10-Q 1 a2q2018form10-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 May 27, 2018
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, a non-accelerated filer, a smaller reporting company, or an emerging growth company. See definition of "Large accelerated filer," "accelerated filer," "smaller reporting company," and "emerging growth company" in Rule 12b-2 of the Exchange Act. (Check one):
Large accelerated filer ¨
 
 
Accelerated filer ¨
Non-accelerated filer þ
(Do not check if a smaller reporting company)
Smaller reporting company ¨
Emerging growth 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 — 37,667,623 shares outstanding on July 5, 2018
 
 
 
 
 
 
 
 
 
 



LEVI STRAUSS & CO. AND SUBSIDIARIES
INDEX TO FORM 10-Q
FOR THE QUARTERLY PERIOD ENDED MAY 27, 2018
 
 
 
 
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)
 
 
 
May 27,
2018
 
November 26,
2017
 
(Dollars in thousands)
ASSETS
Current Assets:
 
 
 
Cash and cash equivalents
$
698,724


$
633,622

Trade receivables, net of allowance for doubtful accounts of $10,717 and $11,726
342,322


485,485

Inventories:
 


Raw materials
4,817


3,858

Work-in-process
4,131


3,008

Finished goods
833,620


752,530

Total inventories
842,568


759,396

Other current assets
120,740


118,724

Total current assets
2,004,354


1,997,227

Property, plant and equipment, net of accumulated depreciation of $990,122 and $951,249
413,243


424,463

Goodwill
237,186


237,327

Other intangible assets, net
42,865


42,893

Deferred tax assets, net
397,891


537,923

Other non-current assets
124,537


118,005

Total assets
$
3,220,076


$
3,357,838

 
 
 
 
LIABILITIES, TEMPORARY EQUITY AND STOCKHOLDERS’ EQUITY
Current Liabilities:
 
 
 
Short-term debt
$
23,122


$
38,451

Accounts payable
328,787


289,505

Accrued salaries, wages and employee benefits
196,724


227,251

Restructuring liabilities
522


786

Accrued interest payable
6,378


6,327

Accrued income taxes
27,230


16,020

Other accrued liabilities
320,933


300,730

Total current liabilities
903,696


879,070

Long-term debt
1,034,036


1,038,860

Long-term capital leases
16,329


16,524

Postretirement medical benefits
84,465


89,248

Pension liability
225,773


314,525

Long-term employee related benefits
87,977


90,998

Long-term income tax liabilities
7,517


20,457

Other long-term liabilities
77,800


78,733

Total liabilities
2,437,593


2,528,415

Commitments and contingencies





Temporary equity
190,268


127,035

 

 
 
Stockholders’ Equity:

 
 
Levi Strauss & Co. stockholders’ equity


 
 
Common stock — $.01 par value; 270,000,000 shares authorized; 37,667,623 shares and 37,521,447 shares issued and outstanding
377


375

Accumulated other comprehensive loss
(408,619
)

(404,381
)
Retained earnings
992,396


1,100,916

Total Levi Strauss & Co. stockholders’ equity
584,154


696,910

Noncontrolling interest
8,061


5,478

Total stockholders’ equity
592,215


702,388

Total liabilities, temporary equity and stockholders’ equity
$
3,220,076


$
3,357,838


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
 
Six Months Ended
 
May 27,
2018
 
May 28,
2017
 
May 27,
2018
 
May 28,
2017

(Dollars in thousands)
(Unaudited)
Net revenues
$
1,245,742


$
1,067,855

 
$
2,589,427

 
$
2,169,846

Cost of goods sold
574,865


509,463

 
1,180,426

 
1,046,901

Gross profit
670,877


558,392

 
1,409,001

 
1,122,945

Selling, general and administrative expenses
594,353


495,741

 
1,158,378

 
951,954

Operating income
76,524


62,651

 
250,623

 
170,991

Interest expense
(14,465
)

(17,895
)
 
(29,962
)
 
(37,829
)
Loss on early extinguishment of debt

 
(22,793
)
 

 
(22,793
)
Other income (expense), net
13,653


(18,087
)
 
4,076

 
(17,679
)
Income before income taxes
75,712


3,876

 
224,737

 
92,690

Income tax (benefit) expense
(1,320
)

(13,847
)
 
