UNITED STATES SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
_________________
Form 10-Q
(Mark One)
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þ | | QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934 |
For the Quarterly Period Ended February 28, 201626, 2017
or
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¨ | | TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934 |
Commission file number: 002-90139
_________________
LEVI STRAUSS & CO.
(Exact Name of Registrant as Specified in Its Charter)
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| | |
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, or a non-accelerated filer or a smaller reporting company. See definition of “Large accelerated filer,” “accelerated filer” and “smaller reporting company” in Rule 12b-2 of the Exchange Act. (Check one):
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Large accelerated filer ¨ | | Accelerated filer ¨ | | Non-accelerated filer þ | | Smaller reporting company ¨ |
| (Do not check if a smaller reporting company) |
Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Act). Yes ¨ No þ
The Company is privately held. Nearly all of its common equity is owned by descendants of the family of the Company’s founder, Levi Strauss, and their relatives. There is no trading in the common equity and therefore an aggregate market value based on sales or bid and asked prices is not determinable.
Indicate the number of shares outstanding of each of the issuer’s classes of common stock, as of the latest practicable date.
Common Stock $.01 par value — 37,452,31937,612,891 shares outstanding on April 7, 20165, 2017
LEVI STRAUSS & CO. AND SUBSIDIARIES
INDEX TO FORM 10-Q
FOR THE QUARTERLY PERIOD ENDED FEBRUARY 28, 201626, 2017
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| | | Page Number |
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Item 1. | | | |
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Item 2. | | | |
Item 3. | | | |
Item 4. | | | |
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Item 1. | | | |
Item 1A. | | | |
Item 2. | | | |
Item 3. | | | |
Item 4. | | | |
Item 5. | | | |
Item 6. | | | |
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PART I — FINANCIAL INFORMATION
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Item 1. | CONSOLIDATED FINANCIAL STATEMENTS |
LEVI STRAUSS & CO. AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEETS
| | | (Unaudited) | | | (Unaudited) | | |
| February 28, 2016 | | November 29, 2015 | February 26, 2017 | | November 27, 2016 |
| (Dollars in thousands) | (Dollars in thousands) |
ASSETS | Current Assets: | | | | | | |
Cash and cash equivalents | $ | 271,101 |
| | $ | 318,571 |
| $ | 368,623 |
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| $ | 375,563 |
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Trade receivables, net of allowance for doubtful accounts of $11,043 and $11,025 | 388,620 |
| | 498,196 |
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Trade receivables, net of allowance for doubtful accounts of $12,402 and $11,974 | | 406,689 |
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| 479,018 |
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Inventories: | | | | |
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Raw materials | 3,382 |
| | 3,368 |
| 3,157 |
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| 2,454 |
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Work-in-process | 3,696 |
| | 3,031 |
| 2,309 |
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| 3,074 |
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Finished goods | 733,213 |
| | 600,460 |
| 761,761 |
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| 710,653 |
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Total inventories | 740,291 |
| | 606,859 |
| 767,227 |
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| 716,181 |
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Other current assets | 109,410 |
| | 104,523 |
| 116,642 |
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| 115,385 |
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Total current assets | 1,509,422 |
| | 1,528,149 |
| 1,659,181 |
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| 1,686,147 |
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Property, plant and equipment, net of accumulated depreciation of $825,536 and $811,013 | 386,272 |
| | 390,829 |
| |
Property, plant and equipment, net of accumulated depreciation of $883,472 and $856,588 | | 380,389 |
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| 393,605 |
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Goodwill | 235,541 |
| | 235,041 |
| 234,518 |
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| 234,280 |
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Other intangible assets, net | 43,170 |
| | 43,350 |
| 42,929 |
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| 42,946 |
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Non-current deferred tax assets, net | 569,936 |
| | 580,640 |
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Deferred tax assets, net | | 504,700 |
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| 523,101 |
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Other non-current assets | 93,890 |
| | 106,386 |
| 108,598 |
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| 107,017 |
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Total assets | $ | 2,838,231 |
| | $ | 2,884,395 |
| $ | 2,930,315 |
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| $ | 2,987,096 |
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LIABILITIES, TEMPORARY EQUITY AND STOCKHOLDERS’ EQUITY | Current Liabilities: | | | | | | |
Short-term debt | $ | 40,779 |
| | $ | 114,978 |
| $ | 34,150 |
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| $ | 38,922 |
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Current maturities of long-term debt | 35,394 |
| | 32,625 |
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Accounts payable | 267,033 |
| | 238,309 |
| 256,738 |
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| 270,293 |
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Accrued salaries, wages and employee benefits | 133,269 |
| | 182,430 |
| 141,992 |
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| 180,740 |
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Restructuring liabilities | 15,736 |
| | 20,141 |
| 2,243 |
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| 4,878 |
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Accrued interest payable | 21,004 |
| | 5,510 |
| 20,397 |
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| 5,098 |
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Accrued income taxes | 17,190 |
| | 6,567 |
| 13,260 |
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| 9,652 |
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Other accrued liabilities | 296,516 |
| | 245,607 |
| 263,003 |
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| 252,160 |
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Total current liabilities | 826,921 |
| | 846,167 |
| 731,783 |
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| 761,743 |
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Long-term debt | 1,005,243 |
| | 1,004,938 |
| 1,006,625 |
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| 1,006,256 |
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Long-term capital leases | 12,466 |
| | 12,320 |
| 15,428 |
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| 15,360 |
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Postretirement medical benefits | 102,071 |
| | 105,240 |
| 98,302 |
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| 100,966 |
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Pension liability | 348,921 |
| | 358,443 |
| 337,487 |
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| 354,461 |
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Long-term employee related benefits | 59,938 |
| | 73,342 |
| 67,924 |
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| 73,243 |
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Long-term income tax liabilities | 27,359 |
| | 26,312 |
| 20,876 |
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| 20,150 |
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Other long-term liabilities | 57,140 |
| | 56,987 |
| 58,724 |
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| 63,796 |
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Total liabilities | 2,440,059 |
| | 2,483,749 |
| 2,337,149 |
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| 2,395,975 |
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Commitments and contingencies |
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Temporary equity | 76,538 |
| | 68,783 |
| 86,197 |
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| 79,346 |
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Stockholders’ Equity: | | | |
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Levi Strauss & Co. stockholders’ equity | | | |
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Common stock — $.01 par value; 270,000,000 shares authorized; 37,460,145 shares and 37,460,145 shares issued and outstanding | 375 |
| | 375 |
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Common stock — $.01 par value; 270,000,000 shares authorized; 37,467,356 shares and 37,470,158 shares issued and outstanding | | 375 |
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| 375 |
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Additional paid-in capital | — |
| | 3,291 |
| — |
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| 1,445 |
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Retained earnings | 705,985 |
| | 705,668 |
| 921,943 |
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| 935,049 |
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Accumulated other comprehensive loss | (386,995 | ) | | (379,066 | ) | (417,558 | ) |
| (427,314 | ) |
Total Levi Strauss & Co. stockholders’ equity | 319,365 |
| | 330,268 |
| 504,760 |
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| 509,555 |
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Noncontrolling interest | 2,269 |
| | 1,595 |
| 2,209 |
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| 2,220 |
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Total stockholders’ equity | 321,634 |
| | 331,863 |
| 506,969 |
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| 511,775 |
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Total liabilities, temporary equity and stockholders’ equity | $ | 2,838,231 |
| | $ | 2,884,395 |
| $ | 2,930,315 |
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| $ | 2,987,096 |
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The accompanying notes are an integral part of these consolidated financial statements.
LEVI STRAUSS & CO. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF INCOME
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| Three Months Ended |
| February 28, 2016 | | March 1, 2015 |
| (Dollars in thousands) (Unaudited) |
Net revenues | $ | 1,056,500 |
| | $ | 1,055,075 |
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Cost of goods sold | 496,902 |
| | 518,010 |
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Gross profit | 559,598 |
| | 537,065 |
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Selling, general and administrative expenses | 441,163 |
| | 425,282 |
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Restructuring, net | 1,848 |
| | 4,338 |
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Operating income | 116,587 |
| | 107,445 |
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Interest expense | (14,902 | ) | | (23,312 | ) |
Other expense, net | (2,219 | ) | | (26,028 | ) |
Income before income taxes | 99,466 |
| | 58,105 |
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Income tax expense | 33,175 |
| | 19,822 |
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Net income | 66,291 |
| | 38,283 |
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Net (income) loss attributable to noncontrolling interest | (455 | ) | | 109 |
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Net income attributable to Levi Strauss & Co. | $ | 65,836 |
| | $ | 38,392 |
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| Three Months Ended |
| February 26, 2017 |
| February 28, 2016 |
| (Dollars in thousands) (Unaudited) |
Net revenues | $ | 1,101,991 |
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| $ | 1,056,500 |
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Cost of goods sold | 537,438 |
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| 496,902 |
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Gross profit | 564,553 |
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| 559,598 |
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Selling, general and administrative expenses | 456,213 |
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| 441,163 |
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Restructuring, net | — |
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| 1,848 |
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Operating income | 108,340 |
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| 116,587 |
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Interest expense | (19,934 | ) |
| (14,902 | ) |
Other income (expense), net | 408 |
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| (2,219 | ) |
Income before income taxes | 88,814 |
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| 99,466 |
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Income tax expense | 28,693 |
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| 33,175 |
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Net income | 60,121 |
| | 66,291 |
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Net loss (income) attributable to noncontrolling interest | 22 |
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| (455 | ) |
Net income attributable to Levi Strauss & Co. | $ | 60,143 |
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| $ | 65,836 |
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The accompanying notes are an integral part of these consolidated financial statements.
LEVI STRAUSS & CO. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF COMPREHENSIVE INCOME
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| Three Months Ended |
| February 28, 2016 | | March 1, 2015 |
| (Dollars in thousands) (Unaudited) |
Net income | $ | 66,291 |
| | $ | 38,283 |
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Other comprehensive income (loss), before related income taxes: | | | |
Pension and postretirement benefits | 3,582 |
| | 4,607 |
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Net investment hedge (losses) gains | (664 | ) | | 141 |
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Foreign currency translation losses | (7,575 | ) | | (10,532 | ) |
Unrealized (losses) gains on marketable securities | (1,829 | ) | | 113 |
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Total other comprehensive loss, before related income taxes | (6,486 | ) | | (5,671 | ) |
Income tax expense related to items of other comprehensive income | (1,224 | ) | | (1,549 | ) |
Comprehensive income, net of income taxes | 58,581 |
| | 31,063 |
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Comprehensive (income) loss attributable to noncontrolling interest | (674 | ) | | 132 |
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Comprehensive income attributable to Levi Strauss & Co. | $ | 57,907 |
| | $ | 31,195 |
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| Three Months Ended |
| February 26, 2017 | | February 28, 2016 |
| (Dollars in thousands) (Unaudited) |
Net income | $ | 60,121 |
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| $ | 66,291 |
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Other comprehensive income (loss), before related income taxes: |
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Pension and postretirement benefits | 3,691 |
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| 3,582 |
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Net investment hedge losses | — |
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| (664 | ) |
Foreign currency translation gains (losses) | 7,684 |
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| (7,575 | ) |
Unrealized gains (losses) on marketable securities | 1,000 |
| | (1,829 | ) |
Total other comprehensive income (loss), before related income taxes | 12,375 |
| | (6,486 | ) |
Income taxes related to items of other comprehensive income | (2,811 | ) | | (1,224 | ) |
Comprehensive income, net of income taxes | 69,685 |
| | 58,581 |
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Comprehensive loss (income) attributable to noncontrolling interest | 214 |
| | (674 | ) |
Comprehensive income attributable to Levi Strauss & Co. | $ | 69,899 |
| | $ | 57,907 |
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The accompanying notes are an integral part of these consolidated financial statements.
