,661

Financial liabilities
(14,425
)
 
3,026

 
(11,399
)
 
(2,181
)
 
1,756

 
(425
)
Total
 
 
 
 
$
2,815

 
 
 
 
 
$
14,236

Embedded derivative contracts
 
 
 
 
 
 
 
 
 
 
 
Financial assets
$
1,844

 
$

 
$
1,844

 
$
1,955

 
$

 
$
1,955

Financial liabilities
(2,064
)
 

 
(2,064
)
 
(2,266
)
 

 
(2,266
)
Total
 
 
 
 
$
(220
)
 
 
 
 
 
$
(311
)

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 24,
2019
November 25,
2018
February 24,
2019
 
November 25,
2018
 
(Dollars in thousands)
 
 
 
 
Foreign exchange risk contracts
$
(1,493
)
 
$

 
$
(880
)
 
$

Realized forward foreign exchange swaps (2)
4,637

 
4,637

 

 

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

 

Euro-denominated senior notes
(51,186
)
 
(54,416
)
 

 

Cumulative income taxes
29,582

 
29,703

 

 

Total
$
(38,271
)
 
$
(39,887
)
 
 
 
 
_____________
(1) Amounts reclassified from AOCI were classified as net revenues and costs of goods sold on the consolidated statements of income.
(2) During 2005 and prior years, 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 24, 2019

$1.7 million of cash flow hedges are expected to be reclassified from AOCI into net income within the next 12 months.
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 24, 2019:
 
February 24,
2019
Amount of Gain (Loss) on Cash Flow Hedge Activity:
(Dollars in thousands)
Revenues
$
(459
)
Cost of Goods Sold
$
1,339

The table below provides data about the amount of gains and losses related to derivatives not designated as hedging instruments included in "Other income (expense), net" in the Company's consolidated statements of income:
 
Three Months Ended
 
February 24,
2019
 
February 25,
2018
 
(Dollars in thousands)
Realized gain (loss) (1)
$
4,618

 
$
(10,303
)
Unrealized loss
(10,756
)
 
(5,784
)
Total
$
(6,138
)
 
$
(16,087
)
_____________
(1) Realized gains of $4.6 million were recognized from the settlement of forward foreign exchange contracts, of which proceeds of $55.8 million for gains were received in the first quarter of 2019 and $51.2 million of payments on losses were accrued in the first quarter of 2019. The Company will settle these contracts in the second quarter of 2019.
NOTE 4: DEBT 
The following table presents the Company's debt: 
 
February 24,
2019
 
November 25,
2018
 
(Dollars in thousands)
Long-term debt
 
 
 
5.00% senior notes due 2025
$
486,093

 
$
485,605

3.375% senior notes due 2027
531,567

 
534,614

Total long-term debt
$
1,017,660


$
1,020,219

Short-term debt
 
 
 
Short-term borrowings
$
23,477

 
$
31,935

Total debt
$
1,041,137

 
$
1,052,154

Senior Revolving Credit Facility
The Company's unused availability under its senior secured revolving credit facility was $805.9 million at February 24, 2019, as the Company's total availability of $850 million was reduced by $44.1 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 months ended February 24, 2019 was 5.22%, as compared to 4.77% in the same period of 2018.


15



LEVI STRAUSS & CO. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS — (continued)
FOR THE QUARTERLY PERIOD ENDED FEBRUARY 24, 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 24,
2019
 
February 25,
2018
 
(Dollars in thousands)
Net periodic benefit cost:
 
 
 
Pension Benefits
$
3,977

 
$
849

Postretirement Benefits
893

 
926

Net periodic benefit cost
$
4,870

 
$
1,775

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 is currently undergoing audit assessments and the related legal appeal processes with various customs authorities. 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.
NOTE 7: DIVIDEND
In January 2019, the Company's Board of Directors declared two cash dividends of $55 million each. The first dividend was paid in the first quarter of 2019. The second dividend will be paid in the fourth quarter of 2019 to the holders of record of the Company's Class A common stock and Class B common stock at the close of business on October 5, 2019, and was recorded in "Other accrued liabilities" in the Company's consolidated balance sheets.
The Company does not have an established 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.


16



LEVI STRAUSS & CO. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS — (continued)
FOR THE QUARTERLY PERIOD ENDED FEBRUARY 24, 2019

NOTE 8: ACCUMULATED OTHER COMPREHENSIVE LOSS
The following is a summary of the components of "Accumulated other comprehensive loss," net of related income taxes: 
 
February 24,
2019
 
November 25,
2018
 
(Dollars in thousands)
Pension and postretirement benefits
$
(226,480
)
 
$
(229,023
)
Derivative instruments
(38,271
)
 
(39,887
)
Foreign currency translation losses
(145,752
)
 
(149,318
)
Unrealized gains on marketable securities
3,617

 
2,948

Accumulated other comprehensive loss
(406,886
)
 
(415,280
)
Accumulated other comprehensive income attributable to noncontrolling interest
9,484

 
9,304

Accumulated other comprehensive loss attributable to Levi Strauss & Co.
$
(416,370
)
 
$
(424,584
)

Refer to Note 3 for insignificant amounts reclassified out of "Accumulated other comprehensive loss" into net income related to the Company's derivative instruments. Other insignificant amounts that pertain to the Company's pension and postretirement benefit plans were also reclassified out of "Accumulated other comprehensive loss" into "Other Expense (Income), net" in the Company's consolidated statements of income.
NOTE 9: NET REVENUES
Disaggregated Revenue
The table below provides the Company's revenues disaggregated by segment and channel.
 