166,334

 
14,846

Net income
77,032

 
17,723

 
58,403

 
77,844

Net income attributable to noncontrolling interest
(2,100
)

(207
)
 
(2,483
)
 
(185
)
Net income attributable to Levi Strauss & Co.
$
74,932


$
17,516

 
$
55,920

 
$
77,659
















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
 
Six Months Ended
 
May 27,
2018
 
May 28,
2017
 
May 27,
2018
 
May 28,
2017
 
(Dollars in thousands)
(Unaudited)
Net income
$
77,032


$
17,723

 
$
58,403

 
$
77,844

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


 
 
 
 
 
Pension and postretirement benefits
3,157


3,769

 
6,517

 
7,460

Net investment hedge gains (losses)
28,975


(29,640
)
 
6,127

 
(29,640
)
Foreign currency translation (losses) gains
(34,353
)

20,903

 
(14,572
)
 
28,587

Unrealized (losses) gains on marketable securities
(116
)
 
875

 
174

 
1,875

Total other comprehensive (loss) income, before related income taxes
(2,337
)
 
(4,093
)
 
(1,754
)
 
8,282

Income taxes (expense) benefit related to items of other comprehensive income
(7,229
)
 
8,984

 
(2,383
)
 
6,173

Comprehensive income, net of income taxes
67,466

 
22,614

 
54,266

 
92,299

Comprehensive income attributable to noncontrolling interest
(1,939
)
 
(226
)
 
(2,583
)
 
(12
)
Comprehensive income attributable to Levi Strauss & Co.
$
65,527

 
$
22,388

 
$
51,683

 
$
92,287


































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


5


LEVI STRAUSS & CO. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS
 
Six Months Ended
 
May 27,
2018

May 28,
2017

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



Net income
$
58,403


$
77,844

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




Depreciation and amortization
64,695


55,829

Unrealized foreign exchange (gains) losses
(10,678
)

23,434

Realized loss (gain) on settlement of forward foreign exchange contracts not designated for hedge accounting
18,148


(4,078
)
Employee benefit plans’ amortization from accumulated other comprehensive loss and settlement loss
6,517


7,457

Loss on early extinguishment of debt

 
22,793

Stock-based compensation
10,822


5,662

Other, net
3,767


3,579

Provision for (benefit from) deferred income taxes
135,168


(3,523
)
Change in operating assets and liabilities:




Trade receivables
135,739


172,382

Inventories
(95,690
)

(54,723
)
Other current assets
(1,580
)

4,755

Other non-current assets
(7,435
)

(3,794
)
Accounts payable and other accrued liabilities
38,284


(7,696
)
Restructuring liabilities
(254
)

(3,285
)
Income tax liabilities
(980
)

(12,165
)
Accrued salaries, wages and employee benefits and long-term employee related benefits
(127,321
)

(66,750
)
Other long-term liabilities
(47
)

(635
)
Net cash provided by operating activities
227,558


217,086

Cash Flows from Investing Activities:




Purchases of property, plant and equipment
(61,153
)

(52,889
)
(Payments) proceeds on settlement of forward foreign exchange contracts not designated for hedge accounting
(18,148
)

4,078

Net cash used for investing activities
(79,301
)

(48,811
)
Cash Flows from Financing Activities:




Proceeds from issuance of long-term debt


502,835

Repayments of long-term debt


(525,000
)
Proceeds from short-term credit facilities
22,689


15,557

Repayments of short-term credit facilities
(20,673
)

(13,221
)
Other short-term borrowings, net
(14,537
)

(10,747
)
Payment of debt extinguishment costs

 
(21,899
)
Payment of debt issuance costs

 
(10,101
)
Repurchase of common stock, including shares surrendered for tax withholdings on equity award exercises
(22,027
)

(11,462
)
Dividend to stockholders
(45,000
)

(35,000
)
Other financing, net
(241
)

(3,440
)
Net cash used for financing activities
(79,789
)

(112,478
)
Effect of exchange rate changes on cash and cash equivalents
(3,366
)

6,157

Net increase in cash and cash equivalents
65,102


61,954

Beginning cash and cash equivalents
633,622


375,563

Ending cash and cash equivalents
$
698,724


$
437,517





Noncash Investing Activity:



Property, plant and equipment acquired and not yet paid at end of period
$
14,454


$
8,191

Property, plant and equipment additions due to build-to-suit lease transactions
1,822


6,419





Supplemental disclosure of cash flow information:



Cash paid for interest during the period
$
25,824


$
28,795

Cash paid for income taxes during the period, net of refunds
35,066


26,134




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 MAY 27, 2018
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 26, 2017, included in the Annual Report on Form 10-K filed with the Securities and Exchange Commission ("SEC") on February 7, 2018.
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 six months ended May 27, 2018 may not be indicative of the results to be expected for any other interim period or the year ending November 25, 2018.
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 2018 and 2017 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.
Certain insignificant amounts on the Consolidated Balance Sheets and Consolidated Statements of Cash Flows have been conformed to the May 27, 2018 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.









7



LEVI STRAUSS & CO. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS — (continued)
FOR THE QUARTERLY PERIOD ENDED MAY 27, 2018

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 2017 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 May 2014, the Financial Accounting Standards Board ("FASB") issued ASU 2014-09, Revenue from Contracts with Customers (Topic 606). ASU 2014-09 outlines a single comprehensive model for entities to use in accounting for revenue arising from contracts with customers and supersedes most current revenue recognition guidance. Under the new standard and its related amendments (collectively known as Accounting Standards Codification ("ASC 606")), an entity recognizes revenue when its customer obtains control of promised goods or services, in an amount that reflects the consideration which the entity expects to receive in exchange for those goods or services. Enhanced disclosures will be required regarding the nature, amount, timing and uncertainty of revenue and cash flows arising from contracts with customers.
The Company has established an implementation team to assist with its assessment of the impact that the new standard will have on its processes and controls, consolidated financial statements and related disclosures. This includes a review of current accounting policies and practices to identify potential differences that would result from applying ASC 606.
The Company has identified its major revenue streams as sales of products to wholesale customers, including franchised stores, direct sales to consumers at the company-operated stores, including e-commerce, and company-operated shop-in-shops and performed an analysis of its contracts with customers to evaluate the impact ASC 606 will have on the timing and classification of revenue. The majority of the Company's revenue relates to product sales of which revenue is recognized when products are shipped or delivered to the customer or provided directly to consumers through retail locations. In addition, impacts associated with variable consideration received for items such as loyalty rewards, gift cards, discounts and retailer promotions are not expected to be material as the Company is currently accounting for this consideration consistent with the new standard.
The Company has identified certain changes in balance sheet classification under ASC 606. Allowances for estimated returns, discounts and retailer promotions and other similar incentives will be presented as other accrued liabilities rather than netted within accounts receivable and the estimated cost of inventory associated with allowances for estimated returns will be included as other current assets rather than inventories. The Company will be adopting the standard as of November 26, 2018, and is still evaluating the transition method and potential practical expedient elections.
First Quarter of 2020
In February 2016, the FASB issued ASU 2016-02, Leases (Topic 842) which requires the identification of arrangements that should be accounted for as leases by lessees. In general, for operating or financing lease arrangements exceeding a twelve month term, a right-of-use asset and a lease obligation will be recognized on the balance sheet of the lessee while the income statement will reflect lease expense for operating leases and amortization and interest expense for financing leases. The Company is in the process of gathering information to evaluate real estate, personal property, and other arrangements that may meet the definition of a lease. Given the significant number of leases, the Company anticipates the new guidance will have a material impact on the consolidated balance sheets.
In February 2018, the FASB issued ASU 2018-02, Income Statement - Reporting Comprehensive Income (Topic 220). ASU 2018-02 addresses the effect of the change in the U.S. federal corporate tax rate due to the enactment of the December 22, 2017 Tax Cuts and Jobs Act (the "Tax Act") on items within accumulated other comprehensive income (loss). The guidance will be effective for the Company in the first quarter of fiscal 2020 with early adoption permitted. The Company is currently assessing the impact that adopting this new accounting standard will have on its consolidated financial statements.