LEVI STRAUSS & CO. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS
| | | Three Months Ended | Three Months Ended |
| February 28, 2016 | | March 1, 2015 | February 26, 2017 | | February 28, 2016 |
| (Dollars in thousands) (Unaudited) | (Dollars in thousands) (Unaudited) |
Cash Flows from Operating Activities: | | | | | | |
Net income | $ | 66,291 |
| | $ | 38,283 |
| $ | 60,121 |
| | $ | 66,291 |
|
Adjustments to reconcile net income to net cash provided by operating activities: | | | | | | |
Depreciation and amortization | 25,111 |
| | 26,475 |
| 27,386 |
| | 25,111 |
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Asset impairments | 459 |
| | 184 |
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(Gain) loss on disposal of assets | (12 | ) | | 26 |
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Unrealized foreign exchange losses | 8,348 |
| | 7,489 |
| 5,373 |
| | 8,348 |
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Realized (gain) loss on settlement of forward foreign exchange contracts not designated for hedge accounting | (12,967 | ) | | 3,960 |
| |
Employee benefit plans’ amortization from accumulated other comprehensive loss | 3,734 |
| | 4,272 |
| |
Noncash restructuring charges | — |
| | 335 |
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Amortization of premium, discount and debt issuance costs | 620 |
| | 557 |
| |
Realized gain on settlement of forward foreign exchange contracts not designated for hedge accounting | | (9,076 | ) | | (12,967 | ) |
Employee benefit plans’ amortization from accumulated other comprehensive loss and settlement loss | | 3,682 |
| | 3,734 |
|
Stock-based compensation | (1,053 | ) | | 3,600 |
| 2,350 |
| | (1,053 | ) |
Allowance for doubtful accounts | 498 |
| | 519 |
| |
Other, net | | 1,554 |
|
| 1,565 |
|
Change in operating assets and liabilities: | | | | | | |
Trade receivables | 104,777 |
| | 129,587 |
| 69,935 |
| | 104,777 |
|
Inventories | (134,923 | ) | | 30,939 |
| (53,432 | ) | | (134,923 | ) |
Other current assets | (2,758 | ) | | (12,647 | ) | (1,961 | ) | | (2,758 | ) |
Other non-current assets | (1,425 | ) | | 746 |
| (2,928 | ) | | (1,425 | ) |
Accounts payable and other accrued liabilities | 49,462 |
| | (106,432 | ) | 4,611 |
| | 49,462 |
|
Restructuring liabilities | (5,614 | ) | | (16,009 | ) | (2,652 | ) | | (5,614 | ) |
Income tax liabilities | 23,654 |
| | 409 |
| 17,732 |
| | 23,654 |
|
Accrued salaries, wages and employee benefits and long-term employee related benefits | (78,302 | ) | | (74,484 | ) | (72,555 | ) | | (78,302 | ) |
Other long-term liabilities | 178 |
| | (201 | ) | (1,091 | ) | | 178 |
|
Other, net | — |
| | 21 |
| |
Net cash provided by operating activities | 46,078 |
| | 37,629 |
| 49,049 |
| | 46,078 |
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Cash Flows from Investing Activities: | | | | | | |
Purchases of property, plant and equipment | (30,746 | ) | | (21,152 | ) | (25,073 | ) | | (30,725 | ) |
Proceeds from sales of assets | 21 |
| | 11 |
| |
Proceeds (payments) on settlement of forward foreign exchange contracts not designated for hedge accounting | 12,967 |
| | (3,960 | ) | |
Proceeds on settlement of forward foreign exchange contracts not designated for hedge accounting | | 9,076 |
| | 12,967 |
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Net cash used for investing activities | (17,758 | ) | | (25,101 | ) | (15,997 | ) | | (17,758 | ) |
Cash Flows from Financing Activities: | | | | | | |
Repayments of capital leases | (781 | ) | | (741 | ) | |
Proceeds from senior revolving credit facility | 75,000 |
| | 35,000 |
| — |
| | 75,000 |
|
Repayments of senior revolving credit facility | (154,000 | ) | | (135,000 | ) | — |
| | (154,000 | ) |
Proceeds from short-term credit facilities | 9,208 |
| | 7,753 |
| 9,911 |
| | 9,208 |
|
Repayments of short-term credit facilities | (6,763 | ) | | (5,045 | ) | (7,774 | ) | | (6,763 | ) |
Other short-term borrowings, net | 3,102 |
| | 689 |
| (8,288 | ) | | 3,102 |
|
Change in restricted cash, net | 663 |
| | 736 |
| |
Excess tax benefits from stock-based compensation | — |
| | 75 |
| |
Repurchase of common stock | | (193 | ) | | — |
|
Dividend to stockholders | | (35,000 | ) | | — |
|
Other financing, net | | (1,158 | ) |
| (118 | ) |
Net cash used for financing activities | (73,571 | ) | | (96,533 | ) | (42,502 | ) | | (73,571 | ) |
Effect of exchange rate changes on cash and cash equivalents | (2,219 | ) | | (11,520 | ) | 2,510 |
| | (2,219 | ) |
Net decrease in cash and cash equivalents | (47,470 | ) | | (95,525 | ) | (6,940 | ) | | (47,470 | ) |
Beginning cash and cash equivalents | 318,571 |
| | 298,255 |
| 375,563 |
| | 318,571 |
|
Ending cash and cash equivalents | $ | 271,101 |
| | $ | 202,730 |
| $ | 368,623 |
| | $ | 271,101 |
|
| | | | | | |
Noncash Investing Activity: | | | | | | |
Purchases of property, plant and equipment not yet paid at end of period | $ | 14,244 |
| | $ | 9,993 |
| $ | 7,103 |
| | $ | 14,244 |
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| | | | | | |
Supplemental disclosure of cash flow information: | | | | | | |
Cash paid for interest during the period | $ | 1,176 |
| | $ | 2,020 |
| $ | 1,456 |
|
| $ | 1,176 |
|
Cash paid for income taxes during the period, net of refunds | 11,164 |
| | 18,049 |
| 11,677 |
|
| 11,164 |
|
The accompanying notes are an integral part of these consolidated financial statements.
LEVI STRAUSS & CO. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
FOR THE QUARTERLY PERIOD ENDED FEBRUARY 28, 201626, 2017
NOTE 1:1: SIGNIFICANT ACCOUNTING POLICIES
Nature of Operations
Levi Strauss & Co. (the “Company”"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”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 29, 201527, 2016, included in the Annual Report on Form 10-K filed by the Company with the Securities and Exchange Commission (“SEC”("SEC") on February 11, 2016.9, 2017.
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 28, 201626, 2017, may not be indicative of the results to be expected for any other interim period or the year ending November 27, 201626, 2017.
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 20162017 and 20152016 consists of 13 weeks. All references to years relate to fiscal years rather than calendar years.
Subsequent events have been evaluated through the issuance date of these financial statements.
The Company's consolidated statementsReclassification
Certain amounts in Note 13 "Business Segment Information" have been conformed to the February 26, 2017 presentation. Effective as of comprehensive incomethe beginning of 2017, certain of our global expenses that support all of our regional segments, including global e-commerce infrastructure and global brand merchandising, marketing and design, previously recorded centrally in our Americas region segment and Corporate expenses, have now been allocated to our three regional business segments, and reported in their operating results. Business segment information for the prior-year period has been reclassifiedrevised to presentreflect this change in presentation.
Certain insignificant amounts on the componentsStatements of other comprehensive income before related income tax effects with one amount shown for aggregate income tax expense relatedCash Flows have been conformed to the total of other comprehensive income items. Amounts were previously presented net of related income tax effects. There was no change to total comprehensive income, net of income taxes, and the change was immaterial to the financial statements taken as a whole.February 26, 2017 presentation.
Use of Estimates
The preparation of financial statements in conformity with U.S. GAAP requires management to make estimates and assumptions that affect the amounts reported in the consolidated financial statements and the related notes to the consolidated financial statements. Estimates are based upon historical factors, current circumstances and the experience and judgment of the Company’s management. Management evaluates its estimates and assumptions on an ongoing basis and may employ outside experts to assist in its evaluations. Changes in such estimates, based on more accurate future information, or different assumptions or conditions, may affect amounts reported in future periods.
LEVI STRAUSS & CO. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS — (continued)
FOR THE QUARTERLY PERIOD ENDED FEBRUARY 28, 201626, 2017
Recently IssuedChanges in 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 Company’s 2015 Annual Report on Form 10-K, except for the following, which have been grouped by their effective dates for the Company:
First Quarter of 2018
In March 2016, the FASB issued Accounting Standards Update No. 2016-06, Derivatives and Hedging (Topic 815) – Contingent Put and Call Options in Debt Instruments (“ASU 2016-06”), which will reduce diversity of practice in identifying embedded derivatives in debt instruments. ASU 2016-06 clarifies that the nature of an exercise contingency is not subject to the “clearly and closely” criteria for purposes of assessing whether the call or put option must be separated from the debt instrument and accounted for separately as a derivative. The Company is currently assessing the impact that adopting this new accounting standard will have on its consolidated financial statements and footnote disclosures.
PrincipleIn March 2016, the FASB issued Accounting Standards Update No. 2016-09, Compensation – Stock Compensation (Topic 718) (“"ASU 2016-09”2016-09"). ASU 2016-09 identifies areas for simplification involving several aspects of accounting for share-based payment transactions, including the income tax consequences, classification of awards as either equity or liabilities, an option to recognize gross stock compensation expense with actual forfeitures recognized as they occur, as well as certain classifications on the statement of cash flows. The Company is currently assessing the impact that adoptingelected to early adopt all provisions of this new accounting standard in the first quarter of 2017 and will maintain the current forfeiture policy to estimate forfeitures expected to occur to determine stock-based compensation expense. There was no material impact to the Company's financial statements.
Recently Issued Accounting Standards
There have been no developments to recently issued accounting standards, including the expected dates of adoption and estimated effects on itsthe Company’s consolidated financial statements and footnote disclosures.
disclosures, from those disclosed in the Company’s 2016 Annual Report on Form 10-K, except for the following, which have been grouped by their effective dates for the Company:First Quarter of 2019
In March 2016,2017, the FASB issued Accounting Standards Update No. 2016-04,ASU 2017-07, Liabilities – ExtinguishmentCompensation-Retirement Benefits (Topic 715) Improving the Presentation of Liabilities (Subtopic 405-20): RecognitionNet Periodic Pension Cost and Net Periodic Postretirement Benefit Cost. ASU 2017-07 changes the income statement presentation of Breakagedefined benefit plan expense by requiring separation between operating expense (service cost component) and non-operating expense (all other components, including interest cost, amortization of prior service cost, curtailments and settlements, etc.). The operating expense component is reported with similar compensation costs while the non-operating components are reported in Other Income and Expense. In addition, only the service cost component is eligible for Certain Prepaid Stored-Value Products (“ASU 2016-04”). ASU 2016-04 aligns recognitioncapitalization as part of the financial liabilities related to prepaid stored-value products (for example, prepaid gift cards), with Topic 606, Revenues from Contracts with Customers, for non-financial liabilities. In general, certainan asset such as inventory or these liabilities may be extinguished proportionally in earnings as redemptions occur, or when redemption is remote if issuers are not entitled to the unredeemed stored value.property, plant and equipment. The Company is currently assessing the impact that adopting this new accounting standard will have on its consolidated financial statements and footnote disclosures.statements.
First Quarter of 2021
In March 2016,January 2017, the FASB issued Accounting Standards Update No. 2016-08,ASU 2017-04, Revenue from Contracts with CustomersIntangibles-Goodwill and Other (Topic 606): Principal versus Agent Considerations (Reporting Revenue Gross versus Net)350) Simplifying the Test for Goodwill Impairment. (“ASU 2016-08”). ASU 2016-08 clarifies2017-04 eliminates the implementation guidance on principal versus agent considerations.two-step process that required identification of potential impairment and a separate measure of the actual impairment. The guidance includes indicators to assist an entity in determining whether it controls a specified good or service before it is transferred toannual assessment of goodwill impairment will be determined by using the customers.difference between the carrying amount and the fair value of the reporting unit. The Company is currently assessing the impact that adopting this new accounting standard will have on its consolidated financial statements and footnote disclosures.
First Quarter of 2020
In February 2016, the FASB issued Accounting Standards Update No. 2016-02, Leases (Topic 842) (“ASU 2016-02”). ASU 2016-02 requires the identification of arrangements that should be accounted for as leases by lessees. In general, for lease arrangements exceeding a twelve month term, these arrangements must now be recognized as assets and liabilities on the balance sheet of the lessee. Under ASU 2016-02, a right-of-use asset and lease obligation will be recorded for all leases, whether operating or financing, while the income statement will reflect lease expense for operating leases and amortization/interest expense for financing leases. The balance sheet amount recorded for existing leases at the date of adoption of ASU 2016-02 must be calculated using the applicable incremental borrowing rate at the date of adoption. In addition, ASU 2016-02 requires the use of the modified retrospective method, which will require adjustment to all comparative periods presented in the consolidated financial statements. The Company is currently assessing the impact that adopting this new accounting standard will have on its consolidated financial statements and footnote disclosures.
