10-Q 1 a3q2016form10-q.htm 10-Q Document

 
 
 
 
 
 
 
 
 
 
UNITED STATES SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
_________________
Form 10-Q
(Mark One)
 þ
 
QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934
For the Quarterly Period Ended August 28, 2016
or
 ¨
 
TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934
Commission file number: 002-90139
_________________
LEVI STRAUSS & CO.
(Exact Name of Registrant as Specified in Its Charter)
DELAWARE
  
94-0905160
(State or Other Jurisdiction of
Incorporation or Organization)
  
(I.R.S. Employer
Identification No.)
1155 Battery Street, San Francisco, California 94111
(Address of Principal Executive Offices) (Zip Code)
(415) 501-6000
(Registrant’s Telephone Number, Including Area Code)
None
(Former Name, Former Address and Former Fiscal Year, if Changed Since Last Report)
_________________
Indicate by check mark whether the registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days.    Yes  ¨    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):
 
 
 
 
 
 
 
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 — 37,470,158 shares outstanding on October 6, 2016
 
 
 
 
 
 
 
 
 
 



LEVI STRAUSS & CO. AND SUBSIDIARIES
INDEX TO FORM 10-Q
FOR THE QUARTERLY PERIOD ENDED AUGUST 28, 2016
 
 
 
 
Page
Number
 
 
 
 
 
 
Item 1.
 
 
 
 
 
 
 
 
 
 
 
 
Item 2.
 
Item 3.
 
Item 4.
 
 
 
 
 
 
Item 1.
 
Item 1A.
 
Item 2.
 
Item 3.
 
Item 4.
 
Item 5.
 
Item 6.
 
 



PART I — FINANCIAL INFORMATION

Item 1.
CONSOLIDATED FINANCIAL STATEMENTS
LEVI STRAUSS & CO. AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEETS
 
(Unaudited)
 
 
 
August 28,
2016
 
November 29,
2015
 
(Dollars in thousands)
ASSETS
Current Assets:
 
 
 
Cash and cash equivalents
$
271,640


$
318,571

Trade receivables, net of allowance for doubtful accounts of $13,370 and $11,025
445,238


498,196

Inventories:



Raw materials
3,522


3,368

Work-in-process
3,408


3,031

Finished goods
844,240


600,460

Total inventories
851,170


606,859

Other current assets
105,809


104,523

Total current assets
1,673,857


1,528,149

Property, plant and equipment, net of accumulated depreciation of $845,158 and $811,013
384,501


390,829

Goodwill
236,066


235,041

Other intangible assets, net
43,033


43,350

Non-current deferred tax assets, net
556,556


580,640

Other non-current assets
95,360


106,386

Total assets
$
2,989,373


$
2,884,395

 
 
 
 
LIABILITIES, TEMPORARY EQUITY AND STOCKHOLDERS’ EQUITY
Current Liabilities:
 
 
 
Short-term debt
$
61,235


$
114,978

Current maturities of long-term debt
39,791


32,625

Accounts payable
269,737


238,309

Accrued salaries, wages and employee benefits
163,029


182,430

Restructuring liabilities
8,603


20,141

Accrued interest payable
21,345


5,510

Accrued income taxes
18,531


6,567

Other accrued liabilities
254,165


245,607

Total current liabilities
836,436


846,167

Long-term debt
1,005,902


1,004,938

Long-term capital leases
14,782


12,320

Postretirement medical benefits
96,718


105,240

Pension liability
340,142


358,443

Long-term employee related benefits
68,167


73,342

Long-term income tax liabilities
23,314


26,312

Other long-term liabilities
60,930


56,987

Total liabilities
2,446,391


2,483,749

Commitments and contingencies



 
Temporary equity
82,829


68,783

 
 
 
 
Stockholders’ Equity:
 
 
 
Levi Strauss & Co. stockholders’ equity
 
 
 
Common stock — $.01 par value; 270,000,000 shares authorized; 37,467,442 shares and 37,460,145 shares issued and outstanding
375


375

Additional paid-in capital


3,291

Retained earnings
834,488


705,668

Accumulated other comprehensive loss
(377,093
)

(379,066
)
Total Levi Strauss & Co. stockholders’ equity
457,770


330,268

Noncontrolling interest
2,383


1,595

Total stockholders’ equity
460,153


331,863

Total liabilities, temporary equity and stockholders’ equity
$
2,989,373


$
2,884,395

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


3


LEVI STRAUSS & CO. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF INCOME
 
 
Three Months Ended
 
Nine Months Ended
 
August 28,
2016
 
August 30,
2015
 
August 28,
2016
 
August 30,
2015
 
(Dollars in thousands)
(Unaudited)
Net revenues
$
1,185,111


$
1,142,012


$
3,253,198


$
3,209,267

Cost of goods sold
592,305


568,655


1,583,596


1,598,614

Gross profit
592,806


573,357


1,669,602


1,610,653

Selling, general and administrative expenses
448,525


454,530


1,349,039


1,329,474

Restructuring, net
(627
)

4,054


1,030


11,346

Operating income
144,908


114,773


319,533


269,833

Interest expense
(19,170
)

(17,138
)

(54,483
)

(62,363
)
Loss on early extinguishment of debt






(14,002
)
Other income (expense), net
4,679


(8,316
)

6,755


(26,705
)
Income before income taxes
130,417


89,319


271,805


166,763

Income tax expense
32,713


30,858


76,750


58,567

Net income
97,704


58,461


195,055


108,196

Net loss (income) attributable to noncontrolling interest
614


(286
)

(176
)

62

Net income attributable to Levi Strauss & Co.
$
98,318


$
58,175


$
194,879


$
108,258














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


4


LEVI STRAUSS & CO. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF COMPREHENSIVE INCOME
 
 
Three Months Ended
 
Nine Months Ended
 
August 28,
2016
 
August 30,
2015
 
August 28,
2016
 
August 30,
2015
 
(Dollars in thousands)
(Unaudited)
Net income
$
97,704


$
58,461


$
195,055


$
108,196

Other comprehensive income (loss), before related income taxes:







Pension and postretirement benefits
3,356


4,678


10,673


13,613

Net investment hedge (losses) gains
(804
)