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

 
Three Months Ended February 25, 2018
 
Americas
 
Europe
 
Asia
 
Total
 
(Dollars in thousands)
Net revenues by channel:
 
 
 
 
 
 
 
Wholesale
$
448,742

 
$
259,865

 
$
119,633

 
$
828,240

Direct-to-consumer
208,455

 
192,857

 
114,133

 
515,445

Total net revenues
$
657,197

 
$
452,722

 
$
233,766

 
$
1,343,685



17



LEVI STRAUSS & CO. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS — (continued)
FOR THE QUARTERLY PERIOD ENDED FEBRUARY 24, 2019

Wholesale channel revenues includes sales through third-party retailers such as department stores, specialty retailers, leading third-party e-commerce sites and franchise locations dedicated to the Company's brands. The Company also sells products directly to consumers, which are reflected in the direct-to-consumer ("DTC") channel, through a variety of formats, including company-operated mainline and outlet stores, company-operated e-Commerce sites and select shop-in-shops located in department stores and other third-party retail locations.
Revenue transactions generally comprise a single performance obligation which consists of the sale of products to customers either through wholesale or direct-to-consumer channels. The Company satisfies the performance obligation and records revenues when transfer of control has passed to the customer, based on the terms of sale. Transfer of control passes to wholesale customers upon shipment or upon receipt depending on the agreement with the customer. Within the Company's DTC channel, control generally transfers to the customer at the time of sale within company-operated retail stores and upon delivery to the customer with respect to e-commerce transactions.
Licensing revenues represent approximately 2% of total revenues and are recognized over time based on the contractual term with variable amounts recognized only when royalties exceed contractual minimum royalty guarantees.
Payment terms for wholesale transactions depend on the country of sale or agreement with the customer, and payment is generally required after shipment or receipt by the wholesale customer. Payment is due at the time of sale for retail store and e-commerce transactions.
At February 24, 2019, the Company did not have any material contract assets and or contract liabilities recorded in the unaudited consolidated balance sheets.
Net revenues are recognized when the Company's performance obligations are satisfied upon transfer of control of promised goods. A customer is deemed to have control once they are able to direct the use and receive substantially all of the benefits of the product. This includes a present obligation to payment, the transfer of legal title, physical possession, the risks and rewards of ownership, and customer acceptance.
Consideration promised in the Company’s contracts with customers includes a variable amount related to anticipated sales returns, discounts and miscellaneous claims from customers. Estimates of discretionary authorized returns, discounts and claims are based on (1) historical rates, (2) specific identification of outstanding returns not yet received from customers and outstanding discounts and claims and (3) expected returns, discounts and claims not yet finalized with customers. Actual returns, discounts and claims in any future period are inherently uncertain and thus may differ from estimates recorded.
The Company treats all shipping to the Company's customers, handling and certain other distribution activities as a fulfillment cost and recognizes these costs as SG&A expenses.
Sales and value-added taxes collected from customers and remitted to governmental authorities are presented on a net basis in the accompanying consolidated statements of income.


18



LEVI STRAUSS & CO. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS — (continued)
FOR THE QUARTERLY PERIOD ENDED FEBRUARY 24, 2019

NOTE 10: OTHER INCOME (EXPENSE), NET
The following table summarizes significant components of "Other income (expense), net": 
 
Three Months Ended
 
February 24,
2019
 
February 25,
2018
 
(Dollars in thousands)
Foreign exchange management losses(1)
$
(6,138
)
 
$
(16,087
)
Foreign currency transaction gains
2,621

 
3,317

Interest income
4,011

 
2,429

Investment income
1,007

 
428

Other, net(2)
(3,147
)
 
(487
)
Total other income (expense), net(2)
$
(1,646
)
 
$
(10,400
)
_____________
 
(1)
Gains and losses on forward foreign exchange contracts primarily resulted from currency fluctuations relative to negotiated contract rates. Losses in the three-month period ended February 24, 2019 were primarily due to unfavorable currency fluctuations relative to negotiated contract rates on positions to sell the Mexican Peso. Losses in the three-month period ended February 25, 2018 were primarily due to unfavorable currency fluctuations relative to negotiated contract rates on positions to sell the Euro and the the British Pound.
(2)
The amounts in Other, net have been conformed to reflect the adoption of ASU 2017-07, "Compensation-Retirement Benefits (Topic 715) Improving the Presentation of Net Periodic Cost and Net Periodic Postretirement Benefit Cost" and include non-service cost component of net periodic benefit costs. Refer to Note 1 for more information.


19



LEVI STRAUSS & CO. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS — (continued)
FOR THE QUARTERLY PERIOD ENDED FEBRUARY 24, 2019

NOTE 11: INCOME TAXES
On December 22, 2017, the U.S. enacted the Tax Cuts and Jobs Act (the "Tax Act"), which significantly changed U.S. tax law. The Tax Act lowered the Company’s U.S. statutory federal income tax rate from 35% to 21% effective on November 26, 2018. Beginning the first quarter of 2019, the Company's effective tax rate reflected a provision to tax Global Intangible Low-Taxed Income ("GILTI") of foreign subsidiaries and a tax benefit for Foreign Derived Intangible Income ("FDII"). The Company accounted for GILTI in the period in which it is incurred.
The effective income tax rate was 19.4% for the three months ended February 24, 2019, compared to 112.5% for the same prior-year period. The decrease in the effective tax rate in 2019 as compared to 2018 was primarily driven by a 91% one-time tax charge recorded in the first quarter of 2018 related to the impact of the Tax Act. Of the impact, 67% is due to remeasurement of deferred tax assets and liabilities and 25% is related transition charges on undistributed foreign earnings.
NOTE 12: EARNINGS PER SHARE ATTRIBUTABLE TO COMMON STOCKHOLDERS
Basic earnings per share attributable to common stockholders is calculated by dividing net income attributable to common stockholders by the weighted-average number of common shares outstanding. Diluted earnings per share attributable to common stockholders adjusts the basic earnings per share attributable to common stockholders and the weighted-average number of common shares outstanding for the potentially dilutive impact of restricted stock units and stock appreciation rights using the treasury stock method. The following table sets forth the computation of the Company's basic and diluted earnings per share:
 
Year Ended
 
February 24,
2019
 
February 25,
2018
 
(Dollars in thousands, except per share amounts)
Numerator:
 