LEVI STRAUSS & CO. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS — (continued)
FOR THE QUARTERLY PERIOD ENDED FEBRUARY 28, 201626, 2017
NOTE 2: FAIR VALUE OF FINANCIAL INSTRUMENTS
The following table presents the Company’s financial instruments that are carried at fair value:
| | | February 28, 2016 | | November 29, 2015 | February 26, 2017 | | November 27, 2016 |
| | | Fair Value Estimated Using | | | | Fair Value Estimated Using | | | 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) | Fair Value | | Level 1 Inputs(1) | | Level 2 Inputs(2) | | Fair Value | | Level 1 Inputs(1) | | Level 2 Inputs(2) |
| (Dollars in thousands) | (Dollars in thousands) |
Financial assets carried at fair value | | | | | | | | | | | | | | | | | | | | | | |
Rabbi trust assets | $ | 24,892 |
| | $ | 24,892 |
| | $ | — |
| | $ | 26,013 |
| | $ | 26,013 |
| | $ | — |
| $ | 28,485 |
| | $ | 28,485 |
| | $ | — |
| | $ | 27,131 |
| | $ | 27,131 |
| | $ | — |
|
Forward foreign exchange contracts, net(3) | 19,741 |
| | — |
| | 19,741 |
| | 27,131 |
| | — |
| | 27,131 |
| 9,446 |
| | — |
| | 9,446 |
| | 23,267 |
| | — |
| | 23,267 |
|
Total | $ | 44,633 |
| | $ | 24,892 |
| | $ | 19,741 |
| | $ | 53,144 |
| | $ | 26,013 |
| | $ | 27,131 |
| $ | 37,931 |
| | $ | 28,485 |
| | $ | 9,446 |
| | $ | 50,398 |
| | $ | 27,131 |
| | $ | 23,267 |
|
Financial liabilities carried at fair value | | | | | | | | | | | | | | | | | | | | | | |
Forward foreign exchange contracts, net(3) | $ | 9,373 |
| | $ | — |
| | $ | 9,373 |
| | $ | 7,809 |
| | $ | — |
| | $ | 7,809 |
| $ | 10,843 |
| | $ | — |
| | $ | 10,843 |
| | $ | 5,533 |
| | $ | — |
| | $ | 5,533 |
|
_____________
| |
(1) | Fair values estimated using Level 1 inputs are inputs which consist of quoted prices in active markets for identical assets or liabilities that the Company has the ability to access at the measurement date. Rabbi trust assets consist of a diversified portfolio of equity, fixed income and other securities. |
| |
(2) | Fair values estimated using Level 2 inputs are inputs, other than quoted prices, that are observable for the asset or liability, either directly or indirectly and include among other things, quoted prices for similar assets or liabilities in markets that are active or inactive as well as inputs other than quoted prices that are observable. For forward foreign exchange contracts, inputs include foreign currency exchange and interest rates and, where applicable, credit default swap prices. |
| |
(3) | The Company’s over-the-counter forward foreign exchange contracts are subject to International Swaps and Derivatives Association, Inc. master agreements. These agreements permit the net settlement of these contracts on a per-institution basis. |
The following table presents the carrying value, – including related accrued interest, – and estimated fair value of the Company’s financial instruments that are carried at adjusted historical cost:
| | | February 28, 2016 | | November 29, 2015 | February 26, 2017 | | November 27, 2016 |
| Carrying Value | | Estimated Fair Value | | Carrying Value | | Estimated Fair Value | Carrying Value | | Estimated Fair Value | | Carrying Value | | Estimated Fair Value |
| (Dollars in thousands) | (Dollars in thousands) |
Financial liabilities carried at adjusted historical cost | | | | | | | | | | | | | | |
Senior revolving credit facility | $ | 20,031 |
| | $ | 20,031 |
| | $ | 99,020 |
| | $ | 99,020 |
| |
4.25% Yen-denominated Eurobonds due 2016(1) | 35,861 |
| | 36,480 |
| | 32,736 |
| | 33,593 |
| |
6.875% senior notes due 2022(1) | 536,519 |
| | 575,871 |
| | 527,715 |
| | 570,355 |
| 535,948 |
| | 560,198 |
| | 527,102 |
| | 550,700 |
|
5.00% senior notes due 2025(1) | 488,749 |
| | 486,347 |
| | 482,145 |
| | 480,945 |
| 490,363 |
| | 499,406 |
| | 483,735 |
| | 480,121 |
|
Short-term borrowings | 20,806 |
| | 20,806 |
| | 15,996 |
| | 15,996 |
| 34,393 |
| | 34,393 |
| | 39,009 |
| | 39,009 |
|
Total | $ | 1,101,966 |
| | $ | 1,139,535 |
| | $ | 1,157,612 |
| | $ | 1,199,909 |
| $ | 1,060,704 |
| | $ | 1,093,997 |
| | $ | 1,049,846 |
| | $ | 1,069,830 |
|
_____________
| |
(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. |
LEVI STRAUSS & CO. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS — (continued)
FOR THE QUARTERLY PERIOD ENDED FEBRUARY 28, 201626, 2017
NOTE 3: DERIVATIVE INSTRUMENTS AND HEDGING ACTIVITIES
As of February 28, 2016,26, 2017, the Company had forward foreign exchange contracts to buy $725.7 million$1.2 billion and to sell $271.0$327.5 million against various foreign currencies. These contracts are at various exchange rates and expire at various dates through November 2017.August 2018.
The table below provides data about the carrying values of derivative instruments and non-derivative instruments:
| | | February 28, 2016 | | November 29, 2015 | February 26, 2017 | | November 27, 2016 |
| Assets | | (Liabilities) | | Derivative Net Carrying Value | | Assets | | (Liabilities) | | Derivative Net Carrying Value | Assets | | (Liabilities) | | Derivative Net Carrying Value | | Assets | | (Liabilities) | | Derivative Net Carrying Value |
| Carrying Value | | Carrying Value | | Carrying Value | | Carrying Value | | Carrying Value | | Carrying Value | | Carrying Value | | Carrying Value | |
| (Dollars in thousands) | (Dollars in thousands) |
Derivatives not designated as hedging instruments | | | | | | | | | | | | | | | | | | | | | | |
Forward foreign exchange contracts(1) | $ | 25,123 |
| | $ | (5,382 | ) | | $ | 19,741 |
| | $ | 31,808 |
| | $ | (4,677 | ) | | $ | 27,131 |
| $ | 17,002 |
| | $ | (7,556 | ) | | $ | 9,446 |
| | $ | 30,160 |
| | $ | (6,893 | ) | | $ | 23,267 |
|
Forward foreign exchange contracts(2) | 1,668 |
| | (11,041 | ) | | (9,373 | ) | | 253 |
| | (8,062 | ) | | (7,809 | ) | 4,614 |
| | (15,457 | ) | | (10,843 | ) | | 1,481 |
| | (7,014 | ) | | (5,533 | ) |
Total | $ | 26,791 |
| | $ | (16,423 | ) | | | | $ | 32,061 |
| | $ | (12,739 | ) | | | $ | 21,616 |
| | $ | (23,013 | ) | | | | $ | 31,641 |
| | $ | (13,907 | ) | | |
Non-derivatives designated as hedging instruments | | | | | | | | | | | | |
Yen-denominated Eurobonds | $ | — |
| | $ | (8,496 | ) | | | | $ | — |
| | $ | (7,832 | ) | | | |
_____________
| |
(1) | Included in “Other current assets” or “Other non-current assets” on the Company’s consolidated balance sheets. |
| |
(2) | Included in “Other accrued liabilities” on the Company’s consolidated balance sheets. |
The Company's over-the-counter forward foreign exchange contracts are subject to International Swaps and Derivatives Association, Inc. master agreements. These agreements permit the net settlement of these contracts on a per-institution basis.basis and are offset accordingly. The table below presents by type of financial instrument, the gross and net amounts of the Company's derivative instruments, amounts offset due to master netting arrangements with the Company's various counterparties, and the net amountsthese contracts recognized on the Company's consolidated balance sheets:sheets by type of financial instrument:
| | | February 28, 2016 | | November 29, 2015 | February 26, 2017 | | November 27, 2016 |
| Gross Amounts of Recognized Assets / (Liabilities) | | Gross Amounts Offset in the Statement of Financial Position | | Net Amounts of Assets / (Liabilities) Presented in the Statement of Financial Position | | Gross Amounts of Recognized Assets / (Liabilities) | | Gross Amounts Offset in the Statement of Financial Position | | Net Amounts of Assets / (Liabilities) Presented in the Statement of Financial Position | Gross Amounts of Recognized Assets / (Liabilities) | | Gross Amounts Offset in the Statement of Financial Position | | Net Amounts of Assets / (Liabilities) Presented in the Statement of Financial Position | | Gross Amounts of Recognized Assets / (Liabilities) | | Gross Amounts Offset in the Statement of Financial Position | | Net Amounts of Assets / (Liabilities) Presented in the Statement of Financial Position |
| | | |
| (Dollars in thousands) | (Dollars in thousands) |
Over-the-counter forward foreign exchange contracts | | | | | | | | | | | | | | | | | | | | | | |
Financial assets | $ | 26,211 |
| | $ | (7,050 | ) | | $ | 19,161 |
| | $ | 30,837 |
| | $ | (4,930 | ) | | $ | 25,907 |
| $ | 16,847 |
| | $ | (12,169 | ) | | $ | 4,678 |
| | $ | 29,240 |
| | $ | (8,374 | ) | | $ | 20,866 |
|
Financial liabilities | (9,690 | ) | | 7,050 |
| | (2,640 | ) | | (7,599 | ) | | 4,930 |
| | (2,669 | ) | (19,679 | ) | | 12,169 |
| | (7,510 | ) | | (10,365 | ) | | 8,374 |
| | (1,991 | ) |
Total | | | | | $ | 16,521 |
| | | | | | $ | 23,238 |
| | | | | $ | (2,832 | ) | | | | | | $ | 18,875 |
|
Embedded derivative contracts | | | | | | | | | | | | | | | | | | | | | | |
Financial assets | $ | 580 |
| | $ | — |
| | $ | 580 |
| | $ | 1,224 |
| | $ | — |
| | $ | 1,224 |
| $ | 4,768 |
| | $ | — |
| | $ | 4,768 |
| | $ | 2,401 |
| | $ | — |
| | $ | 2,401 |
|
Financial liabilities | (6,733 | ) | | — |
| | (6,733 | ) | | (5,140 | ) | | — |
| | (5,140 | ) | (3,333 | ) | | — |
| | (3,333 | ) | | (3,542 | ) | | — |
| | (3,542 | ) |
Total | | | | | $ | (6,153 | ) | | | | | | $ | (3,916 | ) | | | | | $ | 1,435 |
| | | | | | $ | (1,141 | ) |
LEVI STRAUSS & CO. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS — (continued)
FOR THE QUARTERLY PERIOD ENDED FEBRUARY 28, 201626, 2017
The table below provides data about the amount of gains and losses related to derivative instruments and non-derivative instruments designated as net investment hedges included in “Accumulated"Accumulated other comprehensive loss” (“AOCI”loss" ("AOCI") on the Company’s consolidated balance sheets, and in “Other expense, net”"Other income (expense), net" in the Company’sCompany's consolidated statements of income:
| | | Gain or (Loss) Recognized in AOCI (Effective Portion) | | Gain or (Loss) Recognized in Other expense, net (Ineffective Portion and Amount Excluded from Effectiveness Testing) | Gain or (Loss) Recognized in AOCI (Effective Portion) | | Gain or (Loss) Recognized in Other Income (Expense), net (Ineffective Portion and Amount Excluded from Effectiveness Testing) |
| As of | | As of | | Three Months Ended | As of | | As of | | Three Months Ended |
February 28, 2016 | November 29, 2015 | February 28, 2016 | | March 1, 2015 | February 26, 2017 | November 27, 2016 | February 26, 2017 | | February 28, 2016 |
| (Dollars in thousands) | (Dollars in thousands) |
Forward foreign exchange contracts | $ | 4,637 |
| | $ | 4,637 |
| |
|
| |
|
| $ | 4,637 |
| | $ | 4,637 |
| | | | |
Yen-denominated Eurobonds | (19,646 | ) | | (18,982 | ) | | $ | (2,103 | ) | | $ | 346 |
| (19,811 | ) | | (19,811 | ) | | $ | — |
| | $ | (2,103 | ) |
Euro senior notes | (15,751 | ) | | (15,751 | ) | | — |
| | — |
| (15,751 | ) | | (15,751 | ) | | | | |
Cumulative income taxes | 12,104 |
| | 11,849 |
| | | | | 12,168 |
| | 12,168 |
| | | | |
Total | $ | (18,656 | ) | | $ | (18,247 | ) | | | | | $ | (18,757 | ) | | $ | (18,757 | ) | | | | |
The table below provides data about the amount of gains and losses related to derivatives not designated as hedging instruments included in “Other expense, net”"Other income (expense), net" in the Company’sCompany's consolidated statements of income:
| | | Gain or (Loss) | | | | | |
| Three Months Ended | Three Months Ended |
| February 28, 2016 | | March 1, 2015 | February 26, 2017 | | February 28, 2016 |
| (Dollars in thousands) | |
Forward foreign exchange contracts: | | | | | | |
Realized | $ | 12,967 |
| | $ | (3,960 | ) | |
Unrealized | (9,231 | ) | | 11,868 |
| |
Realized gain | | $ | 9,076 |
| | $ | 12,967 |
|
Unrealized loss | | (19,320 | ) | | (9,231 | ) |
Total | $ | 3,736 |
| | $ | 7,908 |
| $ | (10,244 | ) | | $ | 3,736 |
|
LEVI STRAUSS & CO. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS — (continued)
FOR THE QUARTERLY PERIOD ENDED FEBRUARY 28, 201626, 2017
NOTE 4: DEBT
The following table presents the Company's Debt:
| | | February 28, 2016 | | November 29, 2015 | February 26, 2017 | | November 27, 2016 |
| (Dollars in thousands) | (Dollars in thousands) |
Long-term debt | | | | | | |
Unsecured: | | | | | | |
6.875% senior notes due 2022 | 524,689 |
| | 524,807 |
| $ | 524,318 |
| | $ | 524,396 |
|
5.00% senior notes due 2025 | 480,554 |
| | 480,131 |
| 482,307 |
| | 481,860 |
|
Total unsecured long-term debt | $ | 1,005,243 |
| | $ | 1,004,938 |
| 1,006,625 |
| | 1,006,256 |
|
Total long-term debt | | $ | 1,006,625 |
| | $ | 1,006,256 |
|
Short-term debt and current maturities of long-term debt | | | | | | |
Secured: | | | | |
Senior revolving credit facility | $ | 20,000 |
| | $ | 99,000 |
| |
Unsecured: | | | | | | |
Current maturities of 4.25% Yen-denominated Eurobonds due 2016 | 35,394 |
| | 32,625 |
| |
Short-term borrowings | 20,779 |
| | 15,978 |
| $ | 34,150 |
| | $ | 38,922 |
|
Total short-term debt and current maturities of long-term debt | $ | 76,173 |
| | $ | 147,603 |
| 34,150 |
| | 38,922 |
|
Total debt | $ | 1,081,416 |
| | $ | 1,152,541 |
| $ | 1,040,775 |
| | $ | 1,045,178 |
|
Senior Revolving Credit Facility
The Company’s unused availability under its senior secured revolving credit facility was $739.7$746.1 million at February 28, 2016,26, 2017, as the Company’s total availability of $798.2$799.1 million was reduced by $58.5$53.0 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 28, 2016,26, 2017 was 6.26%6.67%, as compared to 7.65%6.26% in the same period of 2015.2016.