(319
)

(1,718
)

285

Foreign currency translation losses
(33
)

(14,034
)

(1,731
)

(23,534
)
Unrealized gains (losses) on marketable securities
675

 
(1,389
)
 
356


(1,115
)
Total other comprehensive income (loss), before related income taxes
3,194

 
(11,064
)
 
7,580


(10,751
)
Income taxes related to items of other comprehensive income
(1,356
)
 
(2,083
)
 
(4,994
)

(3,384
)
Comprehensive income, net of income taxes
99,542

 
45,314

 
197,641


94,061

Comprehensive loss (income) attributable to noncontrolling interest
333

 
(331
)
 
(788
)

98

Comprehensive income attributable to Levi Strauss & Co.
$
99,875

 
$
44,983

 
$
196,853


$
94,159


































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


5


LEVI STRAUSS & CO. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS
 
Nine Months Ended
 
August 28,
2016
 
August 30,
2015
 
(Dollars in thousands)
(Unaudited)
Cash Flows from Operating Activities:
 
 
 
Net income
$
195,055

 
$
108,196

Adjustments to reconcile net income to net cash provided by operating activities:
 
 
 
Depreciation and amortization
75,966

 
75,448

Asset impairments
1,259

 
1,912

Gain on sale of assets
(6,024
)
 
(8,607
)
Unrealized foreign exchange losses
17,702

 
11,667

Realized gain on settlement of forward foreign exchange contracts not designated for hedge accounting
(21,419
)
 
(6,107
)
Employee benefit plans’ amortization from accumulated other comprehensive loss and settlement loss
11,240

 
12,764

Employee benefit plans’ curtailment loss
35

 

Noncash restructuring (gain) charges
(396
)
 
269

Noncash loss on early extinguishment of debt

 
3,448

Amortization of premium, discount and debt issuance costs
1,909

 
1,546

Stock-based compensation
6,045

 
12,827

Allowance for doubtful accounts
2,622

 
890

Change in operating assets and liabilities:
 
 
 
Trade receivables
40,334

 
62,259

Inventories
(255,460
)
 
(41,789
)
Other current assets
248

 
3,110

Other non-current assets
(12,504
)
 
(9,080
)
Accounts payable and other accrued liabilities
77,355

 
(35,209
)
Restructuring liabilities
(13,618
)
 
(31,314
)
Income tax liabilities
34,309

 
16,697

Accrued salaries, wages and employee benefits and long-term employee related benefits
(55,595
)
 
(56,415
)
Other long-term liabilities
3,756

 
(13,402
)
Other, net

 
1,221

Net cash provided by operating activities
102,819

 
110,331

Cash Flows from Investing Activities:
 
 
 
Purchases of property, plant and equipment
(74,797
)
 
(66,405
)
Proceeds from sales of assets
17,279

 
8,977

Proceeds on settlement of forward foreign exchange contracts not designated for hedge accounting
21,419

 
6,107

Acquisitions, net of cash acquired
(47
)
 
(2,271
)
Net cash used for investing activities
(36,146
)
 
(53,592
)
Cash Flows from Financing Activities:
 
 
 
Proceeds from issuance of long-term debt

 
500,000

Repayments of long-term debt and capital leases
(2,409
)
 
(527,315
)
Proceeds from senior revolving credit facility
180,000

 
295,000

Repayments of senior revolving credit facility
(249,000
)
 
(281,000
)
Proceeds from short-term credit facilities
24,905

 
20,292

Repayments of short-term credit facilities
(14,216
)
 
(14,137
)
Other short-term borrowings, net
3,274

 
(987
)
Debt issuance costs

 
(4,605
)
Change in restricted cash, net
2,977

 
1,381

Repurchase of common stock
(1,402
)
 
(2,294
)
Excess tax benefits from stock-based compensation
214

 
805

Dividend to stockholders
(60,000
)
 
(50,000
)
Net cash used for financing activities
(115,657
)
 
(62,860
)
Effect of exchange rate changes on cash and cash equivalents
2,053

 
(19,579
)
Net decrease in cash and cash equivalents
(46,931
)
 
(25,700
)
Beginning cash and cash equivalents
318,571

 
298,255

Ending cash and cash equivalents
$
271,640

 
$
272,555

 
 
 
 
Noncash Investing Activity:
 
 
 
Purchases of property, plant and equipment not yet paid at end of period
$
19,401

 
$
17,779

 
 
 
 
Supplemental disclosure of cash flow information:
 
 
 
Cash paid for interest during the period
$
34,667

 
$
44,562

Cash paid for income taxes during the period, net of refunds
41,090

 
44,827


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


6


LEVI STRAUSS & CO. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
FOR THE QUARTERLY PERIOD ENDED AUGUST 28, 2016
NOTE 1: SIGNIFICANT ACCOUNTING POLICIES
Nature of Operations
Levi Strauss & Co. (the “Company”) is one of the world’s largest brand-name apparel companies. The Company designs, markets and sells – directly or through third parties and licensees – products that include jeans, casual and dress pants, tops, shorts, skirts, jackets, footwear and related accessories for men, women and children around the world under the Levi’s®, Dockers®, Signature by Levi Strauss & Co.™ and Denizen® brands. The Company operates its business through three geographic regions: Americas, Europe and Asia.
Basis of Presentation and Principles of Consolidation
The unaudited consolidated financial statements of the Company and its wholly-owned and majority-owned foreign and domestic subsidiaries are prepared in conformity with generally accepted accounting principles in the United States (“U.S. GAAP”) for interim financial information. In the opinion of management, all adjustments necessary for a fair statement of the financial position and the results of operations for the periods presented have been included. These unaudited consolidated financial statements should be read in conjunction with the audited consolidated financial statements of the Company for the year ended November 29, 2015, included in the Annual Report on Form 10-K filed with the Securities and Exchange Commission (“SEC”) on February 11, 2016.
The unaudited consolidated financial statements include the accounts of the Company and its subsidiaries. All significant intercompany transactions have been eliminated. Management believes the disclosures are adequate to make the information presented herein not misleading. The results of operations for the three and nine months ended August 28, 2016, may not be indicative of the results to be expected for any other interim period or the year ending November 27, 2016.
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 2016 and 2015 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 statements of comprehensive income for all periods presented have been conformed to show each component of other comprehensive income before related income tax effects with one amount shown for aggregate income tax expense related to the total of other comprehensive income items. Each component was 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.
Use of Estimates
The preparation of financial statements in conformity with U.S. GAAP requires management to make estimates and assumptions that affect the amounts reported in the consolidated financial statements and the related notes to the consolidated financial statements. Estimates are based upon historical factors, current circumstances and the experience and judgment of the Company’s management. Management evaluates its estimates and assumptions on an ongoing basis and may employ outside experts to assist in its evaluations. Changes in such estimates, based on more accurate future information, or different assumptions or conditions, may affect amounts reported in future periods.