 
 
Net income attributable to Levi Strauss & Co.
$
146,577

 
$
(19,012
)
Denominator:
 
 
 
Weighted-average common shares outstanding - basic
377,077,111

 
376,165,783

Dilutive effect of stock awards
16,157,714

 

Weighted-average common shares outstanding - diluted
393,234,825

 
376,165,783

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

 
$
(0.05
)
Diluted
$
0.37

 
$
(0.05
)
Anti-dilutive securities excluded from calculation of diluted earnings per share attributable to common stockholders
974,070

 
13,905,842


NOTE 13: RELATED PARTIES
Charles V. Bergh, President and Chief Executive Officer, Peter E. Haas Jr., a director of the Company, Elizabeth O'Neill, Executive Vice President and President of Product, Innovation and Supply Chain, and Marc Rosen, Executive Vice President and President of Direct-to-Consumer, are board members 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-month period ended February 24, 2019, the Company donated $8.5 million to the Levi Strauss Foundation as compared to $6.5 million for the same prior-year period.


20



LEVI STRAUSS & CO. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS — (continued)
FOR THE QUARTERLY PERIOD ENDED FEBRUARY 24, 2019

NOTE 14: 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 24,
2019
 
February 25,
2018
 
(Dollars in thousands)
Net revenues:
 
 
 
Americas
$
717,264

 
$
657,197

Europe
464,676

 
452,722

Asia
252,518

 
233,766

Total net revenues
$
1,434,458

 
$
1,343,685

Operating income:
 
 
 
Americas
$
123,656

 
$
111,245

Europe
121,624

 
115,286

Asia
42,965

 
40,709

Regional operating income
288,245

 
267,240

Corporate expenses
87,333

 
92,318

Total operating income
200,912

 
174,922

Interest expense
(17,544
)
 
(15,497
)
Other income (expense), net
(1,646
)
 
(10,400
)
Income before income taxes
$
181,722

 
$
149,025

_____________
(1)
The amounts in Corporate expenses and Other expense, net have been conformed to reflect the adoption of ASU 2017-07, "Compensation-Retirement Benefits (Topic 715) Improving the Presentation of Net Periodic Cost and Net Periodic Postretirement Benefit Cost" and include non-service cost component of net periodic benefit costs. Refer to Note 1 for more information.


21


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 II, Item 1A of this Quarterly Report and with our audited financial statements and related notes thereto for the year ended November 25, 2018, included in the final prospectus related to our initial public offering ("IPO"), dated March 20, 2019 (File No. 333-229630) (the "Prospectus"), filed with the Securities and Exchange Commission ("SEC") pursuant to Rule 424(b)(4) under the Securities Act of 1933, as amended (the "Securities Act"), on March 21, 2019. We use a 52- or 53-week fiscal year, with each fiscal year ending on the Sunday 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 Unites 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, leading 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 24, 2019, our products were sold in over 50,000 retail locations in more than 110 countries, including approximately 3,000 brand-dedicated stores and shop-in-shops. As of February 24, 2019, we had 832 company-operated stores located in 32 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 2019, as compared to 51% of our net revenues and 58% of our regional operating income in the same


22


period in 2018. Sales of Levi’s® brand products represented 88% and 89% of our total net sales in the first three-month periods of 2019 and 2018, respectively.
Our wholesale channel generated 61% and 62% of our net revenues in three months ended February 24, 2019 and February 25, 2018, respectively. Our DTC channel generated 39% and 38% of our net revenues in three months ended February 24, 2019 and February 25, 2018, respectively, with our company operated e-commerce representing 16% and 14% of DTC channel net revenues in three months ended February 24, 2019 and February 25, 2018 and 6% of total net revenues in the first three-month periods of 2019 and 2018.
Factors Affecting Our Business
We believe the key business and marketplace factors that are impacting our business include the following:
Factors that impact consumer discretionary spending, which remains volatile globally, 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. Sales directly to consumers generally have higher gross margins than sales through third parties, although these sales 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 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. Most recently, the United States enacted new tax legislation, which is intended to stimulate economic growth and capital investments in the United States by, among other provisions, lowering tax rates for both corporations and individuals alike. In addition, the current domestic and international political environment, including changes to other United States 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.


23


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.
Recent Developments
In connection with the IPO, on March 19, 2019, our board of directors approved the cancellation of the majority of the outstanding unvested cash-settled restricted stock units and the concurrent replacement with similar equity-settled restricted stock units, pursuant to the our 2016 Equity Incentive Plan, as amended and restated to date ("2016 Plan"). Other than the form of settlement, all other terms of the award (including its vesting schedule) are the same. Prior to this modification, the cash-settled awards were classified as liabilities and stock-based compensation expense was measured using the fair value at the end of each reporting period. After the modification, the stock-based compensation expense for these awards will be measured using the modification date fair value. Additionally, approximately $50 million and $9 million will be reclassified on our consolidated balance sheets from accrued salaries, wages and employee benefits and other long-term liabilities, respectively, to additional paid in capital.
As part of the IPO (discussed in Note 1), we agreed to pay all underwriting discounts and commissions applicable to the sales of shares of Class A common stock by the selling stockholders. This amount, $24.9 million, was paid at completion of the IPO in March 2019 and will be recorded as non-operating expense in the second quarter of 2019.
Our First Quarter 2019 Results
 
Net revenues. Compared to the first quarter of 2018, consolidated net revenues increased 7% on a reported basis and 11% on a constant-currency basis driven by broad-based growth across all three regions and channels.
Operating income. Compared to the first quarter of 2018, consolidated operating income increased 15% and operating margin increased to 14.0%, primarily reflecting higher net revenues, partially offset by higher selling, general and administrative expenses ("SG&A") associated with the expansion of our company-operated retail network.
Net income (loss). Consolidated net income in the first quarter of 2019 of $146.5 million compares to the consolidated net loss of $18.6 million in the prior year, primarily due to a $99 million charge for the re-measurement of the Company's deferred tax assets and liabilities and a $37 million one-time U.S. transition tax on undistributed foreign earnings in the prior year from the transitional impact from the 2017 Tax Cuts and Jobs Act (the "Tax Act").
Adjusted EBIT. Compared to the first quarter of 2018, adjusted EBIT increased 14% primarily due to higher net revenues and lower administration and advertising SG&A expenses in the current year. Adjusted EBIT margin increased 1% from 13.4% in the prior year to 14.4% in the current year as a result of higher net revenues and lower advertising expenses.
Adjusted Net Income. Compared to the first quarter of 2018, adjusted net income increased due to higher net revenues and lower administration and advertising SG&A expenses. Additionally a $37 million charge in the prior year from the one-time transition tax on undistributed foreign earnings as a result of the Tax Act.