Subsequent Event - Senior Notes due 2027
On February 28, 2017, the Company issued €475 million in aggregate principal amount of 3.375% senior notes due 2027. On March 3, 2017, the Company completed a tender offer for $370.3 million of the 6.875% senior notes due 2022 and the remaining $154.7 million was called on March 31, 2017 for redemption on May 1, 2017. Refer to Note 14 "Subsequent Events" for more information.
LEVI STRAUSS & CO. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS — (continued)
FOR THE QUARTERLY PERIOD ENDED FEBRUARY 28, 201626, 2017
NOTE 5: EMPLOYEE BENEFIT PLANS
The following table summarizestables summarize the components of net periodic benefit cost and the changes recognized in “Accumulated"Accumulated other comprehensive loss”loss" for the Company’s defined benefit pension plans and postretirement benefit plans:
|
| | | | | | | | | | | | | | | |
| Pension Benefits | | Postretirement Benefits |
| Three Months Ended | | Three Months Ended |
| February 26, 2017 | | February 28, 2016 | | February 26, 2017 | | February 28, 2016 |
| (Dollars in thousands) |
Net periodic benefit cost: | | | | | | | |
Service cost | $ | 2,463 |
| | $ | 2,058 |
| | $ | 43 |
| | $ | 50 |
|
Interest cost | 9,180 |
| | 9,472 |
| | 787 |
| | 806 |
|
Expected return on plan assets | (12,115 | ) | | (12,134 | ) | | — |
| | — |
|
Amortization of prior service benefit | (15 | ) | | (15 | ) | | — |
| | — |
|
Amortization of actuarial loss | 3,379 |
| | 3,007 |
| | 318 |
| | 742 |
|
Net periodic benefit cost | 2,892 |
| | 2,388 |
| | 1,148 |
| | 1,598 |
|
Changes in accumulated other comprehensive loss: | | | | | | | |
Actuarial (gain) loss | (9 | ) | | 152 |
| | — |
| | — |
|
Amortization of prior service benefit | 15 |
| | 15 |
| | — |
| | — |
|
Amortization of actuarial loss | (3,379 | ) | | (3,007 | ) | | (318 | ) | | (742 | ) |
Total recognized in accumulated other comprehensive loss | (3,373 | ) | | (2,840 | ) | | (318 | ) | | (742 | ) |
Total recognized in net periodic benefit cost and accumulated other comprehensive loss | $ | (481 | ) | | $ | (452 | ) | | $ | 830 |
| | $ | 856 |
|
|
| | | | | | | | | | | | | | | |
| Pension Benefits | | Postretirement Benefits |
| Three Months Ended | | Three Months Ended |
| February 28, 2016 | | March 1, 2015 | | February 28, 2016 | | March 1, 2015 |
| (Dollars in thousands) |
Net periodic benefit cost: | | | | | | | |
Service cost | $ | 2,058 |
| | $ | 2,128 |
| | $ | 50 |
| | $ | 63 |
|
Interest cost(1) | 9,472 |
| | 11,840 |
| | 806 |
| | 1,147 |
|
Expected return on plan assets | (12,134 | ) | | (12,717 | ) | | — |
| | — |
|
Amortization of prior service benefit | (15 | ) | | (16 | ) | | — |
| | — |
|
Amortization of actuarial loss | 3,007 |
| | 3,160 |
| | 742 |
| | 1,128 |
|
Curtailment loss | — |
| | 335 |
| | — |
| | — |
|
Net periodic benefit cost | 2,388 |
| | 4,730 |
| | 1,598 |
| | 2,338 |
|
Changes in accumulated other comprehensive loss: | | | | | | | |
Actuarial loss | 152 |
| | — |
| | — |
| | — |
|
Amortization of prior service benefit | 15 |
| | 16 |
| | — |
| | — |
|
Amortization of actuarial loss | (3,007 | ) | | (3,160 | ) | | (742 | ) | | (1,128 | ) |
Curtailment loss | — |
| | (335 | ) | | — |
| | — |
|
Total recognized in accumulated other comprehensive loss | (2,840 | ) | | (3,479 | ) | | (742 | ) | | (1,128 | ) |
Total recognized in net periodic benefit cost and accumulated other comprehensive loss | $ | (452 | ) | | $ | 1,251 |
| | $ | 856 |
| | $ | 1,210 |
|
_____________
| |
(1) | The decrease in interest cost is primarily due to the election made at the end of 2015 to adopt the spot-rate approach to determine the interest cost component of pension and postretirement expense. |
LEVI STRAUSS & CO. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS — (continued)
FOR THE QUARTERLY PERIOD ENDED FEBRUARY 28, 201626, 2017
NOTE 6: RESTRUCTURING
In 2014,2016, the Company announced and began to implementcompleted a global productivity initiative designed to streamline operations and fuel long-term profitable growth. The Company expects that the majority of the actions related todoes not anticipate any significant additional costs associated with the global productivity initiative will be implemented through the end of 2016, with a focus on redesigning business processes and identifying opportunities to reduce costs, increase efficiencies and further streamline processes in supporting functions, supply chain and planning.initiative.
For the three months ended February 28, 2016, the Company recognized net restructuring charges net, of $1.8 million as compared to $4.3 million for the same period in 2015. Theseand related charges of $1.5 million. The net restructuring charges were recorded in "Restructuring, net" in the Company's consolidated statements of income. RelatedThe related charges, of $1.5 million for the three months ended February 28, 2016, as compared to $8.0 million for the same period in 2015,which consist primarily of consulting fees for the Company's centrally-led cost-savings, and productivity projects as well as transition costs associated with the Company's decision to outsource certain global business service activities. These related charges representand transition-related projects, represented costs incurred associated with ongoing operations which are expected to benefit future periods and thus were recorded in "Selling, general and administrative expenses" in the Company's consolidated statements of income. Cash payments for charges recognized to date are expected to continue through 2017.
The table below summarizes the components of charges included in “Restructuring, net” in the Company’s consolidated statements of income:
|
| | | | | | | |
| Three Months Ended |
| February 28, 2016 | | March 1, 2015 |
| (Dollars in thousands) |
Restructuring, net: | | | |
Severance and employee-related benefits(1) | $ | 1,445 |
| | $ | 5,320 |
|
Adjustments to severance and employee-related benefits | 279 |
| | (1,249 | ) |
Lease and other contract termination costs | — |
| | — |
|
Other(2) | 124 |
| | 414 |
|
Adjustments to other | — |
| | (482 | ) |
Noncash pension and postretirement curtailment losses, net(3) | — |
| | 335 |
|
Total | $ | 1,848 |
| | $ | 4,338 |
|
_____________
| |
(1) | Severance and employee-related benefits relate to items such as severance, based on separation benefits provided by Company policy or statutory benefit plans, out-placement services and career counseling for employees affected by the global productivity initiative. |
| |
(2) | Other restructuring costs are expensed as incurred and primarily relate to consulting fees and legal expenses associated with the execution of the restructuring initiative. |
| |
(3) | Noncash pension and postretirement curtailment gains or losses resulting from the global productivity initiative are included in restructuring charges, with the associated liabilities included in "Pension liability" and "Postretirement medical benefits" on the Company's consolidated balance sheets. |
The Company is unable at this time to make a good faith determination of cost estimates, or ranges of cost estimates, for additional actions associated with the global productivity initiative.
LEVI STRAUSS & CO. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS — (continued)
FOR THE QUARTERLY PERIOD ENDED FEBRUARY 28, 2016
The following table summarizes the activities associated with restructuring liabilities for the three months ended February 28, 2016, and March 1, 2015. In the table below, "Charges" represents the initial charge related to the restructuring activity. "Adjustments" includes revisions of estimates related to severance, employee-related benefits, lease and other contract termination costs, and other restructuring costs. "Payments" consists of cash payments for severance, employee-related benefits, lease and other contract termination costs, and other restructuring costs.
|
| | | | | | | | | | | | | | | | | | | | | | | |
| Three Months Ended February 28, 2016 |
| Liabilities | | | | Adjustments | | | | Foreign Currency Fluctuation | | Liabilities |
| November 29, 2015 | | Charges | | | Payments | | | February 28, 2016 |
| (Dollars in thousands) |
Severance and employee-related benefits | $ | 20,774 |
| | $ | 1,445 |
| | $ | 279 |
| | $ | (7,339 | ) | | $ | 515 |
| | $ | 15,674 |
|
Lease and other contract termination costs | — |
| | — |
| | — |
| | — |
| | — |
| | — |
|
Other | 964 |
| | 124 |
| | — |
| | (124 | ) | | — |
| | 964 |
|
Total | $ | 21,738 |
| | $ | 1,569 |
| | $ | 279 |
| | $ | (7,463 | ) | | $ | 515 |
| | $ | 16,638 |
|
| | | | | | | | | | | |
Current portion | $ | 20,141 |
| | | | | | | | | | $ | 15,736 |
|
Long-term portion | 1,597 |
| | | | | | | | | | 902 |
|
Total | $ | 21,738 |
| | | | | | | | | | $ | 16,638 |
|
| | | | | | | | | | | |
| Three Months Ended March 1, 2015 |
| Liabilities | | | | Adjustments | | | | Foreign Currency Fluctuation | | Liabilities |
| November 30, 2014 | | Charges | | | Payments | | | March 1, 2015 |
| (Dollars in thousands) |
Severance and employee-related benefits | $ | 56,963 |
| | $ | 5,320 |
| | $ | (1,249 | ) | | $ | (13,681 | ) | | $ | (3,738 | ) | | $ | 43,615 |
|
Lease and other contract termination costs | — |
| | — |
| | — |
| | — |
| | — |
| | — |
|
Other | 6,400 |
| | 414 |
| | (482 | ) | | (6,331 | ) | | — |
| | 1 |
|
Total | $ | 63,363 |
| | $ | 5,734 |
| | $ | (1,731 | ) | | $ | (20,012 | ) | | $ | (3,738 | ) | | $ | 43,616 |
|
| | | | | | | | | | | |
Current portion | $ | 57,817 |
| | | | | | | | | | $ | 42,596 |
|
Long-term portion | 5,546 |
| | | | | | | | | | 1,020 |
|
Total | $ | 63,363 |
| | | | | | | | | | $ | 43,616 |
|
LEVI STRAUSS & CO. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS — (continued)
FOR THE QUARTERLY PERIOD ENDED FEBRUARY 28, 2016
NOTE 7: COMMITMENTS AND CONTINGENCIES
Forward Foreign Exchange Contracts
The Company uses over-the-counter derivative instruments to manage its exposure to foreign currencies. The Company is exposed to credit loss in the event of nonperformance by the counterparties to the forward foreign exchange contracts. However, the Company believes that its exposures are appropriately diversified across counterparties and that these counterparties are creditworthy financial institutions. Please see Note 3 for additional information.
Other Contingencies
Litigation. There have been no material developments with respect to the information previously reported in the Company’s 20152016 Annual Report on Form 10-K related to legal proceedings.
In the ordinary course of business, the Company has various pending cases involving contractual matters, facility and employee-related matters, distribution matters, product liability claims, trademark infringement and other matters. The Company does not believe any of these pending legal proceedings will have a material impact on its financial condition, results of operations or cash flows.
NOTE 8: DIVIDEND
TheIn February 2017, the Company's Board of Directors (the “Board”) declared a cash dividend of $60.0$70 million, payable in two $35 million installments. The Company paid the first installment of the cash dividend of $35.0 million in the first quarter of 2016, payable2017. The second installment of $35 million is expected to be paid in the secondfourth quarter of 2016 to stockholders of record at the close of business on February 19, 2016. Dividend payable is included2017, and thus was recorded in "Other accrued liabilities" onin the Company's consolidated balance sheets. Subsequent to the Company's quarter-end, on April 7, 2016, the Company paid the cash dividend.
The Company does not have an established annual dividend policy. The Company will continue to review its ability to pay cash dividends at least annually, and dividends may be declared at the discretion of the Company's Board of Directors depending upon, among other factors, the Company's financial condition and compliance with the terms of the Company's debt agreements.
LEVI STRAUSS & CO. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS — (continued)
FOR THE QUARTERLY PERIOD ENDED FEBRUARY 26, 2017
NOTE 9: ACCUMULATED OTHER COMPREHENSIVE LOSS
The following is a summary of the components of “Accumulated"Accumulated other comprehensive loss,”" net of related income taxes:
| | | February 28, 2016 | | November 29, 2015 | February 26, 2017 | | November 27, 2016 |
| (Dollars in thousands) | (Dollars in thousands) |
Pension and postretirement benefits | $ | (234,166 | ) | | $ | (236,340 | ) | $ | (249,704 | ) | | $ | (252,027 | ) |
Net investment hedge losses | (18,656 | ) | | (18,247 | ) | (18,757 | ) | | (18,757 | ) |
Foreign currency translation losses | (125,743 | ) | | (117,394 | ) | (142,439 | ) | | (149,065 | ) |
Unrealized gains on marketable securities | 754 |
| | 1,880 |
| 2,583 |
| | 1,968 |
|
Accumulated other comprehensive loss | (377,811 | ) | | (370,101 | ) | (408,317 | ) | | (417,881 | ) |
Accumulated other comprehensive income attributable to noncontrolling interest | 9,184 |
| | 8,965 |
| 9,241 |
| | 9,433 |
|
Accumulated other comprehensive loss attributable to Levi Strauss & Co. | $ | (386,995 | ) | | $ | (379,066 | ) | $ | (417,558 | ) | | $ | (427,314 | ) |
No material amounts were reclassified out of "Accumulated other comprehensive loss" into net income other than those that pertain to the Company's pension and postretirement benefit plans. Please see Note 5 for additional information. These amounts are included in "Selling, general and administrative expenses" in the Company's consolidated statements of income.