7




LEVI STRAUSS & CO. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS — (continued)
FOR THE QUARTERLY PERIOD ENDED AUGUST 28, 2016

Recently Issued Accounting Standards
There have been no developments to recently issued accounting standards, including the expected dates of adoption and estimated effects on the Company’s consolidated financial statements and footnote disclosures, from those disclosed in the 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 Financial Accounting Standards Board ("FASB") issued Accounting Standards Update No. ("ASU") 2016-06, Derivatives and Hedging (Topic 815) – Contingent Put and Call Options in Debt Instruments, 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.
In March 2016, the FASB issued ASU 2016-09, Compensation – Stock Compensation (Topic 718). 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 adopting this new accounting standard will have on its consolidated financial statements and footnote disclosures.
First Quarter of 2019
In March 2016, the FASB issued ASU 2016-04, Liabilities – Extinguishment of Liabilities (Subtopic 405-20): Recognition of Breakage for Certain Prepaid Stored-Value Products. ASU 2016-04 aligns recognition 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, certain 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. The Company is currently assessing the impact that adopting this new accounting standard will have on its consolidated financial statements and footnote disclosures.

In August 2016, the FASB issued ASU 2016-15, Statement of Cash Flows (Topic 230) Classification of Certain Cash Receipts and Cash Payments. ASU 2016-15 eliminates the diversity in practice related to the classification of certain cash receipts and payments for debt prepayment or extinguishment costs, the maturing of a zero coupon bond, the settlement of contingent liabilities arising from a business combination, proceeds from insurance settlements, distributions from certain equity method investees and beneficial interests obtained in a financial asset securitization. ASU 2016-15 designates the appropriate cash flow classification, including requirements to allocate certain components of these cash receipts and payments among operating, investing and financing activities. The retrospective transition method, requiring adjustment to all comparative periods presented, is required unless it is impracticable for some of the amendments, in which case those amendments would be prospectively as of the earliest date practicable. The Company is currently assessing the impact that adopting this new accounting standard will have on its consolidated financial statements and footnote disclosures.

The FASB has issued several more amendments to the new revenue standard ASU 2014-09, as amended by ASU 2015-14:
March 2016 - ASU 2016-08, Revenue from Contracts with Customers (Topic 606): Principal versus Agent Considerations (Reporting Revenue Gross versus Net) . ASU 2016-08 clarifies the implementation guidance on principal versus agent considerations. The guidance includes indicators to assist an entity in determining whether it controls a specified good or service before it is transferred to customers.


8




LEVI STRAUSS & CO. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS — (continued)
FOR THE QUARTERLY PERIOD ENDED AUGUST 28, 2016

April 2016 - ASU 2016-10, Revenue from Contracts with Customers (Topic 606): Identifying Performance Obligations and Licensing. ASU 2016-10 covers two specific topics: performance obligations and licensing. This amendment includes guidance on immaterial promised goods or services, shipping or handling activities, separately identifiable performance obligations, functional or symbolic intellectual property licenses, sales-based and usage-based royalties, license restrictions (time, use, geographical) and licensing renewals.
May 2016 - ASU 2016-12, Revenue from Contracts with Customers (Topic 606): Narrow Scope Improvements and Practical Expedients. ASU 2016-12 clarifies certain core recognition principles including collectability, sales tax presentation, noncash consideration, contract modifications and completed contracts at transition and disclosures no longer required if the full retrospective transition method is adopted.
The Company is currently assessing the impact that adopting these new accounting standards will have on its consolidated financial statements and footnote disclosures.


First Quarter of 2020
In February 2016, the FASB issued ASU 2016-02, Leases (Topic 842). 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.

First Quarter of 2021
In June 2016, the FASB issued ASU 2016-13, Financial Instruments - Credit Losses (Topic 326): Measurement of Credit Losses on Financial Instruments. ASU 2016-13 amends the impairment model to utilize an expected loss methodology in place of the currently used incurred loss methodology, which will result in the more timely recognition of losses. ASU 2016-13 also applies to employee benefit plan accounting, with an effective date of the first quarter of fiscal 2022. The Company is currently assessing the impact that adopting this new accounting standard will have on its consolidated financial statements, footnote disclosures and employee benefit plans’ accounting.





9




LEVI STRAUSS & CO. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS — (continued)
FOR THE QUARTERLY PERIOD ENDED AUGUST 28, 2016

NOTE 2: FAIR VALUE OF FINANCIAL INSTRUMENTS
The following table presents the Company’s financial instruments that are carried at fair value:
 
August 28, 2016
 
November 29, 2015
 
 
 
Fair Value Estimated
Using
 
 
 
Fair Value Estimated
Using
 
Fair Value
 
Level 1 Inputs(1)
 
Level 2 Inputs(2)
 
Fair Value
 
Level 1 Inputs(1)
 
Level 2 Inputs(2)
 
(Dollars in thousands)
Financial assets carried at fair value
 
 
 
 
 
 
 
 
 
 
 
Rabbi trust assets
$
27,344

 
$
27,344

 
$

 
$
26,013

 
$
26,013

 
$

Forward foreign exchange contracts, net(3)
8,346

 

 
8,346

 
27,131

 

 
27,131

Total
$
35,690

 
$
27,344

 
$
8,346

 
$
53,144

 
$
26,013

 
$
27,131

Financial liabilities carried at fair value
 
 
 
 
 
 
 
 
 
 
 