24


Financial Information Presentation
Fiscal year.    We use a 52- or 53- week fiscal year, with each fiscal year ending on the Sunday 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 Sunday that is closest to the last day of the last month of that quarter. Each quarter of fiscal years 2019 and 2018 consists of 13 weeks.
Segments.    We manage our business according to three regional segments: the Americas, Europe and Asia, which includes the Middle East and Africa.
Classification.    Our classification of certain significant revenues and expenses reflects the following:
 
Net revenues comprises 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 selling, general and administrative expenses ("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.
SG&A and Operating Income (Expense), net in the period ended February 25, 2018 have been conformed to reflect the adoption of ASU 2017-07, "Compensation-Retirement Benefits (Topic 715) Improving the Presentation of Net Periodic Cost and Net Periodic Postretirement Benefit Cost". Refer to Note 1 for more information.


25


Results of Operations for Three Months Ended February 24, 2019, as Compared to Same Period in 2018
The following table presents, for the periods indicated, our consolidated statements of income (loss), the changes in these items from period to period and these items expressed as a percentage of net revenues:
 

 
Three Months Ended
 
February 24,
2019
 
February 25,
2018
 
%
Increase
(Decrease)
 
February 24,
2019
 
February 25,
2018
 
 
 
% of Net
Revenues
 
% of Net
Revenues
 
(Dollars in millions)
Net revenues
$
1,434.5

 
$
1,343.7

 
6.8
 %
 
100.0
 %
 
100.0
 %
Cost of goods sold
651.7

 
605.6

 
7.6
 %
 
45.4
 %
 
45.1
 %
Gross profit
782.8

 
738.1

 
6.1
 %
 
54.6
 %
 
54.9
 %
Selling, general and administrative expenses
581.9

 
563.2

 
3.3
 %
 
40.6
 %
 
41.9
 %
Operating income
200.9

 
174.9

 
14.9
 %
 
14.0
 %
 
13.0
 %
Interest expense
(17.5
)
 
(15.5
)
 
12.9
 %
 
(1.2
)%
 
(1.2
)%
Other income (expense), net
(1.6
)
 
(10.4
)
 
(84.6
)%
 
(0.1
)%
 
(0.8
)%
Income before income taxes
181.8

 
149.0

 
22.0
 %
 
12.7
 %
 
11.1
 %
Income tax expense
35.3

 
167.6

 
(78.9
)%
 
2.5
 %
 
12.5
 %
Net income (loss)
146.5

 
(18.6
)
 
*

 
10.2
 %
 
(1.4
)%
Net loss (income) attributable to noncontrolling interest
0.1

 
(0.4
)
 
(125.0
)%
 

 

Net income (loss) attributable to Levi Strauss & Co.
$
146.6

 
$
(19.0
)
 
*

 
10.2
 %
 
(1.4
)%
_____________
* Not meaningful



26


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
 
February 24,
2019
 
February 25,
2018
 
As
Reported
 
Constant
Currency
 
(Dollars in millions)
Net revenues:
 
 
 
 
 
 
 
Americas
$
717.3

 
$
657.2

 
9.1
%
 
10.1
%
Europe
464.7

 
452.7

 
2.7
%
 
10.0
%
Asia
252.5

 
233.8

 
8.0
%
 
13.8
%
Total net revenues
$
1,434.5

 
$
1,343.7

 
6.8
%
 
10.7
%
Total net revenues increased on both a reported and constant-currency basis for the three-month period ended February 24, 2019, as compared to the same prior-year period.
Americas.    On both a reported and constant-currency basis, net revenues in our Americas region increased for the three-month period ended February 24, 2019. Currency translation had an unfavorable impact on net revenues of approximately $6 million for the three-month period ended February 24, 2019.
Excluding the effects of currency, the increase in net revenues for the three-month period ended February 24, 2019 was due to broad-based growth in the region. Wholesale revenues grew in the region, primarily driven by increased sales of Levi's® and Signature products to both traditional and off-price retailers. DTC revenues also grew from strong performance within our company-operated retail network in the region, primarily due to 19 more stores in operation at the end of the first quarter of 2019 than the first quarter of 2018.
Europe.    Net revenues in Europe increased on both a reported and constant-currency basis for the three-month period ended February 24, 2019, with currency translation affecting net revenues unfavorably by approximately $30 million.
Constant-currency net revenues increased for the three-month period ended February 24, 2019 as a result of strong performance in both our DTC and wholesale businesses. Growth was driven by the continued expansion in product assortment and strong performance, mainly in Levi's® tops and women's product. Additionally, growth in DTC was driven by our company-operated retail network and was the result of strong performance as well as 25 more stores in operation at the end of the first quarter of 2019 than the first quarter of 2018.
Asia.    Net revenues in Asia increased on both a reported and constant-currency basis for the three-month period ended February 24, 2019, with currency affecting net revenues unfavorably by approximately $12 million.
Excluding the effects of currency, the increase in net revenues for the three-month period ended February 24, 2019 was primarily due to store expansion and strong performance across all channels. Wholesale and franchised store revenues increased, particularly in India, and our company-operated retail network benefited from 26 more stores at the end of the first quarter of 2019 than the first quarter of 2018.