LEVI STRAUSS & CO. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS — (continued)
FOR THE QUARTERLY PERIOD ENDED FEBRUARY 28, 2016
NOTE 10: OTHER EXPENSE,INCOME (EXPENSE), NET
The following table summarizes significant components of “Other expense, net”"Other income (expense), net":
| | | Three Months Ended | Three Months Ended |
| February 28, 2016 | | March 1, 2015 | February 26, 2017 | | February 28, 2016 |
| (Dollars in thousands) | (Dollars in thousands) |
Foreign exchange management gains(1) | $ | 3,736 |
| | $ | 7,908 |
| |
Foreign currency transaction losses(2) | (8,203 | ) | | (35,959 | ) | |
Foreign exchange management (losses) gains(1) | | $ | (10,244 | ) | | $ | 3,736 |
|
Foreign currency transaction gains (losses)(2) | | 9,676 |
| | (8,203 | ) |
Interest income | 209 |
| | 460 |
| 617 |
| | 209 |
|
Investment income | 708 |
| | 439 |
| 353 |
| | 708 |
|
Other | 1,331 |
| | 1,124 |
| 6 |
| | 1,331 |
|
Total other expense, net | $ | (2,219 | ) | | $ | (26,028 | ) | |
Total other income (expense), net | | $ | 408 |
| | $ | (2,219 | ) |
_____________
| |
(1) | Gains and losses on forward foreign exchange contracts primarily result from currency fluctuations relative to negotiated contract rates. Losses in the three-month period ended February 26, 2017 were primarily due to unfavorable currency fluctuations relative to negotiated contract rates on positions to sell the Mexican Peso. Gains in the three-month period ended 2016 and 2015 were primarily due to favorable currency fluctuations relative to negotiated contract rates on positions to sell the Mexican Peso, partially offset in 2016 by unfavorable currency fluctuations relative to negotiated contract rates on positions to sell the Euro. |
| |
(2) | Foreign currency transaction gains and losses reflect the impact of foreign currency fluctuation on the Company's foreign currency denominated balances. Gains in 2017 were primarily due to the strengthening of the Mexican Peso and Euro against the US dollar. Losses in 2016 were primarily due to the weakening of various foreign currencies against the Euro. Losses in 2015 were primarily due to the weakening of various foreign currencies, particularly the Euro, against the U.S. Dollar. |
NOTE 11:11: INCOME TAXES
The effective income tax rate was 33.4%32.3% for the three months ended February 28, 201626, 2017, compared to 34.1%33.4% for the same period ended March 1, 2015February 28, 2016. The decrease in the effective tax rate in 2017 as compared to 2016 was primarily due to lower tax rates on foreign earnings.
LEVI STRAUSS & CO. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS — (continued)
FOR THE QUARTERLY PERIOD ENDED FEBRUARY 26, 2017
NOTE 12: RELATED PARTIES
Robert D. Haas, Chairman Emeritus of the Company, Charles V. Bergh, President and Chief Executive Officer, Peter E. Haas Jr., a director of the Company, and Kelly McGinnis, Senior Vice President of Corporate Affairs and Chief Communications Officer, are board members of the Levi Strauss Foundation, which is not a consolidated entity of the Company. Seth R. Jaffe, Senior Vice President and General Counsel, is Vice President of the Levi Strauss Foundation. During the three-month period ended February 28, 2016,26, 2017, the Company donated $0.3$6.3 million to the Levi Strauss Foundation as compared to $5.9$6.1 million for the same prior-year period.
LEVI STRAUSS & CO. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS — (continued)
FOR THE QUARTERLY PERIOD ENDED FEBRUARY 28, 2016
NOTE 13:13: BUSINESS SEGMENT INFORMATION
The Company manages its business according to three regional segments: the Americas, Europe and Asia. The Company considers its chief executive officer to be the Company’s chief operating decision maker. The Company’s chief operating decision maker manages business operations, evaluates performance and allocates resources based on the regional segments’ net revenues and operating income.
Effective as of the beginning of 2017, certain of the Company's global expenses that support all regional segments, including global e-commerce infrastructure and global brand merchandising, marketing and design, previously recorded centrally in the Americas region segment and Corporate expenses, have now been allocated to the three regional business segments, and reported in operating results. Business segment information for the prior-year period has been revised to reflect the change in presentation.
Business segment information for the Company is as follows:
| | | Three Months Ended | Three Months Ended |
| February 28, 2016 | | March 1, 2015 | February 26, 2017 | | February 28, 2016 |
| (Dollars in thousands) | (Dollars in thousands) |
Net revenues: | | | | | | |
Americas | $ | 571,185 |
| | $ | 574,087 |
| $ | 577,907 |
| | $ | 571,185 |
|
Europe | 276,486 |
| | 277,488 |
| 310,317 |
| | 276,486 |
|
Asia | 208,829 |
| | 203,500 |
| 213,767 |
| | 208,829 |
|
Total net revenues | $ | 1,056,500 |
| | $ | 1,055,075 |
| $ | 1,101,991 |
| | $ | 1,056,500 |
|
Operating income: | | | | | | |
Americas | $ | 81,749 |
| | $ | 102,292 |
| $ | 90,342 |
| | $ | 88,032 |
|
Europe | 61,709 |
| | 58,189 |
| 64,539 |
| | 50,939 |
|
Asia | 46,605 |
| | 47,340 |
| 35,941 |
| | 40,893 |
|
Regional operating income | 190,063 |
| | 207,821 |
| 190,822 |
| | 179,864 |
|
Corporate: | | | | | | |
Restructuring, net | 1,848 |
| | 4,338 |
| — |
| | 1,848 |
|
Restructuring-related charges | 1,497 |
| | 8,007 |
| — |
| | 1,497 |
|
Other corporate staff costs and expenses | 70,131 |
| | 88,031 |
| 82,482 |
| | 59,932 |
|
Corporate expenses | 73,476 |
| | 100,376 |
| 82,482 |
| | 63,277 |
|
Total operating income | 116,587 |
| | 107,445 |
| 108,340 |
| | 116,587 |
|
Interest expense | (14,902 | ) | | (23,312 | ) | (19,934 | ) | | (14,902 | ) |
Other expense, net | (2,219 | ) | | (26,028 | ) | |
Other income (expense), net | | 408 |
| | (2,219 | ) |
Income before income taxes | $ | 99,466 |
| | $ | 58,105 |
| $ | 88,814 |
| | $ | 99,466 |
|
LEVI STRAUSS & CO. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS — (continued)
FOR THE QUARTERLY PERIOD ENDED FEBRUARY 26, 2017
NOTE 14: SUBSEQUENT EVENTS
On February 28, 2017, the Company issued €475 million in aggregate principal amount of 3.375% senior notes due 2027 (the "Senior Notes due 2027"). On March 3, 2017, a portion of the proceeds from the new debt were used to complete a tender offer for $370.3 million of the 6.875% senior notes due 2022 and the remaining $154.7 million was called on March 31, 2017 for redemption on May 1, 2017. The remaining proceeds from the issuances of Senior Notes due 2027 as well as cash on hand will be used to complete the redemption. The Company will record a net loss on the early extinguishment of debt of approximately $23 million. The estimated loss includes approximately $21 million of tender and call premiums on the retired debt. Debt issuance costs for the Senior Notes due 2027 are estimated at approximately $8 million and will be capitalized as deferred financing costs as a direct reduction to the debt.
|
| |
Item 2. | MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS |
Overview
We design, market and sell – directly or through third parties and licensees – products that include jeans, casual and dress pants, tops, shorts, skirts, jackets, footwear and related accessories for men, women and children around the world under our Levi’s®, Dockers®, Signature by Levi Strauss & Co.™ (“Signature”("Signature") and Denizen® brands.
Our business is operated through three geographic regions: Americas, Europe and Asia. Our products are sold in approximately 50,000 retail locations in more than 110 countries. We support our brands through a global infrastructure, developing, sourcing and marketing our products around the world. We distribute our Levi’s® and Dockers® products primarily through chain retailers and department stores in the United States and primarily through department stores, specialty retailers and approximately 2,1002,200 franchised or other brand-dedicated stores and shop-in-shops outside of the United States. We also distribute our Levi’s® and Dockers® products through 655706 company-operated retail stores located in 31 countries, including the United States, and through the ecommerce sites we operate. Our company-operated retail stores and ecommerce sites generated approximately 31%32% of our net revenues in the first three months of 2016,2017, as compared to 28%31% in the same period in 2015,2016, with our ecommerce sites representing approximately 15%16% of this revenue in 2016,2017, as compared to 14%15% in the same period in 2015.2016. In addition, we distribute our Levi’s® and Dockers® products through ecommerce sites operated by certain of our key wholesale customers and other third parties. We distribute products under our Signature and Denizen® brands primarily through mass channel retailers in the Americas.
Our Europe and Asia businesses, collectively, contributed approximately 46%48% of our net revenues and 57%53% of our regional operating income in the first three months of 2016,2017, as compared to 46% of our net revenues and 51% of our regional operating income in the same period in 2015.2016. Sales of Levi’s® brand products represented approximately 88% and 87% of our total net sales in each of the first three-month periods inof 2017 and 2016, and in 2015.respectively. Effective as of the beginning of 2017, we revised our approach to measuring the performance of our business by allocating certain of our global expenses to our three regional business segments. Comparative period regional operating income amounts were revised to reflect this change. Refer to "Financial Information Presentation" section below for additional details.
Trends Affecting Our Business
OurWe believe the key long-term objectivesbusiness and marketplace factors that are to strengthenimpacting our brands globally in order to deliver sustainable profitable growth, generate strong cash flow and reduce our debt. Critical strategies to achieve these objectivesbusiness include driving our profitable core business; expanding the reach of our global brands and building a more balanced product portfolio; elevating the performance of our retail channel, including ecommerce; and leveraging our global scale to improve our cost structure.following:
ConsumerFactors that impact consumer discretionary spending, which remains mixed globally, continues to result inhave created a challenging retail environment for us and our customers, characterized by declining traffic patterns and contributing to a generally promotional environment. SlowIn developed economies, slow real wage growth in developed economies and a shift in consumer spending to interest-rate sensitive durable goods and other non-apparel categories also continue to pressure global discretionary spending. Given consumers’ increasingConsumers continue to focus on value pricing, amid the slowly recovering economy,with the off-price retail channel remainsremaining strong, partially to the detriment of traditional broadline retailers, particularly at the mid-tier. Both our
More competitors are seeking growth globally, thereby raising the competitiveness across regions. Some of these competitors are entering into markets where we already have a mature business such as the United States, Mexico, Western Europe and Japan, and those new brands may provide consumers discretionary purchase alternatives or lower-priced apparel offerings.
Wholesaler/retailer dynamics and wholesale and retail channels continueremain challenged by slowed growth prospects due to faceincreased competition from ecommerce shopping, pricing transparency enabled by the proliferation of online technologies, vertically-integrated specialty stores, and fast-fashion retail. Retailers, including our top customers, may decide to consolidate, undergo restructurings or rationalize their stores which constitutes an increasing proportioncould result in reduction in the number of global apparel sales, particularly around key selling seasons. Our domesticstores that carry our products. Additionally, many of our customers desire increased returns on their investment with us through increased margins and multi-national competitors alsoinventory turns, and they continue to expandbuild competitive exclusive or private-label offerings. Many apparel wholesalers, including us, seek to strengthen relationships with customers as a result of these changes in the marketplace through efforts such as investment in new products, marketing programs, fixtures and collaborative planning systems.
Many apparel companies that have traditionally relied on wholesale distribution channels have invested in expanding their own retail store and ecommerce 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 footprintssupply chain. Trends affecting the supply chain include the proliferation of lower-cost sourcing alternatives, resulting in both brick-and-mortar retailreduced barriers to entry for new competitors, and online. While currency values are in constant flux, the appreciationimpact of fluctuating prices of labor and raw materials. 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, particularlyincluding the Euro,Mexican Peso and British Pound, will continue to impact our financial results, affecting translation, margins,and revenue and operating margins.
The current sociopolitical environment has introduced greater uncertainty with respect to future potential tax and trade regulations. Such changes, including import tariffs or taxes, may require us to modify our current business practices and could have material adverse effect on our business and results of operations.
These factors contribute to a global market environment of intense competition, constant product innovation and continuing cost pressure, and combine with the continuing global economic conditions to create a challenging commercial and economic environment. We evaluate these factors as well as traffic in stores located in or near major domestic tourist attractions.we develop and execute our strategies. For more information on the risk factors affecting our business, see our 2016 Annual Report on Form 10-K, Item 1A "Risk Factors".
Our First Quarter 20162017 Results
Net revenues. Compared to the first quarter of 2015,2016, consolidated net revenues was flatincreased 4% on a reported basis butand increased 5% on a constant-currency basis driven by 5%, primarily reflecting higher retail revenues due tofrom expansion and improved performance and expansion of our retail network in all three regions.
Gross margin. Compared to the first quarter of 2016, consolidated gross profit decreased 2% due principally to higher sales allowances, primarily in the United States wholesale channel, and unfavorable transactional currency impacts, primarily in Europe. This was partially offset by company-operated retail growth in Europe and Asia.Americas.