8



LEVI STRAUSS & CO. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS — (continued)
FOR THE QUARTERLY PERIOD ENDED MAY 27, 2018

NOTE 2: FAIR VALUE OF FINANCIAL INSTRUMENTS
The following table presents the Company’s financial instruments that are carried at fair value:
 
May 27, 2018
 
November 26, 2017
 
 
 
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
$
31,741

 
$
31,741

 
$

 
$
31,139

 
$
31,139

 
$

Forward foreign exchange contracts(3)
9,620

 

 
9,620

 
6,296

 

 
6,296

Total
$
41,361

 
$
31,741

 
$
9,620

 
$
37,435

 
$
31,139

 
$
6,296

Financial liabilities carried at fair value
 
 
 
 
 
 
 
 
 
 
 
Forward foreign exchange contracts(3)
$
11,300

 
$

 
$
11,300

 
$
23,799

 
$

 
$
23,799

_____________
 
(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. Effective as of the first quarter of 2018, the Company recorded and presented the fair values of derivative over-the-counter forward foreign exchange contracts on a gross basis in its consolidated balance sheets, including those subject to master netting arrangements. The comparative period was revised to reflect the change from a net basis to a gross 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:
 
May 27, 2018
 
November 26, 2017
 
Carrying
Value
 
Estimated Fair Value
 
Carrying
Value
 
Estimated Fair Value
 
(Dollars in thousands)
Financial liabilities carried at adjusted historical cost
 
 
 
 
 
 
 
5.00% senior notes due 2025(1)
$
486,437

 
$
488,860

 
$
485,419

 
$
507,185

3.375% senior notes due 2027(1)
553,440

 
563,742

 
559,037

 
590,266

Short-term borrowings
23,405

 
23,405

 
38,727

 
38,727

Total
$
1,063,282

 
$
1,076,007

 
$
1,083,183

 
$
1,136,178

_____________
 
(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.


9



LEVI STRAUSS & CO. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS — (continued)
FOR THE QUARTERLY PERIOD ENDED MAY 27, 2018

NOTE 3: DERIVATIVE INSTRUMENTS AND HEDGING ACTIVITIES
As of May 27, 2018, the Company had forward foreign exchange contracts to buy $516.9 million and to sell $158.3 million against various foreign currencies. These contracts are at various exchange rates and expire at various dates through May 2019.
Effective as of the first quarter of 2018, the Company recorded and presented the fair value of its derivative assets and liabilities on a gross basis in the consolidated balance sheets based on contractual maturity dates, including those subject to master netting arrangements. The comparative period was revised to reflect the change from a net basis to a gross basis.
The table below provides data about the carrying values of derivative instruments and non-derivative instruments: 
 
May 27, 2018
 
November 26, 2017
 
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)
$
9,620

 
$

 
$
9,620

 
$
6,296

 
$

 
$
6,296

Forward foreign exchange contracts(2)

 
(11,300
)
 
(11,300
)
 

 
(23,799
)
 
(23,799
)
Total
$
9,620

 
$
(11,300
)
 
 
 
$
6,296

 
$
(23,799
)
 
 
Non-derivatives designated as hedging instruments
 
 
 
 
 
 
 
 
 
 
 
Euro senior notes
$

 
$
(556,653
)
 
 
 
$

 
$
(562,780
)
 
 
_____________
 
(1)
Included in "Other current assets" or "Other non-current assets" on the Company’s consolidated balance sheets.
(2)
Included in "Other accrued liabilities" or "Other long-term liabilities" on the Company’s consolidated balance sheets.


10



LEVI STRAUSS & CO. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS — (continued)
FOR THE QUARTERLY PERIOD ENDED MAY 27, 2018

The Company's over-the-counter forward foreign exchange contracts are subject to International Swaps and Derivatives Association, Inc. master agreements. These agreements permit the net settlement of these contracts on a per-institution basis; however, the Company records the fair value on a gross basis on its consolidated balance sheets based on maturity dates, including those subject to master netting arrangements. The table below presents the gross and net amounts of these contracts recognized on the Company's consolidated balance sheets by type of financial instrument:
 
May 27, 2018
 
November 26, 2017
 
Gross Amounts of Assets / (Liabilities) Presented in the Balance Sheet
 
Gross Amounts Not Offset in the Balance Sheet
 
Net Amounts of Assets / (Liabilities)
 
Gross Amounts of Assets / (Liabilities) Presented in the Balance Sheet
 
Gross Amounts Not Offset in the Balance Sheet
 
Net Amounts of Assets / (Liabilities)
 
 
 
 
 