Forward foreign exchange contracts, net(3)
$
16,455

 
$

 
$
16,455

 
$
7,809

 
$

 
$
7,809

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

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

(3)
The Company’s over-the-counter forward foreign exchange contracts are subject to International Swaps and Derivatives Association, Inc. master agreements. These agreements permit the net settlement of these contracts on a per-institution basis.
The following table presents the carrying value – including related accrued interest – and estimated fair value of the Company’s financial instruments that are carried at adjusted historical cost:
 
August 28, 2016
 
November 29, 2015
 
Carrying
Value
 
Estimated Fair Value
 
Carrying
Value
 
Estimated Fair Value
 
(Dollars in thousands)
Financial liabilities carried at adjusted historical cost
 
 
 
 
 
 
 
Senior revolving credit facility
$
30,062

 
$
30,062

 
$
99,020

 
$
99,020

4.25% Yen-denominated Eurobonds due 2016(1)
40,322

 
40,571

 
32,736

 
33,593

6.875% senior notes due 2022(1)
536,314

 
571,716

 
527,715

 
570,355

5.00% senior notes due 2025(1)
489,614

 
513,685

 
482,145

 
480,945

Short-term borrowings
31,555

 
31,555

 
15,996

 
15,996

Total
$
1,127,867

 
$
1,187,589

 
$
1,157,612

 
$
1,199,909

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



10




LEVI STRAUSS & CO. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS — (continued)
FOR THE QUARTERLY PERIOD ENDED AUGUST 28, 2016

NOTE 3: DERIVATIVE INSTRUMENTS AND HEDGING ACTIVITIES
As of August 28, 2016, the Company had forward foreign exchange contracts to buy $858.9 million and to sell $411.5 million against various foreign currencies. These contracts are at various exchange rates and expire at various dates through February 2018.
The table below provides data about the carrying values of derivative instruments and non-derivative instruments: 
 
August 28, 2016
 
November 29, 2015
 
Assets
 
(Liabilities)
 
Derivative Net Carrying Value
 
Assets
 
(Liabilities)
 
Derivative Net Carrying Value
 
Carrying
Value
 
Carrying
Value
 
 
Carrying
Value
 
Carrying
Value
 
 
(Dollars in thousands)
Derivatives not designated as hedging instruments
 
 
 
 
 
 
 
 
 
 
 
Forward foreign exchange contracts(1)
$
10,239

 
$
(1,893
)
 
$
8,346

 
$
31,808

 
$
(4,677
)
 
$
27,131

Forward foreign exchange contracts(2)
7,072

 
(23,527
)
 
(16,455
)
 
253

 
(8,062
)
 
(7,809
)
Total
$
17,311

 
$
(25,420
)
 
 
 
$
32,061

 
$
(12,739
)
 
 
Non-derivatives designated as hedging instruments
 
 
 
 
 
 
 
 
 
 
 
Yen-denominated Eurobonds
$

 
$
(9,550
)
 
 
 
$

 
$
(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. The table below presents, by type of financial instrument, the gross amounts of the Company's derivative instruments, amounts offset due to master netting arrangements with the Company's various counterparties, and the net amounts recognized on the Company's consolidated balance sheets:
 
August 28, 2016
 
November 29, 2015
 
Gross Amounts of Recognized Assets / (Liabilities)
 
Gross Amounts Offset in the Statement of Financial Position
 
Net Amounts of Assets / (Liabilities) Presented in the Statement of Financial Position
 
Gross Amounts of Recognized Assets / (Liabilities)
 
Gross Amounts Offset in the Statement of Financial Position
 
Net Amounts of Assets / (Liabilities) Presented in the Statement of Financial Position
 
 
 
 
 
 
(Dollars in thousands)
Over-the-counter forward foreign exchange contracts
 
 
 
 
 
 
 
 
 
 
 
Financial assets
$
15,044

 
$
(8,965
)
 
$
6,079

 
$
30,837

 
$
(4,930
)
 
$
25,907

Financial liabilities
(22,577
)
 
8,965

 
(13,612
)
 
(7,599
)
 
4,930

 
(2,669
)
Total
 
 
 
 
$
(7,533
)
 
 
 
 
 
$
23,238

Embedded derivative contracts
 
 
 
 
 
 
 
 
 
 
 
Financial assets
$
2,267

 
$

 
$
2,267

 
$
1,224

 
$

 
$
1,224

Financial liabilities
(2,843
)
 

 
(2,843
)
 
(5,140
)
 

 
(5,140
)
Total
 
 
 
 
$
(576
)
 
 
 
 
 
$
(3,916
)



11




LEVI STRAUSS & CO. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS — (continued)
FOR THE QUARTERLY PERIOD ENDED AUGUST 28, 2016

The table below provides data about the amount of gains and losses related to derivative instruments and non-derivative instruments designated as net investment hedges included in “Accumulated other comprehensive loss” (“AOCI”) on the Company’s consolidated balance sheets, and in “Other income (expense), net” in the Company’s consolidated statements of income:
 
Gain 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
 
Nine Months Ended
August 28,
2016
November 29,
2015
August 28,
2016
 
August 30,
2015
 
August 28,
2016
 
August 30,
2015
 
(Dollars in thousands)
Forward foreign exchange contracts
$
4,637

 
$
4,637

 

 


 


 


Yen-denominated Eurobonds
(20,700
)
 
(18,982
)
 
$
(2,546
)
 
$
(949
)
 
$
(5,441
)
 
$
647

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

 


 


 


Cumulative income taxes
12,509

 
11,849

 

 

 


 


Total
$
(19,305
)
 
$
(18,247
)
 
 
 
 
 
 
 
 
The table below provides data about the amount of gains and losses related to derivatives not designated as hedging instruments included in “Other income (expense), net” in the Company’s consolidated statements of income:
 
Gain or (Loss)
 
Three Months Ended
 
Nine Months Ended
 
August 28,
2016
 
August 30,
2015
 
August 28,
2016
 
August 30,
2015
 
(Dollars in thousands)
Forward foreign exchange contracts:

 

 

 

Realized
$
4,531

 
$
7,475

 
$
21,418

 
$
6,107

Unrealized
(12,763
)
 
(4,373
)
 
(27,032
)
 
18,850

Total
$
(8,232
)
 