Operating income. Compared to the first quarter of 2015,2016, consolidated operating income increaseddecreased by approximately 9%7% and operating margin improveddeclined to 11%10%, primarily reflecting an improvement in ourlower gross margin and higher constant-currency revenues, partially offset by increased investmentsselling, general and administrative expenses ("SG&A") associated with our investment in retail and advertising and the effects of currency.expansion.
Cash flows. Cash flows provided by operating activities were approximately $46$49 million for the three-month period in 20162017 as compared to $38$46 million for the same period in 2015;2016; the increase reflected higher trade receivable collections andreflects lower payments to vendors partially offset by higher inventory levels.for SG&A and an increase in cash received from customers.
Financial Information Presentation
Fiscal year. Our fiscal year ends on the last Sunday of November in each year, although the fiscal years of certain foreign subsidiaries end on November 30. Each quarter of fiscal years 20162017 and 20152016 consists of 13 weeks.
Segments. We manage our business according to three regional segments: the Americas, Europe and Asia. Effective as of the beginning of 2017, certain of our global expenses that support all of our regional segments, including global e-commerce infrastructure and global brand merchandising, marketing and design, previously recorded centrally in our Americas region segment and Corporate expenses, have now been allocated to our three regional business segments, and reported in their operating results. Business segment information for the prior-year period has been revised to reflect the change in presentation.
Classification. Our classification of certain significant revenues and expenses reflects the following:
Net revenues is primarily comprised of sales of products to wholesale customers, including franchised stores, and direct sales to consumers at our company-operated ecommerce sites and stores and at our company-operated shop-in-shops located within department stores. It includes discounts, allowances for estimated returns and incentives. Net revenues also includesinclude royalties earned from the use of our trademarks by third-party licensees in connection with the manufacturing, advertising and distribution of trademarked products.
Cost of goods sold is primarily comprised of product costs, labor and related overhead, sourcing costs, inbound freight, internal transfers, and the cost of operating our remaining manufacturing facilities, including the related depreciation expense.
Selling costs include, among other things, all occupancy costs and depreciation associated with our company-operated stores and commissions associated with our company-operated shop-in-shops, as well as costs associated with our ecommercee-commerce operations.
We reflect substantially all distribution costs in selling, general and administrative expenses, including costs related to receiving and inspection at distribution centers, warehousing, shipping to our customers, handling, and certain other activities associated with our distribution network.
Gross margins may not be comparable to those of other companies in our industry since some companies may include costs related to their distribution network and occupancy costs associated with company-operated stores in cost of goods sold.
Constant currency. Constant-currency comparisons are based on translating local currency amounts in the prior-year period at actual foreign exchange rates for the current year. We routinely evaluate our financial performance on a constant-currency basis in order to facilitate period-to-period comparisons without regard to the impact of changing foreign currency exchange rates.
Results of Operations for Three Months Ended February 28, 201626, 2017, as Compared to Same Period in 20152016
The following table summarizes, for the periods indicated, our consolidated statements of income, the changes in these items from period to period and these items expressed as a percentage of net revenues:
| | | Three Months Ended | Three Months Ended |
| February 28, 2016 | | March 1, 2015 | | % Increase (Decrease) | | February 28, 2016 | | March 1, 2015 | February 26, 2017 | | February 28, 2016 | | % Increase (Decrease) | | February 26, 2017 | | February 28, 2016 |
| | % of Net Revenues | | % of Net Revenues | | % of Net Revenues | | % of Net Revenues |
| (Dollars in millions) | (Dollars in millions) |
Net revenues | $ | 1,056.5 |
| | $ | 1,055.1 |
| | 0.1 | % | | 100.0 | % | | 100.0 | % | $ | 1,102.0 |
| | $ | 1,056.5 |
| | 4.3 | % | | 100.0 | % | | 100.0 | % |
Cost of goods sold | 496.9 |
| | 518.0 |
| | (4.1 | )% | | 47.0 | % | | 49.1 | % | 537.5 |
| | 496.9 |
| | 8.2 | % | | 48.8 | % | | 47.0 | % |
Gross profit | 559.6 |
| | 537.1 |
| | 4.2 | % | | 53.0 | % | | 50.9 | % | 564.5 |
| | 559.6 |
| | 0.9 | % | | 51.2 | % | | 53.0 | % |
Selling, general and administrative expenses | 441.2 |
| | 425.4 |
| | 3.7 | % | | 41.8 | % | | 40.3 | % | 456.2 |
| | 441.2 |
| | 3.4 | % | | 41.4 | % | | 41.8 | % |
Restructuring, net | 1.8 |
| | 4.3 |
| | (57.4 | )% | | 0.2 | % | | 0.4 | % | — |
| | 1.8 |
| | (98.8 | )% | | — |
| | 0.2 | % |
Operating income | 116.6 |
| | 107.4 |
| | 8.5 | % | | 11.0 | % | | 10.2 | % | 108.3 |
| | 116.6 |
| | (7.2 | )% | | 9.8 | % | | 11.0 | % |
Interest expense | (14.9 | ) | | (23.3 | ) | | (36.1 | )% | | (1.4 | )% | | (2.2 | )% | (19.9 | ) | | (14.9 | ) | | 33.8 | % | | (1.8 | )% | | (1.4 | )% |
Other expense, net | (2.2 | ) | | (26.0 | ) | | (91.5 | )% | | (0.2 | )% | | (2.5 | )% | |
Other income (expense), net | | 0.4 |
| | (2.2 | ) | | (118.4 | )% | | — |
| | (0.2 | )% |
Income before income taxes | 99.5 |
| | 58.1 |
| | 71.2 | % | | 9.4 | % | | 5.5 | % | 88.8 |
| | 99.5 |
| | (10.7 | )% | | 8.1 | % | | 9.4 | % |
Income tax expense | 33.2 |
| | 19.8 |
| | 67.4 | % | | 3.1 | % | | 1.9 | % | 28.7 |
| | 33.2 |
| | (13.5 | )% | | 2.6 | % | | 3.1 | % |
Net income | 66.3 |
| | 38.3 |
| | 73.2 | % | | 6.3 | % | | 3.6 | % | 60.1 |
| | 66.3 |
| | (9.3 | )% | | 5.5 | % | | 6.3 | % |
Net (income) loss attributable to noncontrolling interest | (0.5 | ) | | 0.1 |
| | (517.4 | )% | | — |
| | — |
| |
Net loss (income) attributable to noncontrolling interest | | — |
| | (0.5 | ) | | (104.9 | )% | | — |
| | — |
|
Net income attributable to Levi Strauss & Co. | $ | 65.8 |
| | $ | 38.4 |
| | 71.5 | % | | 6.2 | % | | 3.6 | % | $ | 60.1 |
| | $ | 65.8 |
| | (8.6 | )% | | 5.5 | % | | 6.2 | % |
Net revenues
The following table presents net revenues by reporting segment for the periods indicated and the changes in net revenues by reporting segment on both reported and constant-currency bases from period to period.
| | | Three Months Ended | Three Months Ended |
| | | | | % Increase (Decrease) | | | | | % Increase (Decrease) |
| February 28, 2016 | | March 1, 2015 | | As Reported | | Constant Currency | February 26, 2017 | | February 28, 2016 | | As Reported | | Constant Currency |
| (Dollars in millions) | (Dollars in millions) |
Net revenues: | | | | | | | | | | | | | | |
Americas | $ | 571.2 |
| | $ | 574.1 |
| | (0.5 | )% | | 1.5 | % | $ | 577.9 |
| | $ | 571.2 |
| | 1.2 | % | | 2.0 | % |
Europe | 276.5 |
| | 277.5 |
| | (0.4 | )% | | 8.1 | % | 310.3 |
| | 276.5 |
| | 12.2 | % | | 14.6 | % |
Asia | 208.8 |
| | 203.5 |
| | 2.6 | % | | 9.7 | % | 213.8 |
| | 208.8 |
| | 2.4 | % | | 2.4 | % |
Total net revenues | $ | 1,056.5 |
| | $ | 1,055.1 |
| | 0.1 | % | | 4.7 | % | $ | 1,102.0 |
| | $ | 1,056.5 |
| | 4.3 | % | | 5.4 | % |
Total net revenues increased on both a reported and constant-currency basesbasis for the three-month periodperiods ended February 28, 201626, 2017, as compared to the same prior-year period.
Americas. NetOn both a reported basis and constant-currency basis, net revenues in our Americas region decreased on a reported basis and increased on a constant-currency basis for the three-month period ended February 28, 2016,26, 2017, with currency affecting net revenues unfavorably by approximately $11$5 million.
Constant-currencyExcluding the effects of currency, the increase in net revenues increased at wholesale and retail, primarilyfor the three-month period ended February 26, 2017 was due to higher revenues in Mexico and the performance and expansion of our performancecompany-operated retail network, including ecommerce, in Mexico. Inthe United States. This was mostly offset by lower wholesale revenues in the United States net revenues declined slightly, primarily at wholesale due to a decline in theour Levi’s® and Dockers® brand in anticipation of product transitions.brands due to a soft retail environment.
Europe. Net revenues in Europe decreasedincreased both on a reported basis and increased on a constant-currency basis for the three-month period ended February 28, 201626, 2017, with currency affecting net revenues unfavorably by approximately $22$6 million.
Constant-currency net revenues increased as a result of the improvedexpansion and strong performance and expansion of our company-operated and franchise store retail network, including ecommerce.e-commerce, as well as solid wholesale performance.
Asia. Net revenues in Asia increased on both a reported and constant-currency basesbasis for the three-month period ended February 28, 201626, 2017, with currency affecting net revenues unfavorably by approximately $13 million.minimally.
The increase in net revenues was primarily due to the performance and expansion of our company-operated retail network, particularly company-operated outlet and e-commerce channels, partially offset by a decline in China,franchised stores and improved wholesale performance in Japan.performance.
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 | Three Months Ended |
| February 28, 2016 | | March 1, 2015 | | % Increase (Decrease) | February 26, 2017 | | February 28, 2016 | | % Increase (Decrease) |
| (Dollars in millions) | (Dollars in millions) |
Net revenues | $ | 1,056.5 |
| | $ | 1,055.1 |
| | 0.1 | % | $ | 1,102.0 |
| | $ | 1,056.5 |
| | 4.3 | % |
Cost of goods sold | 496.9 |
| | 518.0 |
| | (4.1 | )% | 537.5 |
| | 496.9 |
| | 8.2 | % |
Gross profit | $ | 559.6 |
| | $ | 537.1 |
| | 4.2 | % | $ | 564.5 |
| | $ | 559.6 |
| | 0.9 | % |
Gross margin | 53.0 | % | | 50.9 | % | | | 51.2 | % | | 53.0 | % | | |
Currency translation unfavorably impacted gross profit by approximately $24$5 million for the three-month period ended February 28, 2016.26, 2017. Gross margin improved primarilydecreased principally due to lower negotiated product costshigher sales allowances, primarily in the United States wholesale channel, and streamlined supply chain operations,unfavorable transactional currency impacts, primarily in Europe. This was partially offset by the unfavorable transactional impact of currency. Gross margin also benefited from our internationalcompany-operated retail growth.growth in Europe and Americas.
Selling, general and administrative expenses
The following table shows our selling, general and administrative expenses (“SG&A”)&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 | Three Months Ended |
| February 28, 2016 | | March 1, 2015 | | % Increase (Decrease) | | February 28, 2016 | | March 1, 2015 | February 26, 2017 | | February 28, 2016 | | % Increase (Decrease) | | February 26, 2017 | | February 28, 2016 |
| | % of Net Revenues | | % of Net Revenues | | % of Net Revenues | | % of Net Revenues |
| (Dollars in millions) | (Dollars in millions) |
Selling | $ | 189.4 |
| | $ | 181.0 |
| | 4.7 | % | | 17.9 | % | | 17.2 | % | $ | 210.0 |
| | $ | 191.0 |
| | 10.0 | % | | 19.1 | % | | 18.1 | % |
Advertising and promotion | 57.5 |
| | 50.2 |
| | 14.5 | % | | 5.4 | % | | 4.8 | % | 52.7 |
| | 57.5 |
| | (8.3 | )% | | 4.8 | % | | 5.4 | % |
Administration | 84.4 |
| | 83.7 |
| | 1.0 | % | | 8.0 | % | | 7.9 | % | 84.6 |
| | 84.2 |
| | 0.5 | % | | 7.7 | % | | 8.0 | % |
Other | 108.4 |
| | 102.5 |
| | 5.7 | % | | 10.3 | % | | 9.7 | % | 108.9 |
| | 107.0 |
| | 1.8 | % | | 9.9 | % | | 10.1 | % |
Restructuring-related charges | 1.5 |
| | 8.0 |
| | (81.3 | )% | | 0.1 | % | | 0.8 | % | — |
| | 1.5 |
| | (100.0 | )% | | — |
| | 0.1 | % |
Total SG&A | $ | 441.2 |
| | $ | 425.4 |
| | 3.7 | % | | 41.8 | % | | 40.3 | % | $ | 456.2 |
| | $ | 441.2 |
| | 3.4 | % | | 41.4 | % | | 41.8 | % |
Currency impacted SG&A favorably by approximately $15$3 million for the three-month period ended February 28, 2016.26, 2017.
Selling. Currency impacted selling expenses favorably by approximately $9$2 million for the three-month period ended February 28, 2016.26, 2017. Higher selling expenses primarily reflected costs associated with the expansion of our company-operated store network and investment in our ecommerce business.retail network. We had 8651 more company-operated stores at the end of the first quarter of 20162017 than we did at the end of the first quarter of 2015.2016.