 
(Dollars in thousands)
Over-the-counter forward foreign exchange contracts
 
 
 
 
 
 
 
 
 
 
 
Financial assets
$
7,617

 
$
(5,186
)
 
$
2,431

 
$
3,218

 
$
(3,146
)
 
$
72

Financial liabilities
(7,026
)
 
5,186

 
(1,840
)
 
(20,876
)
 
3,146

 
(17,730
)
Total
 
 
 
 
$
591

 
 
 
 
 
$
(17,658
)
Embedded derivative contracts
 
 
 
 
 
 
 
 
 
 
 
Financial assets
$
2,003

 
$

 
$
2,003

 
$
3,078

 
$

 
$
3,078

Financial liabilities
(4,274
)
 

 
(4,274
)
 
(2,923
)
 

 
(2,923
)
Total
 
 
 
 
$
(2,271
)
 
 
 
 
 
$
155


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:
 
Gain or (Loss)
Recognized in AOCI
(Effective Portion)
 
As of
 
As of
May 27,
2018
November 26,
2017
 
(Dollars in thousands)
Forward foreign exchange contracts
$
4,637

 
$
4,637

Yen-denominated Eurobonds
(19,811
)
 
(19,811
)
Euro-denominated senior notes
(69,569
)
 
(75,697
)
Cumulative income taxes
33,629

 
35,253

Total
$
(51,114
)
 
$
(55,618
)


11



LEVI STRAUSS & CO. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS — (continued)
FOR THE QUARTERLY PERIOD ENDED MAY 27, 2018

The table below provides data about the amount of gains and losses related to derivatives not designated as hedging instruments included in "Other income (expense), net" in the Company's consolidated statements of income:
 
Three Months Ended
 
Six Months Ended
 
May 27,
2018
 
May 28,
2017
 
May 27,
2018
 
May 28,
2017
 
(Dollars in thousands)
Forward foreign exchange contracts:
 
 
 
 
 
 
 
Realized (loss) gain
$
(7,845
)
 
$
(4,998
)
 
$
(18,148
)
 
$
4,078

Unrealized gain (loss)
21,556

 
(10,132
)
 
15,772

 
(29,452
)
Total
$
13,711

 
$
(15,130
)
 
$
(2,376
)
 
$
(25,374
)

NOTE 4: DEBT 
The following table presents the Company's debt: 

 
May 27,
2018
 
November 26,
2017
 
(Dollars in thousands)
Long-term debt
 
 
 
5.00% senior notes due 2025
$
484,632

 
$
483,683

3.375% senior notes due 2027
549,404

 
555,177

Total long-term debt
$
1,034,036


$
1,038,860

Short-term debt
 
 
 
Short-term borrowings
$
23,122

 
$
38,451

Total debt
$
1,057,158

 
$
1,077,311

Senior Revolving Credit Facility
The Company's unused availability under its senior secured revolving credit facility was $698.1 million at May 27, 2018, as the Company's total availability of $744.3 million was reduced by $46.2 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 six months ended May 27, 2018 was 5.19% and 5.00%, respectively, as compared to 5.66% and 6.17%, respectively, in the same periods of 2017.


12



LEVI STRAUSS & CO. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS — (continued)
FOR THE QUARTERLY PERIOD ENDED MAY 27, 2018

NOTE 5: EMPLOYEE BENEFIT PLANS
The following table summarizes the total net periodic benefit cost for the Company's defined pension plans and postretirement benefit plans:
 
Three Months Ended
 
Six Months Ended
 
May 27,
2018
 
May 28,
2017
 
May 27,
2018
 
May 28,
2017
 
(Dollars in thousands)
Net periodic benefit cost:
 
 
 
 
 
 
 