$
3,102

 
$
(5,614
)
 
$
24,957




12




LEVI STRAUSS & CO. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS — (continued)
FOR THE QUARTERLY PERIOD ENDED AUGUST 28, 2016

NOTE 4: DEBT 
 
August 28,
2016
 
November 29,
2015
 
(Dollars in thousands)
Long-term debt
 
 
 
Unsecured:
 
 
 
6.875% senior notes due 2022
$
524,483

 
$
524,807

5.00% senior notes due 2025
481,419

 
480,131

Total unsecured long-term debt
$
1,005,902

 
$
1,004,938

Short-term debt and current maturities of long-term debt
 
 
 
Secured:
 
 
 
Senior revolving credit facility
$
30,000

 
$
99,000

Unsecured:
 
 
 
Current maturities of 4.25% Yen-denominated Eurobonds due 2016
39,791

 
32,625

Short-term borrowings
31,235

 
15,978

Total short-term debt and current maturities of long-term debt
$
101,026

 
$
147,603

Total debt
$
1,106,928

 
$
1,152,541

Senior Revolving Credit Facility
The Company’s unused availability under its senior secured revolving credit facility was $665.0 million at August 28, 2016, as the Company’s total availability of $718.5 million was reduced by $53.5 million of letters of credit and other credit usage allocated under the credit facility.
Interest Rates on Borrowings
The Company’s weighted-average interest rate on average borrowings outstanding during the three and nine months ended August 28, 2016, was 6.22% and 6.30% respectively, as compared to 6.17% and 6.85%, respectively, in the same periods of 2015.



13




LEVI STRAUSS & CO. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS — (continued)
FOR THE QUARTERLY PERIOD ENDED AUGUST 28, 2016

NOTE 5: EMPLOYEE BENEFIT PLANS
The following tables summarize the components of net periodic benefit cost and the changes recognized in “Accumulated other comprehensive loss” for the Company’s defined benefit pension plans and postretirement benefit plans: 
 
 
 
 
 
 
 
 
 
Pension Benefits
 
Postretirement Benefits
 
Three Months Ended
 
Three Months Ended
 
August 28,
2016
 
August 30,
2015
 
August 28,
2016
 
August 30,
2015
 
(Dollars in thousands)
Net periodic benefit cost:
 
 
 
 
 
 
 
Service cost
$
2,064

 
$
2,092

 
$
50

 
$
63

Interest cost(1)
9,453

 
11,796

 
805

 
1,147

Expected return on plan assets
(12,105
)
 
(12,715
)
 

 

Amortization of prior service benefit
(15
)
 
(15
)
 

 

Amortization of actuarial loss
3,005

 
3,149

 
742

 
1,127

Curtailment gain
(361
)
 
(118
)
 

 

Net settlement loss (gain)
21

 
(45
)
 

 

Net periodic benefit cost
2,062

 
4,144

 
1,597

 
2,337

Changes in accumulated other comprehensive loss:
 
 
 
 
 
 
 
Actuarial loss

 
(579
)
 

 

Amortization of prior service benefit
15

 
15

 

 

Amortization of actuarial loss
(3,005
)
 
(3,149
)
 
(742
)
 
(1,127
)
Curtailment gain
396

 
118

 

 

Net settlement (loss) gain
(21
)
 
45

 

 

Total recognized in accumulated other comprehensive loss
(2,615
)
 
(3,550
)
 
(742
)
 
(1,127
)
Total recognized in net periodic benefit cost and accumulated other comprehensive loss
$
(553
)
 
$
594

 
$
855

 
$
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.


14




LEVI STRAUSS & CO. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS — (continued)
FOR THE QUARTERLY PERIOD ENDED AUGUST 28, 2016


 
Pension Benefits
 
Postretirement Benefits
 
Nine Months Ended
 
Nine Months Ended
 
August 28,
2016
 
August 30,
2015
 
August 28,
2016
 
August 30,
2015
 
(Dollars in thousands)
Net periodic benefit cost:
 
 
 
 
 
 
 
Service cost
$
6,194

 
$
6,310

 
$
150

 
$
188

Interest cost(1)
28,415

 
35,426

 
2,417

 
3,441

Expected return on plan assets
(36,401
)
 
(38,148
)
 

 

Amortization of prior service benefit
(46
)
 
(46
)
 

 

Amortization of actuarial loss
9,040

 
9,472

 
2,225

 
3,383

Curtailment (gain) loss, net
(361
)
 
269

 

 

Net settlement loss (gain)
21

 
(45
)
 

 

Net periodic benefit cost
6,862

 
13,238

 
4,792

 
7,012

Changes in accumulated other comprehensive loss:
 
 
 
 
 
 
 
Actuarial loss
170

 
(579
)
 

 

Amortization of prior service benefit
46

 
46

 

 

Amortization of actuarial loss
(9,040
)
 
(9,472
)
 
(2,225
)
 
(3,383
)
Curtailment gain (loss)
396

 
(269
)
 

 

Net settlement (loss) gain
(21
)
 
45

 

 

Total recognized in accumulated other comprehensive loss
(8,449
)
 
(10,229
)
 
(2,225
)
 
(3,383
)
Total recognized in net periodic benefit cost and accumulated other comprehensive loss
$
(1,587
)
 
$
3,009

 
$
2,567

 
$
3,629

_____________
 
(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.