Advertising and promotion. Currency did not have a significant impact on advertising and promotion expenses for the three-month period ended February 28, 2016.26, 2017. The increasedecrease in advertising and promotion expenses primarily reflected a difference inreflects the timing of production and media spend for our campaigns as well as increased investment in strengthening our brands through advertising.campaigns.
Administration. Administration expenses include functional administrative and organization costs. Currency impacteddid not have a significant impact on administration expenses favorably by approximately $2 million for the three-month periodthree months ended February 28, 2016.26, 2017.
Other. Other SG&A includes distribution, information resources and marketing organization costs. Currency impacteddid not have a significant impact on other SG&A expenses favorably by approximately $3 million for the three-month periodthree months ended February 28, 2016. Higher other SG&A costs primarily reflected increased distribution expenses.26, 2017.
Restructuring-related charges. Restructuring-related charges consistconsisted primarily of consulting fees incurred for our centrally-led cost-savings, and productivity projects as well as transition costs associated with our decision to outsource certain global business service activities. These related charges represent costs incurred associated with ongoing operationsand transition-related projects, which are expected to benefit future periods and thus were recorded in SG&A inimplemented through the Company's consolidated statementsend of income.2016.
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 | | Three Months Ended |
| February 28, 2016 | | March 1, 2015 | | % Increase (Decrease) | | February 28, 2016 | | March 1, 2015 | | February 26, 2017 | | February 28, 2016 | | % Increase (Decrease) | | February 26, 2017 | | February 28, 2016 |
| | % of Net Revenues | | % of Net Revenues | | | % of Net Revenues | | % of Net Revenues |
| (Dollars in millions) | | (Dollars in millions) |
Operating income: | | | | | | | | | | | | | | | | | | | |
Americas | $ | 81.8 |
| | $ | 102.3 |
| | (20.1 | )% | | 14.3 | % | | 17.8 | % | | $ | 90.4 |
| | $ | 88.1 |
| | 2.6 | % | | 15.6 | % | | 15.4 | % |
Europe | 61.7 |
| | 58.2 |
| | 6.0 | % | | 22.3 | % | | 21.0 | % | | 64.5 |
| | 50.9 |
| | 26.7 | % | | 20.8 | % | | 18.4 | % |
Asia | 46.6 |
| | 47.3 |
| | (1.6 | )% | | 22.3 | % | | 23.3 | % | | 35.9 |
| | 40.9 |
| | (12.1 | )% | | 16.8 | % | | 19.6 | % |
Total regional operating income | 190.1 |
| | 207.8 |
| | (8.5 | )% | | 18.0 | % | * | 19.7 | % | * | 190.8 |
| | 179.9 |
| | 6.1 | % | | 17.3 | % | * | 17.0 | % |
Corporate: | | | | | | | | | | | | | | | | | | | |
Restructuring, net | 1.8 |
| | 4.3 |
| | (57.4 | )% | | 0.2 | % | * | 0.4 | % | * | — |
| | 1.8 |
| | (98.8 | )% | | — |
| * | 0.2 | % |
Restructuring-related charges | 1.5 |
| | 8.0 |
| | (81.3 | )% | | 0.1 | % | * | 0.8 | % | * | — |
| | 1.5 |
| | (100.0 | )% | | — |
| * | 0.1 | % |
Other corporate staff costs and expenses | 70.2 |
| | 88.1 |
| | (20.3 | )% | | 6.6 | % | * | 8.3 | % | * | 82.5 |
| | 60.0 |
| | 37.6 | % | | 7.5 | % | * | 5.7 | % |
Corporate expenses | 73.5 |
| | 100.4 |
| | (26.8 | )% | | 7.0 | % | * | 9.5 | % | * | 82.5 |
| | 63.3 |
| | 30.3 | % | | 7.5 | % | * | 6.0 | % |
Total operating income | $ | 116.6 |
| | $ | 107.4 |
| | 8.5 | % | | 11.0 | % | * | 10.2 | % | * | $ | 108.3 |
| | $ | 116.6 |
| | (7.1 | )% | | 9.8 | % | * | 11.0 | % |
Operating margin | 11.0 | % | | 10.2 | % | | | | | | | | 9.8 | % | | 11.0 | % | | | | | | |
______________
* Percentage of consolidated net revenues
Currency translation unfavorably affected total operating income by approximately $9$2 million for the three-month period ended February 28, 201626, 2017.
Regional operating income.
Americas. Currency translation unfavorably affected operating income in the region by approximately $2 million for the three-month period ended February 28, 2016. Lower26, 2017. The increase in operating income is primarily reflected higherdue to lower SG&A inexpense for the region primarily advertising.reflecting the timing of production and media spend for our campaigns.
Europe. Currency translation unfavorably affectedhad no significant impact on operating income in the region by approximately $4 million for the three-month period ended February 28, 2016. Excluding the effect of currency,26, 2017. The increase in operating income and operating margin increasedis due to the region's higher net revenues and an improvement ingross margin partially offset by higher SG&A expense for the region's gross margin.region to support retail expansion.
Asia. Currency translation unfavorably affected operating income in the region by approximately $4$1 million for the three-month period ended February 28, 2016. Excluding the effect of currency,26, 2017. The decrease in operating income increasedis due to higher SG&A expense for the region's higher net revenues.region to support retail expansion.
Corporate. Corporate expenses represent costs that aremanagement does not attributedattribute to any of our regional operating segments. Included in corporate expenses are restructuring charges, the consulting fees incurred for our centrally-led cost-savings and productivity projects, andrestructuring-related charges, other corporate staff costs.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 28, 2016.26, 2017. As compared to the same prior-year period, corporate expenses increased primarily reflected lowerdue to purchasing variances related to our global sourcing organization costs as well as lower restructuring and restructuring-related charges.organization's procurement of inventory on behalf of our regions.
Interest expense
Interest expense was $14.9$19.9 million for the three-month period ended February 28, 201626, 2017, as compared to $23.3$14.9 million for the same period in 20152016. The decreaseincrease in interest expense was primarily due to lower average borrowing rates in 2016, resulting from our debt refinancing activities in 2015, and lowerhigher interest expense onrelated to our deferred compensation plans.
TheOur weighted-average interest rate on average borrowings outstanding forduring the three-month periodthree months ended February 28, 2016,26, 2017 was 6.26%6.67%, as compared to 7.65% for6.26% in the same period in 2015.2016.
Other expense,income (expense), net
Other expense,income (expense), net, primarily consists of foreign exchange management activities and transactions. For the three-month period ended February 28, 2016,26, 2017, we recorded net expenseincome of $2.2$0.4 million, as compared to $26.0expense of $2.2 million for the same prior-year period. The income in the three-month period in 2017 primarily reflected net expensegains on our foreign currency denominated balances, mostly offset by net losses on our foreign exchange derivatives. The expenses in the three-month period in 2016 primarily reflected net losses on our foreign currency denominated balances, partially offset by net gains on our foreign exchange derivatives. The net expense in 2015 primarily reflected net losses on our foreign currency denominated balances due to the weakening of various foreign currencies, particularly the Euro, against the U.S. Dollar.
Income tax expense
The effective income tax rate was 33.4%32.3% for the three months ended February 28, 2016,26, 2017, compared to 34.1%33.4% for the same period ended March 1, 2015.February 28, 2016. The decrease in the effective tax rate in 2017 as compared to 2016 was primarily due to lower tax rates on foreign earnings.
Liquidity and Capital Resources
Liquidity outlook
We believe we will have adequate liquidity over the next twelve months to operate our business and to meet our cash requirements.
Cash sources
We are a privately-held corporation. We have historically relied primarily on cash flows from operations, borrowings under credit facilities, issuances of notes and other forms of debt financing. We regularly explore financing and debt reduction alternatives, including new credit agreements, unsecured and secured note issuances, equity financing, equipment and real estate financing, securitizations and asset sales.
We are borrowers under a senior secured revolving credit facility. The 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 the 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 28, 2016,26, 2017, we haddid not have any borrowings of $20.0 million under the credit facility, all of which is classified as short-term debt.facility. Unused availability under the credit facility was $739.7$746.1 million,, as our total availability of $798.2$799.1 million,, based on collateral levels as defined by the agreement, was reduced by $58.5$53.0 million of other credit-related instruments.
As of February 28, 2016,26, 2017, we had cash and cash equivalents totaling approximately $271.1$368.6 million,, resulting in a total liquidity position (unused availability and cash and cash equivalents) of approximately $1.0 billion.$1.1 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 20062016 Equity Incentive Plan, as amended to date ("EIP"), and, if market conditions warrant, occasional investments in, or acquisitions of, business ventures in our line of business. In addition, we regularly evaluate our ability to pay dividends or repurchase stock, all consistent with the terms of our debt agreements.
There have been no material changes to our estimated cash requirements for 20162017 from those disclosed in our 20152016 Annual Report on Form 10-K, except that potential payments in 20162017 under the terms of the EIP have been reduced and are now estimated to be insignificant.range up to approximately $30 million.
Cash flows
The following table summarizes, for the periods indicated, selected items in our consolidated statements of cash flows:
|
| | | | | | | | | |
| | Three Months Ended | |
| | February 28, 2016 | | March 1, 2015 | |
| | (Dollars in millions) | |
| Cash provided by operating activities | $ | 46.1 |
| | $ | 37.6 |
| |
| Cash used for investing activities | (17.8 | ) | | (25.1 | ) | |
| Cash used for financing activities | (73.6 | ) | | (96.5 | ) | |
| Cash and cash equivalents | 271.1 |
| | 202.7 |
| |
|
| | | | | | | | | |
| | Three Months Ended | |
| | February 26, 2017 | | February 28, 2016 | |
| | (Dollars in millions) | |
| Cash provided by operating activities | $ | 49.0 |
| | $ | 46.1 |
| |
| Cash used for investing activities | (16.0 | ) | | (17.8 | ) | |
| Cash used for financing activities | (42.5 | ) | | (73.6 | ) | |
| Cash and cash equivalents | 368.6 |
| | 271.1 |
| |
Cash flows from operating activities
Cash provided by operating activities was $46.1$49.0 million for the three-month period in 2016,2017, as compared to $37.6$46.1 million for the same period in 2015. Cash provided by2016. The increase reflects lower payments to vendors for operating activities increased compared to the prior year primarily due toexpenses and an increase in cash received from customers, reflecting our higher beginning accounts receivable balance and higher constant-currency revenues, as well as lower payments to vendors due to timing and lower cash payments for our global productivity initiative. The increase in cash provided by operating activities was partially offset by an increase in cash used for inventory, reflecting our higher inventory levels due to earlier timing of inventory receipts and lower-than-anticipated sales, particularly in the Americas.customers.
Cash flows from investing activities
Cash used for investing activities was $17.8$16.0 million for the three-month period in 2016,2017, as compared to $25.1$17.8 million for the same period in 2015.2016. The decrease in cash used for investing activities as compared to the prior year primarily reflected realized gains onincreased investment in information technology systems and distribution and proceeds from the settlement of our forward foreign exchange contracts, partially offset by increased investment in information technology systems and distribution.contracts.
Cash flows from financing activities
Cash used for financing activities was $73.6$42.5 million for the three-month period in 2016,2017, as compared to $96.5$73.6 million for the same period in 2015.2016. Cash used in 2017 primarily reflected the payment of a $35.0 million cash dividend. Cash used in 2016 and 2015 primarily reflected the utilization ofnet repayments on our senior revolving credit facility partially offset by proceeds from our senior revolving credit facility.
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 $1.1$1.04 billion as of February 28, 2016,26, 2017, we had fixed-rate debt of $1.1$1.02 billion (98%(98.5% of total debt), net of capitalized debt issuance costs, and variable-rate debt of $26.4$15.8 million (2%(1.5% of total debt). As of February 28, 2016,26, 2017, our required aggregate debt principal payments on our unsecured long-term debt were $1.0$1.02 billion in years after 2021. Current maturities of our 4.25% Yen-denominated Eurobonds due 2016 will be paid in 2016.2022. Short-term debt of $20.0 million borrowed under our senior secured revolving credit facility was expected to be repaid over the next twelve months, and short-term borrowings of $20.8$34.2 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 compliance with all of these covenants as of February 26, 2017.
Subsequent Event - Senior Notes due 2027
On February 28, 2016.2017, we issued €475 million in aggregate principal amount of 3.375% senior notes due 2027. On March 3, 2017, we completed a tender offer for $370.3 million of the 6.875% senior notes due 2022 and the remaining $154.7 million was called on March 31, 2017 for redemption on May 1, 2017. The remaining proceeds from the issuances of Senior Notes due 2027 as well as cash on hand will be used to complete the call redemption. The Company will record a net loss on the early extinguishment of debt of approximately $23 million. The estimated loss includes approximately $21 million of tender and call premiums on the retired debt. Debt issuance costs for the Senior Notes due 2027 are estimated at approximately $8 million. Refer to Note 14 "Subsequent Events" for more information.
Off-Balance Sheet Arrangements, Guarantees and Other Contingent Obligations
There have been no significant changes to our off-balance sheet arrangements or contractual commitments from those disclosed in our 20152016 Annual Report on Form 10-K.
Critical Accounting Policies and 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. There have been no significant changes to our critical accounting policies from those disclosed in our 20152016 Annual Report on Form 10-K.
Recently Issued Accounting Standards
See Note 1 to our unaudited consolidated financial statements included in this report for recently issued accounting standards, including the expected dates of adoption and estimated effects on our consolidated financial statements.