27


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 24,
2019
 
February 25,
2018
 
%
Increase
 
(Dollars in millions)
Net revenues
$
1,434.5

 
$
1,343.7

 
6.8
%
Cost of goods sold
651.7

 
605.6

 
7.6
%
Gross profit
$
782.8

 
$
738.1

 
6.1
%
Gross margin
54.6
%
 
54.9
%
 
 
Currency translation unfavorably impacted gross profit by approximately $26 million for the three-month period ended February 24, 2019. For the three-month period, gross margin decreased primarily due to unfavorable transactional currency impacts, partially offset by revenue growth in our company-operated retail network.
Selling, general and administrative expenses
The following table shows SG&A for the periods indicated, the changes in these items from period to period and these items expressed as a percentage of net revenues:
 
 
Three Months Ended
 
February 24,
2019
 
February 25,
2018
 
%
Increase (Decrease)
 
February 24,
2019
 
February 25,
2018
 
 
 
% of Net
Revenues
 
% of Net
Revenues
 
(Dollars in millions)
Selling
$
278.4

 
$
254.0

 
9.6
 %
 
19.4
%
 
18.9
%
Advertising and promotion
72.5

 
76.2

 
(4.9
)%
 
5.1
%
 
5.7
%
Administration
94.4

 
107.8

 
(12.4
)%
 
6.6
%
 
8.0
%
Other
136.6

 
125.2

 
9.1
 %
 
9.5
%
 
9.3
%
Total SG&A
$
581.9

 
$
563.2

 
3.3
 %
 
40.6
%
 
41.9
%

Currency impacted SG&A favorably by approximately $16 million for the three-month period ended February 24, 2019.
Selling.  Currency impacted selling expenses favorably by approximately $10 million for the three-month period ended February 24, 2019. Higher selling expenses primarily reflected costs associated with the expansion and growth of our direct-to-consumer business, including increased investment in new and existing company-operated stores. We had 70 more company-operated stores at the end of the first quarter of 2019 than we did at the end of the first quarter of 2018.
Advertising and promotion.   Currency impacted advertising and promotion expenses favorably by approximately $2 million for the three-month period ended February 24, 2019. Advertising and promotion expenses decreased due to less media spend in the first quarter of 2019.
Administration.   Administration expenses include functional administrative and organization costs. Currency impacted administration expenses favorably by approximately $2 million for the three-month period ended February 24, 2019. Administration costs decreased reflecting lower incentive and stock-based compensation as compared to the same three-month prior period.
Other.   Other SG&A includes distribution, information resources and marketing organization costs. Currency impacted SG&A other costs favorably by approximately $2 million for the three-month period ended February 24, 2019. The increase in SG&A other costs was primarily due to a $6.0 million increase in distribution costs as to support higher wholesale volume.


28


Operating income
The following table shows operating income by reporting segment and corporate expenses for the periods indicated, the changes in these items from period to period and these items expressed as a percentage of net revenues:
 
 
Three Months Ended
 
 
February 24,
2019
 
February 25,
2018
 
%
Increase (Decrease)
 
February 24,
2019
 
February 25,
2018
 
 
% of Net
Revenues
 
% of Net
Revenues
 
(Dollars in millions)
Operating income:
 
 
 
 
 
 
 
 
 
 
Americas
$
123.7

 
$
111.2

 
11.2
 %
 
17.2
%
 
16.9
%
 
Europe
121.6

 
115.3

 
5.5
 %
 
26.2
%
 
25.5
%
 
Asia
43.0

 
40.7

 
5.7
 %
 
17.0
%
 
17.4
%
 
Total regional operating income
288.3

 
267.2

 
7.9
 %
 
20.1
%
*
19.9
%
*
Corporate expenses
87.4

 
92.3

 
(5.3
)%
 
6.1
%
*
6.9
%
*
Total operating income
$
200.9

 
$
174.9

 
14.9
 %
 
14.0
%
*
13.0
%
*
Operating margin
14.0
%
 
13.0
%
 
 
 
 
 
 
 
______________
 * Percentage of consolidated net revenues
Currency translation unfavorably affected total operating income by approximately $10 million for the three-month period ended February 24, 2019.
Regional operating income.    
Americas. Currency translation did not have a significant impact for the three-month period ended February 24, 2019. The increase in operating income was primarily due to higher net revenues as a result of strong performance of our wholesale and DTC businesses. This was partially offset by higher SG&A expense due to store growth.
Europe. Currency translation had an unfavorable impact of approximately $8 million for the three-month period ended February 24, 2019. The increase in operating income was due to higher net revenues in our DTC and wholesale businesses, partially offset by higher selling costs to support store expansion and higher sales.
Asia. Currency translation had an unfavorable impact of approximately $3 million for the three-month period ended February 24, 2019. The increase in operating income was due to higher net revenues, partially offset by higher SG&A expense to support retail expansion.
Corporate.  Corporate expenses represent costs that management does not attribute to any of our regional operating segments. Included in corporate expenses are other corporate staff costs and costs associated with our global inventory sourcing organization. Currency translation did not have a significant impact on corporate expenses for the three-month period ended February 24, 2019. The decrease in the corporate expenses for the three-month period ended February 24, 2019 was primarily due to a decrease in administration expenses related to incentive and stock-based compensation.
Interest expense
Interest expense was $17.5 million for the three-month period ended February 24, 2019, as compared to $15.5 million for the same prior-year period. The increase in interest expense for the three-month period in 2019, as compared to the same period in 2018 was primarily related to higher deferred compensation interest due to changes in market conditions.
Our weighted-average interest rate on average borrowings outstanding during the three months ended February 24, 2019 was 5.22%, as compared to 4.77% in the same period in 2018.