15




LEVI STRAUSS & CO. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS — (continued)
FOR THE QUARTERLY PERIOD ENDED AUGUST 28, 2016

NOTE 6: RESTRUCTURING
In 2014, the Company announced and began to implement a global productivity initiative designed to streamline operations and fuel long-term profitable growth focused on redesigning business processes and identifying opportunities to reduce costs, increase efficiencies and further streamline processes in supporting functions, supply chain and planning. The Company expects that the majority of the actions related to the global productivity initiative will be implemented through the end of 2016.
For the three and nine months ended August 28, 2016, the Company recognized net restructuring reversals and charges, of $0.6 million and $1.0 million, respectively, as compared to net restructuring charges of $4.1 million and $11.4 million, respectively, for the same periods in 2015. These net restructuring reversals and charges were recorded in "Restructuring, net" in the Company's consolidated statements of income. Related charges of $1.3 million and $5.8 million for the three- and nine-month periods ended August 28, 2016, as compared to $7.7 million and $28.1 million for the same periods in 2015, consist primarily of consulting fees for the Company's centrally-led cost-savings and productivity projects, as well as transition costs associated with the Company's decision to outsource certain global business service activities. These related charges represent costs incurred associated with ongoing operations which 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
 
Nine Months Ended
 
August 28,
2016
 
August 30,
2015
 
August 28,
2016
 
August 30,
2015
 
(Dollars in thousands)
Restructuring, net:
 
 
 
 
 
 
 
Severance and employee-related benefits(1)
$
286

 
$
4,989

 
$
2,131

 
$
12,745

Adjustments to severance and employee-related benefits
(612
)
 
(1,652
)
 
(1,016
)
 
(3,415
)
Other(2)
95

 
835

 
311

 
1,747

Noncash pension and postretirement curtailment losses, net(3)
(396
)
 
(118
)
 
(396
)
 
269

Total
$
(627
)
 
$
4,054

 
$
1,030

 
$
11,346

_____________

(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 does not anticipate any significant additional costs associated with the global productivity initiative.


16




LEVI STRAUSS & CO. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS — (continued)
FOR THE QUARTERLY PERIOD ENDED AUGUST 28, 2016

The following tables summarize the activities associated with restructuring liabilities for the three and nine months ended August 28, 2016, and August 30, 2015. In the tables below, "Charges" represents the initial charge related to the restructuring activity. "Adjustments" includes revisions of estimates related to severance, employee-related benefits, lease and other contract termination costs, and other restructuring costs. "Payments" consists of cash payments for severance, employee-related benefits, lease and other contract termination costs, and other restructuring costs.
 
Three Months Ended August 28, 2016
 
Liabilities
 
 
 
Adjustments
 
 
 
Foreign Currency Fluctuation
 
Liabilities
 
May 29, 2016
 
Charges
 
 
Payments
 
 
August 28, 2016
 
(Dollars in thousands)
 
 
 
 
 
 
 
 
 
 
 
 
Severance and employee-related benefits
$
11,768

 
$
286

 
$
(612
)
 
$
(2,601
)
 
$
71

 
$
8,912

Other

 
95

 

 
(95
)
 

 

Total
$
11,768

 
$
381

 
$
(612
)
 
$
(2,696
)
 
$
71

 
$
8,912

 
 
 
 
 
 
 
 
 
 
 
 
Current portion
$
10,853

 
 
 
 
 
 
 
 
 
$
8,603

Long-term portion
915

 
 
 
 
 
 
 
 
 
309

Total
$
11,768

 
 
 
 
 
 
 
 
 
$
8,912

 
 
 
 
 
 
 
 
 
 
 
 
 
Three Months Ended August 30, 2015
 
Liabilities
 
 
 
Adjustments
 
 
 
Foreign Currency Fluctuation
 
Liabilities
 
May 31, 2015
 
Charges
 
 
Payments
 
 
August 30, 2015
 
(Dollars in thousands)
 
 
 
 
 
 
 
 
 
 
 
 
Severance and employee-related benefits
$
33,127

 
$
4,989

 
$
(1,652
)
 
$
(9,287
)
 
$
420

 
$
27,597

Other

 
835

 

 
(319
)
 
5

 
521

Total
$
33,127

 
$
5,824

 
$
(1,652
)
 
$
(9,606
)
 
$
425

 
$
28,118

 
 
 
 
 
 
 
 
 
 
 
 
Current portion
$
32,472

 
 
 
 
 
 
 
 
 
$
27,501

Long-term portion
655

 
 
 
 
 
 
 
 
 
617

Total
$
33,127

 
 
 
 
 
 
 
 
 
$
28,118



17




LEVI STRAUSS & CO. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS — (continued)
FOR THE QUARTERLY PERIOD ENDED AUGUST 28, 2016

 
Nine Months Ended August 28, 2016
 
Liabilities
 
 
 
Adjustments
 
 
 
Foreign Currency Fluctuation
 
Liabilities
 
November 29, 2015
 
Charges
 
 
Payments
 
 
August 28, 2016
 
(Dollars in thousands)
Severance and employee-related benefits
$
20,774

 
$
2,131

 
$
(1,016
)
 
$
(13,769
)
 
$
792

 
$
8,912

Other
964

 
311

 

 
(1,275
)
 

 

Total
$
21,738

 
$
2,442

 
$
(1,016
)
 
$
(15,044
)
 
$
792

 
$
8,912

 
 
 
 
 
 
 
 
 
 
 
 
Current portion
$
20,141

 
 
 
 
 
 
 
 
 
$
8,603

Long-term portion
1,597

 
 
 
 
 
 
 
 
 
309

Total
$
21,738

 
 
 
 
 
 
 
 
 
$
8,912

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

 
$
12,745

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

Other
6,400

 
2,214

 
(467
)
 
(7,631
)
 
5

 
521

Total
$
63,363

 
$
14,959

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

 
 
 
 
 
 
 
 
 
 
 
 
Current portion
$
57,817

 
 
 
 
 
 
 
 
 
$
27,501

Long-term portion
5,546

 
 
 
 
 
 
 
 
 
617

Total
$
63,363

 
 
 
 
 
 
 
 
 
$
28,118




18




LEVI STRAUSS & CO. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS — (continued)
FOR THE QUARTERLY PERIOD ENDED AUGUST 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 2015 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
The Company paid a cash dividend of $60.0 million in the second quarter of 2016. The Company does not have an established annual dividend policy. The Company will continue to review its ability to pay cash dividends at least annually, and dividends may be declared at the discretion of the Company's Board of Directors depending upon, among other factors, the Company's financial condition and compliance with the terms of the Company's debt agreements.

NOTE 9: ACCUMULATED OTHER COMPREHENSIVE LOSS
The following is a summary of the components of “Accumulated other comprehensive loss,” net of related income taxes: 
 
August 28,
2016
 
November 29,
2015
 
(Dollars in thousands)
Pension and postretirement benefits
$
(229,893
)
 
$
(236,340
)
Net investment hedge losses
(19,305
)
 
(18,247
)
Foreign currency translation losses
(120,417
)
 
(117,394
)
Unrealized gains on marketable securities
2,100

 
1,880

Accumulated other comprehensive loss
(367,515
)
 
(370,101
)
Accumulated other comprehensive income attributable to noncontrolling interest
9,578

 
8,965

Accumulated other comprehensive loss attributable to Levi Strauss & Co.
$
(377,093
)
 
$
(379,066
)

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.