FORWARD-LOOKING STATEMENTS
Certain matters discussed in this report, including (without limitation) statements under “Management’s Discussion and Analysis of Financial Condition and Results of Operations” contain forward-looking statements. Although we believe that, in making any such statements, our expectations are based on reasonable assumptions, any such statement may be influenced by factors that could cause actual outcomes and results to be materially different from those projected.
These forward-looking statements include statements relating to our anticipated financial performance and business prospects, including profitable growth, strong cash flow, debt reduction, currency values and financial impact, foreign exchange counterparty exposures, the benefits and timing of our global productivity initiative, the impact of pending legal proceedings, adequate liquidity levels, dividends and/or statements preceded by, followed by or that include the words “believe”, "will", "so we can", "when", “anticipate”"anticipate", “intend”"intend", “estimate”"estimate", “expect”"expect", “project”"project", “could”"could", “plans”"plans", “seeks”"seeks" and similar expressions. These forward-looking statements speak only as of the date stated, and we do not undertake any obligation to update or revise publicly any forward-looking statements, whether as a result of new information, future events or otherwise, even if experience or future events make it clear that any expected results expressed or implied by these forward-looking statements will not be realized. Although we believe that the expectations reflected in these forward-looking statements are reasonable, these expectations may not prove to be correct or we may not achieve the financial results, savings or other benefits anticipated in the forward-looking statements. These forward-looking statements are necessarily estimates reflecting the best judgment of our senior management and involve a number of risks and uncertainties, some of which may be beyond our control. These risks and uncertainties, including those disclosed under “Risk Factors” in our Annual Report on Form 10-K for the fiscal year ended November 29, 201527, 2016, and our other filings with the Securities and Exchange Commission, could cause actual results to differ materially from those suggested by the forward-looking statements and include, without limitation:
changes in general economic and financial conditions, and the resulting impact on the level of discretionary consumer spending for apparel and pricing trendstrend fluctuations, and our ability to plan for and respond to the impact of those changes;
our ability to timelyeffectively implement and effectively implementmanage our global productivity initiativeand outsourcing actions as planned, which isare intended to increase productivity and efficiency in our global operations, take advantage of lower-cost service-delivery models in our distribution network and streamline our procurement practices to maximize efficiency in our global operations, without business disruption or mitigation to such disruptions;
consequences of impacts to the businesses of our wholesale customers, including significant store closures or a significant decline in a wholesale customer's financial condition leading to restructuring actions, bankruptcies, liquidations or other unfavorable events for our wholesale customers, caused by factors such as inability to secure financing, decreased discretionary consumer spending, inconsistent traffic patterns and an increase in promotional activity as a result of decreased traffic, pricing fluctuations, general economic and financial conditions and changing consumer preferences;
our and our wholesale customers' decisions to modify strategies and adjust product mix and pricing, and our ability to manage any resulting product transition costs, including liquidating inventory or increasing promotional activity;
our ability to purchase products through our independent contract manufacturers that are made with quality raw materials and our ability to mitigate the variability of costs related to manufacturing, sourcing, and raw materials supply and to manage consumer response to such mitigating actions;
our ability to gauge and adapt to changing U.S. and international retail environments and fashion trends and changing consumer preferences in product, price-points, as well as in-store and digital shopping experiences;
our ability to respond to price, innovation and other competitive pressures in the global apparel industry, on and from our key customers and in our key markets;
our ability to increase the number of dedicated stores for our products, including through opening and profitably operating company-operated stores;
consequences of foreign currency exchange and interest rate fluctuations;
our ability to successfully prevent or mitigate the impacts of data security breaches;
our ability to attract and retain key executives and other key employees;
our ability to protect our trademarks and other intellectual property;
the impact of the variables that affect the net periodic benefit cost and future funding requirements of our postretirement benefits and pension plans;
our dependence on key distribution channels, customers and suppliers;
our ability to utilize our tax credits and net operating loss carryforwards;
ongoing or future litigation matters and disputes and regulatory developments;
changes in or application of trade and tax laws;laws, including potential increases in import tariffs or taxes; and
political, social and economic instability, or natural disasters, in countries where we or our customers do business.
Our actual results might differ materially from historical performance or current expectations. We do not undertake any obligation to update or revise publicly any forward-looking statements, whether as a result of new information, future events or otherwise.
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Item 3. | QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK |
There have been no material changes in our primary market risk exposures or how those exposures are managed from the information disclosed in our 20152016 Annual Report on Form 10-K.
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Item 4. | CONTROLS AND PROCEDURES |
Evaluation of Disclosure Controls and Procedures
We maintain disclosure controls and procedures (as defined in Rules 13a-15(e) and 15d-15(e) under the Securities and Exchange Act of 1934) that are designed to provide reasonable assurance that information required to be disclosed in the reports we file or submit to the SEC is recorded, processed, summarized and reported within the time periods specified in the SEC’s rules and forms, and that such information is accumulated and communicated to our management, including our chief executive officer and chief financial officer, as appropriate to allow timely decisions regarding required disclosure.
We have evaluated, under the supervision and with the participation of management, including our chief executive officer and our chief financial officer, the effectiveness of the design and operation of our disclosure controls and procedures as of February 28, 201626, 2017. Based on that evaluation, our chief executive officer and our chief financial officer concluded that as of February 28, 201626, 2017, our disclosure controls and procedures were effective at the reasonable assurance level.
Changes in Internal Controls
We maintain a system of internal control over financial reporting that is designed to provide reasonable assurance that our books and records accurately reflect our transactions and that our established policies and procedures are followed. We continued the transition of certain global business service activities towith our outsourced service provider during our last fiscal quarter, and this resulted in a change to our processes and control environment. There were no other changes to our internal control over financial reporting during our last fiscal quarter that have materially affected, or are reasonably likely to materially affect, our internal control over financial reporting.
PART II — OTHER INFORMATION
Litigation. There have been no material developments with respect to the information previously reported in our 20152016 Annual Report on Form 10-K related to legal proceedings.
In the ordinary course of business, we have various pending cases involving contractual matters, facility and employee-related matters, distribution matters, product liability claims, trademark infringement and other matters. We do not believe any of these pending legal proceedings will have a material impact on our financial condition, results of operations or cash flows.
There have been no material changes in our risk factors from those disclosed in our 20152016 Annual Report on Form 10-K.
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Item 2. | UNREGISTERED SALES OF EQUITY SECURITIES AND USE OF PROCEEDS |
On February 9, 2016,1, 2017, our Board approved the award of stock appreciation rights (“SARs”("SARs") representing an aggregate of 871,153 shares of our common, restricted stock units ("RSUs"), and performance restricted stock units ("PRSUs") to certain of our executives. These SARs and RSUs represent 234,031 and 54,705 shares of our common stock, respectively, and the PRSUs represent 109,415 shares of our common stock at target levels of performance and 218,830 shares of our common stock at maximum levels of performance. These awards were made under our 20062016 Equity Incentive Plan (the “Plan”).Plan.
SARs are granted with an exercise price equal to the fair market value of our common stock, as determined under the Plan, on the date of grant. The SARs were granted in two groupsRSUs and are identical except as described below:
522,694PRSUs have an initial grant date value equal to the fair market value on the date of the SARs, referred to as service-vested grant.
SARs were granted with the following vesting schedule: 25% percent of the SAR grant vests annually on the one-yearfirst, second, third, and fourth anniversary of the date of grant,grant.
RSUs were granted with the remaining 75% balancefollowing vesting monthly over 36 months commencingschedule: 100% percent of the RSU grant vests on the month following such anniversary;third anniversary of the date of grant; and
348,459 of the SARs, referred to as performance-based SARs,PRSUs were granted with the following vesting schedule: 50% of the performance-based SARsPRSUs will vest to the extent that the Company has achieved certain goals based on the Company's (i) average earnings before interest and taxes margin percentage and (ii) the compound annual growth rate of the Company's net revenues, each over fiscal years 2016, 2017, and 2018 and the remaining2019 and 50% of the performance-based SARsPRSUs will vest based on the Company's performance against a three-year market-related relative total shareholder return goal. Our Board will determine the extent to which the goals under the performance-based SARsPRSUs have been satisfied on or before March 1, 2019.2020.
Upon the exercise of a SAR, the recipient will be entitled to receive common stock with an aggregate fair market value equal to the excess of the per share fair market value of the Company's common stock on the date of exercise over the exercise price, multiplied by the number of SARs exercised. On the vesting date of RSUs and any earned PRSUs, the recipient will be entitled to receive one share of common stock for every RSU and PRSU that vests.
We will not receive any proceeds from the issuance or vesting of RSUs, PRSUs, or SARs. The RSUs, PRSUs, and SARs were granted under Section 4(a)(2) of the Securities Act of 1933, as amended. Section 4(a)(2) generally provides an exemption from registration for transactions by an issuer not involving any public offering.
We repurchased a total of 2,802 shares of our common stock during the quarter in connection with the exercise of call and put rights under our 2016 Equity Incentive Plan, as amended and restated to date; of the total shares repurchased during the quarter, all were purchased in February 2017.
We are a privately-held corporation; there is no public trading of our common stock. As of April 7, 2016,5, 2017, we had 37,452,31937,612,891 shares outstanding.
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Item 3. | DEFAULTS UPON SENIOR SECURITIES |
None.
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Item 4. | MINE SAFETY DISCLOSURES |
Not applicable.
None.
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10.1 | | Form of Stock Appreciation Right Agreement under the 2016 Equity Incentive Plan. Incorporated by reference to Exhibit 10.1 to Registrant's Current Report on Form 8-K filed with the Commission on January 31, 2017.* |
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10.2 | | Form of Restricted Stock Unit Award Agreement under the 2016 Equity Incentive Plan. Incorporated by reference to Exhibit 10.2 to Registrant's Current Report on Form 8-K filed with the Commission on January 31, 2017.* |
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10.3 | | Form of Performance Vested Restricted Stock Unit Award Agreement under the 2016 Equity Incentive Plan. Incorporated by reference to Exhibit 10.3 to Registrant's Current Report on Form 8-K filed with the Commission on January 31, 2017.* |
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31.1 | | Certification of Chief Executive Officer pursuant to Section 302 of the Sarbanes-Oxley Act of 2002. Filed herewith. |
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31.2 | | Certification of Chief Financial Officer pursuant to Section 302 of the Sarbanes-Oxley Act of 2002. Filed herewith. |
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32 | | Certification of Chief Executive Officer and Chief Financial Officer pursuant to Section 18 U.S.C. 1350, as adopted pursuant to Section 906 of the Sarbanes-Oxley Act of 2002. Furnished herewith. |
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101.INS | | XBRL Instance Document. Filed herewith. |
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101.SCH | | XBRL Taxonomy Extension Schema Document. Filed herewith. |
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101.CAL | | XBRL Taxonomy Extension Calculation Linkbase Document. Filed herewith. |
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101.DEF | | XBRL Taxonomy Extension Definition Linkbase Document. Filed herewith. |
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101.LAB | | XBRL Taxonomy Extension Label Linkbase Document. Filed herewith. |
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101.PRE | | XBRL Taxonomy Extension Presentation Linkbase Document. Filed herewith. |
| | * Management contract, compensatory plan or arrangement. |
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SIGNATURE
Pursuant to the requirements of the Securities Exchange Act of 1934, the registrant has duly caused this report to be signed on its behalf by the undersigned thereunto duly authorized.
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Date: | April 12, 201611, 2017 | | LEVI STRAUSS & Co. |
| | | (Registrant) |
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| | By: | /s/ WADE W. WEBSTER |
| | | Wade W. Webster Senior Vice President and Controller (Principal Accounting Officer) |
EXHIBIT INDEX
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10.1 | | Form of Stock Appreciation Right Agreement under the 2016 Equity Incentive Plan. Incorporated by reference to Exhibit 10.1 to Registrant's Current Report on Form 8-K filed with the Commission on January 31, 2017.* |
| | |
10.2 | | Form of Restricted Stock Unit Award Agreement under the 2016 Equity Incentive Plan. Incorporated by reference to Exhibit 10.2 to Registrant's Current Report on Form 8-K filed with the Commission on January 31, 2017.* |
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10.3 | | Form of Performance Vested Restricted Stock Unit Award Agreement under the 2016 Equity Incentive Plan. Incorporated by reference to Exhibit 10.3 to Registrant's Current Report on Form 8-K filed with the Commission on January 31, 2017.* |
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31.1 | | Certification of Chief Executive Officer pursuant to Section 302 of the Sarbanes-Oxley Act of 2002. Filed herewith. |
| | |
31.2 | | Certification of Chief Financial Officer pursuant to Section 302 of the Sarbanes-Oxley Act of 2002. Filed herewith. |
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32 | | Certification of Chief Executive Officer and Chief Financial Officer pursuant to Section 18 U.S.C. 1350, as adopted pursuant to Section 906 of the Sarbanes-Oxley Act of 2002. Furnished herewith. |
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101.INS | | XBRL Instance Document. Filed herewith. |
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101.SCH | | XBRL Taxonomy Extension Schema Document. Filed herewith. |
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101.CAL | | XBRL Taxonomy Extension Calculation Linkbase Document. Filed herewith. |
| | |
101.DEF | | XBRL Taxonomy Extension Definition Linkbase Document. Filed herewith. |
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101.LAB | | XBRL Taxonomy Extension Label Linkbase Document. Filed herewith. |
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101.PRE | | XBRL Taxonomy Extension Presentation Linkbase Document. Filed herewith. |
| | * Management contract, compensatory plan or arrangement. |
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