29


Other income (expense), net
Other income (expense), net, primarily consists of foreign exchange management activities and transactions. For the three-month period ended February 24, 2019, we recorded expense of $1.6 million, as compared to expense of $10.4 million for the same prior-year period. The expense in the three-month period in 2019 primarily reflected net losses on our foreign exchange derivatives, partially offset by interest income generated from money market funds. The expense in the three-month period in 2018 primarily reflected net losses on our foreign exchange derivatives, partially offset by net gains on our foreign currency denominated balances.
Income tax expense
On December 22, 2017, the U.S. enacted the Tax Act, which significantly changed U.S. tax law. The Tax Act lowered our U.S. statutory federal income tax rate from 35% to 21% effective on November 26, 2018. Beginning the first quarter of 2019, our effective tax rate reflected a provision to tax Global Intangible Low-Taxed Income ("GILTI") of foreign subsidiaries and a tax benefit for Foreign Derived Intangible Income ("FDII"). We accounted for GILTI in the period in which it is incurred.
The effective income tax rate was 19.4% for the three months ended February 24, 2019, compared to 112.5% for the same prior-year period. The decrease in the effective tax rate in 2019 as compared to 2018 was primarily driven by a 91% one-time tax charge related to the impact of the Tax Act. Of the impact, 67% is due to remeasurement of deferred tax assets and liabilities and 25% is related to transition charges on undistributed foreign earnings.




30


Liquidity and Capital Resources
Liquidity outlook
We believe we will have adequate liquidity over the next 12 months to operate our business and to meet our cash requirements. Our capital allocation priorities are (1) to invest in opportunities and initiatives to grow our business organically, (2) to return capital to our stockholders in the form of cash dividends, which we target to be equal to or greater than our most recent annual dividend of $110 million on an annual basis, as well as to potentially offset dilution from our equity incentive programs through stock repurchases, and (3) to pursue acquisitions that support our current strategies. Future determinations regarding the declaration and payment of dividends, if any, will be at the discretion of our board of directors and will depend on then-existing conditions, including our results of operations, payout ratio, capital requirements, financial condition, prospects, contractual arrangements, any limitations on payment of dividends present in our current and future debt agreements and other factors that our board of directors may deem relevant.
Cash sources
We have historically relied primarily on cash flows from operations, borrowings under credit facilities, issuances of notes and other forms of debt financing. We regularly explore financing and debt reduction alternatives, including new credit agreements, unsecured and secured note issuances, equity financing, equipment and real estate financing, securitizations and asset sales.
We are party to a second amended and restated credit agreement that provides for a senior secured revolving credit facility ("credit facility"). Our credit facility is an asset-based facility, in which the borrowing availability is primarily based on the value of our U.S. Levi’s® trademarks and the levels of accounts receivable and inventory in the United States and Canada. The maximum availability under our credit facility is $850 million, of which $800 million is available to us for revolving loans in U.S. Dollars and $50 million is available to us for revolving loans either in U.S. Dollars or Canadian Dollars.
As of February 24, 2019, we did not have any borrowings under the credit facility, unused availability under the credit facility was $805.9 million, and our total availability of $850 million, based on collateral levels as defined by the agreement, was reduced by $44.1 million of other credit-related instruments.
As of February 24, 2019, we had cash and cash equivalents totaling approximately $621.9 million and short-term investments of $100.0 million resulting in a total liquidity position (unused availability and cash and cash equivalents and short-term investments) of approximately $1.5 billion.
Cash uses
Our principal cash requirements include working capital, capital expenditures, payments of principal and interest on our debt, payments of taxes, contributions to our pension plans and payments for postretirement health benefit plans, settlement of shares issued under our 2016 Equity Incentive Plan, as amended to date ("2016 Plan"), and, if market conditions warrant, occasional investments in, or acquisitions of, business ventures in our line of business. In addition, we regularly evaluate our ability to pay dividends or repurchase stock, all consistent with the terms of our debt agreements. Upon completion of our IPO, (discussed in Note 1), our 2016 Plan was replaced with our 2019 Equity Incentive Plan ("2019 Plan"). Under the 2016 Plan, holders of shares could require us to repurchase such shares at the then-current market value pursuant to a contractual put right. Under the 2019 Plan and as a result of the IPO, this contractual put right was terminated. However, upon vesting or exercise of an award, we will continue to net settle shares in order to pay withholding taxes on behalf of our employees.
There have been no material changes to our estimated cash requirements for 2019 from those disclosed in our 2018 Annual Report on Form 10-K.
Cash flows
The following table summarizes, for the periods indicated, selected items in our consolidated statements of cash flows:
 
 
Three Months Ended
 
February 24,
2019
 
February 25,
2018
 
(Dollars in millions)
Cash provided by operating activities
$
55.8

 
$
66.2

Cash used for investing activities
(80.2
)
 
(41.3
)
Cash used for financing activities
(67.7
)
 