19




LEVI STRAUSS & CO. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS — (continued)
FOR THE QUARTERLY PERIOD ENDED AUGUST 28, 2016

NOTE 10: OTHER INCOME (EXPENSE), NET
The following table summarizes significant components of “Other income (expense), net”: 
 
Three Months Ended
 
Nine Months Ended
 
August 28,
2016
 
August 30,
2015
 
August 28,
2016
 
August 30,
2015
 
(Dollars in thousands)
Foreign exchange management (losses) gains(1)
$
(8,232
)
 
$
3,102

 
$
(5,614
)
 
$
24,957

Foreign currency transaction gains (losses)(2)
9,496

 
(13,805
)
 
5,690

 
(57,089
)
Interest income
368

 
400

 
858

 
1,059

Investment income
268

 
258

 
976

 
697

Other
2,779

 
1,729

 
4,845

 
3,671

Total other income (expense), net
$
4,679

 
$
(8,316
)
 
$
6,755

 
$
(26,705
)
_____________
 
(1)
Gains and losses on forward foreign exchange contracts primarily result from currency fluctuations relative to negotiated contract rates. Gains in the nine-month period ended August 30, 2015 were primarily due to favorable currency fluctuations relative to negotiated contract rates on positions to sell the Mexican Peso, partially offset 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. Losses in 2015 were primarily due to the weakening of various foreign currencies, particularly the Euro, against the U.S. Dollar.
  
NOTE 11: INCOME TAXES
The effective income tax rate was 28.2% for the nine months ended August 28, 2016, compared to 35.1% for the same period ended August 30, 2015.
The decrease in the effective tax rate in 2016 as compared to 2015 primarily reflected a discrete tax benefit attributable to deductions for worthless debts in a consolidated subsidiary, as well as a higher proportion of 2016 earnings in jurisdictions where the Company is subject to lower tax rates.


NOTE 12: RELATED PARTIES
Robert D. Haas, Chairman Emeritus of the Company, Charles V. Bergh, President and Chief Executive Officer, Peter E. Haas Jr., a director of the Company, and Kelly McGinnis, Senior Vice President of Corporate Affairs and Chief Communications Officer, are board members of the Levi Strauss Foundation, which is not a consolidated entity of the Company. Seth R. Jaffe, Senior Vice President and General Counsel, is Vice President of the Levi Strauss Foundation. During the three- and nine-month periods ended August 28, 2016, the Company donated $0.3 million and $6.5 million to the Levi Strauss Foundation as compared to $0.3 million and $6.7 million for the same prior-year periods.



20




LEVI STRAUSS & CO. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS — (continued)
FOR THE QUARTERLY PERIOD ENDED AUGUST 28, 2016

NOTE 13: BUSINESS SEGMENT INFORMATION
The Company manages its business according to three regional segments: the Americas, Europe and Asia. The Company considers its chief executive officer to be the Company’s chief operating decision maker. The Company’s chief operating decision maker manages business operations, evaluates performance and allocates resources based on the regional segments’ net revenues and operating income.
Business segment information for the Company is as follows: 
 
Three Months Ended
 
Nine Months Ended
 
August 28,
2016
 
August 30,
2015
 
August 28,
2016
 
August 30,
2015
 
(Dollars in thousands)
Net revenues:
 
 
 
 
 
 
 
Americas
$
723,853

 
$
713,148

 
$
1,884,349

 
$
1,909,011

Europe
282,525

 
258,486

 
799,637

 
758,124

Asia
178,733

 
170,378

 
569,212

 
542,132

Total net revenues
$
1,185,111

 
$
1,142,012

 
$
3,253,198

 
$
3,209,267

Operating income:

 

 

 

Americas(1)
$
149,087

 
$
144,241

 
$
320,122

 
$
349,859

Europe(2)
56,514

 
50,502

 
155,856

 
142,173

Asia
19,389

 
25,666

 
81,868

 
88,037

Regional operating income
224,990

 
220,409

 
557,846

 
580,069

Corporate:


 


 


 


Restructuring, net
(627
)
 
4,054

 
1,030

 
11,346

Restructuring-related charges
1,293

 
7,723

 
5,824

 
28,096

Other corporate staff costs and expenses
79,416

 
93,859

 
231,459

 
270,794

Corporate expenses
80,082

 
105,636

 
238,313

 
310,236

Total operating income
144,908

 
114,773

 
319,533

 
269,833

Interest expense
(19,170
)
 
(17,138
)
 
(54,483
)
 
(62,363
)
Loss on early extinguishment of debt

 

 

 
(14,002
)
Other income (expense), net
4,679

 
(8,316
)
 
6,755

 
(26,705
)
Income before income taxes
$
130,417

 
$
89,319

 
$
271,805

 
$
166,763

_____________
 
(1)
Americas' operating income for the three- and nine- month periods ended ended August 28, 2016 includes the recognition of approximately $7.0 million benefit from resolution of a vendor dispute and related reversal of liabilities recorded in a prior period.
(2)
Europe's operating income for the nine-month period ended August 28, 2016 includes a gain of $6.1 million related to the sale-leaseback of the Company's distribution center in the United Kingdom in the second quarter of 2016. Europe's operating income for the nine-month period ended August 30, 2015 includes a gain of $7.5 million related to the sale of the Company's finishing and distribution facility in Turkey in the second quarter of 2015.