(74.2
)
Cash and cash equivalents at period end
621.9

 
591.0



31


Cash flows from operating activities
Cash provided by operating activities was $55.8 million for the three-month period in 2019, as compared to $66.2 million for the same period in 2018. The decrease primarily reflects higher payments for inventory and SG&A expenses to support our growth and higher payments for employee incentive compensation, partially offset by an increase in cash received from customers as well as less contributions to our pension plans.
Cash flows from investing activities
Cash used for investing activities was $80.2 million for the three-month period in 2019, as compared to $41.3 million for the same period in 2018. The increase in cash used for investing activities primarily reflects payments to acquire short-term investments during the first quarter of 2019, partially offset by proceeds from settlement of forward foreign exchange contracts.
Cash flows from financing activities
Cash used for financing activities was $67.7 million for the three-month period in 2019, as compared to $74.2 million for the same period in 2018. Cash used in 2019 primarily reflects the payment of a $55.0 million cash dividend. Cash used in 2018 primarily reflects the payment of a $45.0 million cash dividend and payments made for equity award exercises.
Indebtedness
The borrower of substantially all of our debt is Levi Strauss & Co., the parent and U.S. operating company. Of our total debt of $1.04 billion as of February 24, 2019, we had fixed-rate debt of $1.03 billion (98.5% of total debt), net of capitalized debt issuance costs, and variable-rate debt of $15.4 million (1.5% of total debt). As of February 24, 2019, our required aggregate debt principal payments on our unsecured long-term debt were $1.03 billion in years after 2023. Short-term borrowings of $23.5 million at various foreign subsidiaries were expected to be either paid over the next twelve months or refinanced at the end of their applicable terms.
Our long-term debt agreements contain customary covenants restricting our activities as well as those of our subsidiaries. We were in material compliance with all of these covenants as of February 24, 2019.
Non-GAAP Financial Measures
Adjusted EBIT, Adjusted EBIT Margin, Adjusted EBITDA, Adjusted Net Income and Adjusted Net Income Margin
We define Adjusted EBIT, a non-GAAP financial measure, as net income (loss) excluding income tax expense, interest expense, other expense (income), net, and impact of changes in fair value on cash-settled stock-based compensation, restructuring and related charges, severance and other, net. We define Adjusted EBIT margin as Adjusted EBIT as a percentage of net revenues. We define Adjusted EBITDA as Adjusted EBIT excluding depreciation and amortization expense. We define adjusted net income, a non-GAAP financial measure, as net income (loss) excluding impact of changes in fair value on cash-settled stock-based compensation, restructuring and related charges, severance and other, net, re-measurement of our deferred tax assets and liabilities based on the lower rates as a result of the Tax Act, adjusted to give effect to the income tax impact of such adjustments. To calculate the income tax impact of such adjustments, we utilize an effective tax rate equal to our income tax expense divided by our income before income taxes, each as reflected in our statement of operations for the relevant period, except that during the first quarter of 2018 we excluded from income tax expense the effect of the $99.1 million re-measurement described above. We define adjusted net income margin as adjusted net income as a percentage of net revenues. We believe Adjusted EBIT, Adjusted EBIT margin, Adjusted EBITDA, adjusted net income and adjusted net income margin are useful to investors because they help identify underlying trends in our business that could otherwise be masked by certain expenses that we include in calculating net income but that can vary from company to company depending on its financing, capital structure and the method by which its assets were acquired, and can also vary significantly from period to period. Our management also uses Adjusted EBIT in conjunction with other GAAP financial measures for planning purposes, including as a measure of our core operating results and the effectiveness of our business strategy, and in evaluating our financial performance.
Adjusted EBIT, Adjusted EBIT margin, Adjusted EBITDA, adjusted net income and adjusted net income margin have limitations as analytical tools and should not be considered in isolation or as a substitute for an analysis of our results prepared and presented in accordance with GAAP. Some of these limitations include:
Adjusted EBIT, Adjusted EBIT margin and Adjusted EBITDA do not reflect interest expense, or the cash requirements necessary to service interest or principal payments on our indebtedness, which reduces cash available to us;
Adjusted EBIT, Adjusted EBIT margin and Adjusted EBITDA do not reflect income tax payments that reduce cash available to us;


32


Adjusted EBIT, Adjusted EBIT margin and Adjusted EBITDA exclude other expense (income) net, which has primarily consisted of realized and unrealized gains and losses on our forward foreign exchange contracts and transaction gains and losses on our foreign exchange balances, although these items affect the amount and timing of cash available to us when these gains and losses are realized;
all of these non-GAAP financial measures exclude restructuring and related charges, severance and other, net which can affect our current and future cash requirements;
all of these non-GAAP financial measures exclude the expense resulting from the impact of changes in fair value on our cash-settled stock-based compensation awards, even though, prior to consummation of this offering, such awards were required to be settled in cash;
the expenses and other items that we exclude in our calculations of all of these non-GAAP financial measures may differ from the expenses and other items, if any, that other companies may exclude from all of these non-GAAP financial measures or similarly titled measures;
Adjusted EBITDA excludes the recurring, non-cash expenses of depreciation of property and equipment and, although these are non-cash expenses, the assets being depreciated may need to be replaced in the future; and
Adjusted net income and adjusted net income margin do not include all of the effects of income taxes and changes in income taxes reflected in net income.
Because of these limitations, all of these non-GAAP financial measures should be considered along with net income and other operating and financial performance measures prepared and presented in accordance with GAAP.
The following table presents a reconciliation of net income, the most directly comparable financial measure calculated in accordance with GAAP, to Adjusted EBIT and Adjusted EBITDA for each of the periods presented.
Adjusted EBIT and Adjusted EBITDA:
 
Three Months Ended
 
February 24, 2019
 
February 25, 2018
 
(Dollars in millions)
 
(Unaudited)
Most comparable GAAP measure:
 
 
 
Net income (loss)
$
146.5

 
$
(18.6
)
 
 
 
 
Non-GAAP measure:
 
 
 
Net income (loss)
146.5

 
(18.6
)
Income tax expense
35.3

 
167.7

Interest expense
17.5

 
15.5

Other expense, net
1.6

 
10.4

Impact of changes in fair value on cash-settled stock based compensation
5.3

 
5.0

Restructuring and related charges, severance and other, net
0.1

 
0.3

Adjusted EBIT
$
206.3

 
$
180.3

Depreciation and amortization
28.6

 
32.8

Adjusted EBITDA
$
234.9

 
$
213.1

Adjusted EBIT margin
14.4
%
 
13.4
%
_____________
(1) Other expense, net in the period ended February 25, 2018 have been conformed to reflect the adoption of ASU 2017-07, "Compensation-Retirement Benefits (Topic 715) Improving the Presentation of Net Periodic Cost and Net Periodic Postretirement Benefit Cost". Refer to Note 1 for more information.


33


The following table presents a reconciliation of net income, the most directly comparable financial measure calculated in accordance with GAAP, to adjusted net income for each of the periods presented.
Adjusted Net Income:
 
Three Months Ended
 
February 24, 2019
 
February 25, 2018
 
(Dollars in millions)
 
(Unaudited)
Most comparable GAAP measure:
 
 
 
Net income (loss)
$
146.5

 
$
(18.6
)
 
 
 
 
Non-GAAP measure:
 
 
 
Net income (loss)
146.5

 
(18.6
)
Impact of changes in fair value on cash-settled stock based compensation
5.3

 
5.0

Restructuring and related charges, severance and other, net
0.1

 
0.3

Remeasurement of deferred tax assets and liabilities

 
99.1

Tax impact of adjustments
(1.0
)
 
(2.4
)
Adjusted net income
$
150.9

 
$
83.4

Adjusted net income margin
10.5
%
 
6.2
%
Net Debt:
We define net debt, a non-GAAP financial measure, as total debt, excluding capital leases, less cash and cash equivalents and short-term investments in marketable securities. Our management believes net debt is an important measure to monitor our financial flexibility and evaluate the strength of our balance sheet. Net debt has limitations as an analytical tool and may vary from similarly titled measures used by other companies. Net debt should not be considered in isolation or as a substitute for an analysis of our results prepared and presented in accordance with GAAP.
The following table presents a reconciliation of total debt, excluding capital leases, the most directly comparable financial measure calculated in accordance with GAAP, to net debt for each of the periods presented.
 
February 24, 2019
 
November 25, 2018
 
(Dollars in millions)
 
(Unaudited)
 
 
Most comparable GAAP measure:
 
 
 
Total debt, excluding capital leases
$
1,041.1

 
$
1,052.2

 
 
 
 
Non-GAAP measure:
 
 
 
Total debt, excluding capital leases
$
1,041.1

 
$
1,052.2

Cash and cash equivalents
(621.9
)
 
(713.1
)
Short-term investments in marketable securities
(100.0
)
 

Net debt
$
319.2

 
$
339.1



34


Adjusted Free Cash Flow:
We define adjusted free cash flow, a non-GAAP financial measure, as net cash flow from operating activities less purchases of property, plant and equipment, less payments (plus proceeds) on settlement of forward foreign exchange contracts not designated for hedge accounting, and less repurchases of common stock, including shares surrendered for tax withholdings on equity award exercises, and cash dividends to stockholders. We believe adjusted free cash flow is an important liquidity measure of the cash that is available after capital expenditures for operational expenses and investment in our business. We believe adjusted free cash flow is useful to investors because it measures our ability to generate or use cash. Once our business needs and obligations are met, cash can be used to maintain a strong balance sheet and invest in future growth.
Our use of adjusted free cash flow has limitations as an analytical tool and should not be considered in isolation or as a substitute for an analysis of our results under GAAP. First, adjusted free cash flow is not a substitute for net cash flow from operating activities. Second, other companies may calculate adjusted free cash flow or similarly titled non-GAAP financial measures differently or may use other measures to evaluate their performance, all of which could reduce the usefulness of adjusted free cash flow as a tool for comparison. Additionally, the utility of adjusted free cash flow is further limited as it does not reflect our future contractual commitments and does not represent the total increase or decrease in our cash balance for a given period. Because of these and other limitations, adjusted free cash flow should be considered along with net cash flow from operating activities and other comparable financial measures prepared and presented in accordance with GAAP.
The following table presents a reconciliation of net cash flow from operating activities, the most directly comparable financial measure calculated in accordance with GAAP, to adjusted free cash flow for each of the periods presented.
 
Three Months Ended
 
February 24, 2019
 
February 25, 2018
 
(Dollars in millions)
 
(Unaudited)
Most comparable GAAP measure:
 
 
 
Net cash provided by operating activities
$
55.8

 
$
66.2

 

 
 
Non-GAAP measure:

 
 
Net cash provided by operating activities
$
55.8

 
$
66.2

Purchases of property, plant and equipment
(36.1
)
 
(31.0
)
Proceeds (Payments) on settlement of forward foreign exchange contracts not designated for hedge accounting
55.8

 
(10.3
)
Repurchase of common stock, including shares surrendered for tax withholdings on equity award exercises
(3.9
)
 
(14.8
)
Dividend to stockholders
(55.0
)
 
(45.0
)
Adjusted free cash flow
$
16.6

 
$
(34.9
)
Constant-currency net revenues:
We report our operating results in accordance with GAAP, as well as on a constant-currency basis in order to facilitate period-to-period comparisons of our results without regard to the impact of fluctuating foreign currency exchange rates. The term foreign currency exchange rates refers to the exchange rates we use to translate our operating results for all countries where the functional currency is not the U.S. Dollar into U.S. Dollars. Because we are a global company, foreign currency exchange rates used for translation may have a significant effect on our reported results. In general, our reported financial results are affected positively by a weaker U.S. Dollar and are affected negatively by a stronger U.S. Dollar as compared to the foreign currencies in which we conduct our business. References to our operating results on a constant-currency basis mean our operating results without the impact of foreign currency translation fluctuations.
We believe disclosure of constant-currency results is helpful to investors because it facilitates period-to-period comparisons of our results by increasing the transparency of our underlying performance by excluding the impact of fluctuating foreign currency exchange rates. However, constant-currency results are non-GAAP financial measures and are not meant to be considered in isolation or as a substitute for comparable measures prepared in accordance with GAAP. Constant-currency results have no standardized meaning prescribed by GAAP, are not prepared under any comprehensive set of accounting rules or principles and should be read in conjunction with our consolidated financial statements prepared in accordance with GAAP. Constant-currency


35


results have limitations in their usefulness to investors and may be calculated differently from, and therefore may not be directly comparable to, similarly titled measures used by other companies.
We calculate constant-currency amounts by translating local currency amounts in the prior-year period at actual foreign exchange rates for the current period. Our constant-currency results do not eliminate the transaction currency impact of purchases and sales of products in currency other than the functional currency.
The table below sets forth the calculation of net revenues for each of our regional operating segments on a constant-currency basis for comparison periods applicable to the three-month period ended February 24, 2019:
 
Three Months Ended
 
February 24,
2019
 
February 25,
2018