21


Item 2.
MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS 
Overview
We design, market and sell – directly or through third parties and licensees – products that include jeans, casual and dress pants, tops, shorts, skirts, jackets, footwear and related accessories for men, women and children around the world under our Levi’s®, Dockers®, Signature by Levi Strauss & Co.™ (“Signature”) and Denizen® brands.
Our business is operated through three geographic regions: Americas, Europe and Asia. Our products are sold in approximately 50,000 retail locations in more than 110 countries. We support our brands through a global infrastructure, developing, sourcing and marketing our products around the world. We distribute our Levi’s® and Dockers® products primarily through chain retailers and department stores in the United States and primarily through department stores, specialty retailers and approximately 2,200 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 671 company-operated stores located in 31 countries, including the United States, and through the ecommerce sites we operate. Our company-operated stores and ecommerce sites generated approximately 27% of our net revenues in the first nine months of 2016, as compared to 26% in the same period in 2015, with our ecommerce sites representing approximately 13% of this revenue in 2016, as compared to 12% in the same period in 2015. 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 42% of our net revenues and 43% of our regional operating income in the first nine months of 2016, as compared to 41% of our net revenues and 40% of our regional operating income in the same period in 2015. Sales of Levi’s® brand products represented approximately 85% of our total net sales in the first nine-month periods, both in 2016 and 2015.
Trends Affecting Our Business
Our key long-term objectives are to strengthen our brands globally in order to deliver sustainable profitable growth, generate strong cash flow and reduce our debt. Critical strategies to achieve these objectives include driving our profitable core business; expanding the reach of our global brands and building a more balanced product portfolio; elevating the performance of our retail channel, including ecommerce; and leveraging our global scale to improve our cost structure.
Consumer discretionary spending, which remains mixed globally, continues to result in a challenging retail environment for us and our customers, characterized by declining traffic patterns and contributing to a generally promotional environment.  In developed economies, slow real wage growth and a shift in consumer spending to interest-rate sensitive durable goods and other non-apparel categories also continue to pressure global discretionary spending.  Given consumers’ increasing focus on value pricing amid the slowly recovering economy, the off-price retail channel remains strong, partially to the detriment of traditional broadline retailers, particularly at the mid-tier. These trends are partially offset by continued economic growth in developing economies such as Mexico and China, where rising incomes and an expanding middle class create new consumers for our products. Both our wholesale and retail channels continue to face competition from ecommerce shopping enabled by the proliferation of online technologies, which constitutes an increasing proportion of global apparel sales, particularly around key selling seasons.  Some competitors also continue to expand their global footprints in both brick-and-mortar retail and online.  Currency values continue to be in a state of constant flux. The appreciation of the U.S. Dollar against various foreign currencies, particularly the Euro and British Pound, will continue to impact our financial results, affecting translation, margins, as well as traffic in stores located in or near major domestic tourist destinations.
Our Third Quarter 2016 Results
 
Net revenues. Compared to the third quarter of 2015, consolidated net revenues increased 4% on a reported basis and increased 5% on a constant-currency basis driven by higher retail revenues from expansion and improved performance of our retail network in all three regions.
Operating income. Compared to the third quarter of 2015, consolidated operating income increased by 26% and operating margin improved to 12%, primarily reflecting higher constant-currency revenues and lower SG&A and restructuring expenses.
Cash flows. Cash flows provided by operating activities were $102.8 million for the nine-month period in 2016 as compared to $110.3 million for the same period in 2015; the decrease reflects our higher inventory levels, offset by lower payments to vendors for SG&A and restructuring-related items.



22


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 2016 and 2015 consists of 13 weeks.
Segments.    We manage our business according to three regional segments: the Americas, Europe and Asia.
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 includes royalties earned from the use of our trademarks by third-party licensees in connection with the manufacturing, advertising and distribution of trademarked products.
Cost of goods sold is primarily comprised of product costs, labor and related overhead, sourcing costs, inbound freight, internal transfers, and the cost of operating our remaining manufacturing facilities, including the related depreciation expense.
Selling costs include, among other things, all occupancy costs and depreciation associated with our company-operated stores and commissions associated with our company-operated shop-in-shops, as well as costs associated with our ecommerce operations.
We reflect substantially all distribution costs in selling, general and administrative expenses, including costs related to receiving and inspection at distribution centers, warehousing, shipping to our customers, handling, and certain other activities associated with our distribution network.
Gross margins may not be comparable to those of other companies in our industry since some companies may include costs related to their distribution network and occupancy costs associated with company-operated stores in cost of goods sold.
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.


23


Results of Operations for Three and Nine Months Ended August 28, 2016, as Compared to Same Periods in 2015
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
 
Nine Months Ended
 
August 28,
2016
 
August 30,
2015
 
%
Increase
(Decrease)
 
August 28,
2016
 
August 30,
2015
 
August 28,
2016
 
August 30,
2015
 
%
Increase
(Decrease)
 
August 28,
2016
 
August 30,
2015
 
 
 
% of Net
Revenues
 
% of Net
Revenues
 
 
 
% of Net
Revenues
 
% of Net
Revenues
 
(Dollars in millions)
Net revenues
$
1,185.1

 
$
1,142.0

 
3.8
 %
 
100.0
 %

100.0
 %
 
$
3,253.2

 
$
3,209.3

 
1.4
 %
 
100.0
 %

100.0
 %
Cost of goods sold
592.3

 
568.6

 
4.2
 %
 
50.0
 %

49.8
 %
 
1,583.6

 
1,598.6

 
(0.9
)%
 
48.7
 %

49.8
 %
Gross profit
592.8

 
573.4

 
3.4
 %
 
50.0
 %

50.2
 %
 
1,669.6

 
1,610.7

 
3.7
 %
 
51.3
 %

50.2
 %
Selling, general and administrative expenses
448.5

 
454.5

 
(1.3
)%
 
37.8
 %

39.8
 %
 
1,349.0

 
1,329.5

 
1.5
 %
 
41.5
 %

41.4
 %
Restructuring, net
(0.6
)
 
4.1

 
(115.5
)%
 
(0.1
)%

0.4
 %
 
1.0

 
11.4

 
(90.9
)%
 


0.4
 %
Operating income
144.9

 
114.8

 
26.3
 %
 
12.2
 %

10.1
 %
 
319.6

 
269.8

 
18.4
 %
 
9.8
 %

8.4
 %
Interest expense
(19.2
)
 
(17.2
)
 
11.9
 %
 
(1.6
)%

(1.5
)%
 
(54.5
)
 
(62.3
)
 
(12.6
)%
 
(1.7
)%

(1.9
)%
Loss on early extinguishment of debt