Pension Benefits
$
766

 
$
3,070

 
$
1,615

 
$
5,962

Postretirement Benefits
926

 
1,147

 
1,852

 
2,295

Net periodic benefit cost
$
1,692

 
$
4,217

 
$
3,467

 
$
8,257

The Company has increased the estimated contributions to its pension plans in 2018 from $94.7 million to $124 million.
NOTE 6: 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. See Note 3 for additional information.
Other Contingencies
Litigation.  In the ordinary course of business, the Company has various pending cases involving contractual matters, facility and employee-related matters, distribution matters, product liability claims, trademark infringement and other matters. The Company does not believe any of these pending legal proceedings will have a material impact on its financial condition, results of operations or cash flows.
Customs Duty Audits. The Company imports both raw materials and finished garments into all of the operating regions and as such, is subject to numerous countries complex customs laws and regulations with respect to our import and export activity. The Company is currently undergoing audit assessments and the related legal appeal processes with various customs authorities. While the Company is vigorously defending its position and does not believe any of the claims for customs duty and related charges have merit, the ultimate resolution of these assessments and legal proceedings are subject to risk and uncertainty.
NOTE 7: DIVIDEND
In the first quarter of 2018, the Company's Board of Directors declared a cash dividend of $90 million, payable in two $45 million installments. The Company paid the first installment in the first quarter of 2018. The second installment of $45 million is expected to be paid in the fourth quarter of 2018 based on the holders of record on October 5, 2018, and was recorded in "Other accrued liabilities" in the Company's consolidated balance sheets.
The Company does not have an established dividend policy. The Company will continue to review its ability to pay cash dividends at least annually, and dividends may be declared at the discretion of the Company's Board of Directors depending upon, among other factors, the Company's financial condition and compliance with the terms of the Company's debt agreements.


13



LEVI STRAUSS & CO. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS — (continued)
FOR THE QUARTERLY PERIOD ENDED MAY 27, 2018

NOTE 8: ACCUMULATED OTHER COMPREHENSIVE LOSS
The following is a summary of the components of "Accumulated other comprehensive loss," net of related income taxes: 
 
May 27,
2018
 
November 26,
2017
 
(Dollars in thousands)
Pension and postretirement benefits
$
(227,464
)
 
$
(232,181
)
Net investment hedge losses
(51,114
)
 
(55,618
)
Foreign currency translation losses
(124,578
)
 
(111,092
)
Unrealized gains on marketable securities
4,175

 
4,048

Accumulated other comprehensive loss
(398,981
)
 
(394,843
)
Accumulated other comprehensive income attributable to noncontrolling interest
9,638

 
9,538

Accumulated other comprehensive loss attributable to Levi Strauss & Co.
$
(408,619
)
 
$
(404,381
)

No material amounts were reclassified out of "Accumulated other comprehensive loss" into net income other than insignificant amounts that pertain to the Company's pension and postretirement benefit plans. These amounts are included in "Selling, general and administrative expenses" in the Company's consolidated statements of income.
NOTE 9: OTHER INCOME (EXPENSE), NET
The following table summarizes significant components of "Other income (expense), net": 
 
Three Months Ended
 
Six Months Ended
 
May 27,
2018
 
May 28,
2017
 
May 27,
2018
 
May 28,
2017
 
(Dollars in thousands)
Foreign exchange management gains (losses)(1)
$
13,711

 
$
(15,130
)
 
$
(2,376
)
 
$
(25,374
)
Foreign currency transaction (losses) gains(2)
(2,698
)
 
(3,623
)
 
619

 
6,053

Interest income
1,401

 
694

 
3,830

 
1,311

Investment (expense) income

 
(11
)
 
428

 
342

Other, net
1,239

 
(17
)
 
1,575

 
(11
)
Total other income (expense), net
$
13,653

 
$
(18,087
)
 
$
4,076

 
$
(17,679
)
_____________
 
(1)
Gains and losses on forward foreign exchange contracts primarily resulted from currency fluctuations relative to negotiated contract rates. Gains in the three-month period ended May 27, 2018 were primarily due to favorable currency fluctuations relative to negotiated contract rates on positions to sell the Euro, Mexican Peso and British Pound. Losses in the three-month and six-month periods ended May 28, 2017 were primarily due to unfavorable currency fluctuations relative to negotiated contract rates on positions to sell the Mexican Peso and 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 the six-month period ended May 28, 2017 were primarily due to the strengthening of the Mexican Peso and Euro against the US dollar.


14



LEVI STRAUSS & CO. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS — (continued)
FOR THE QUARTERLY PERIOD ENDED MAY 27, 2018

NOTE 10: INCOME TAXES
On December 22, 2017, the Tax Act was enacted in the U.S. The Tax Act introduced many changes, including lowering the U.S. corporate tax rate from 35% to 21%, changes in incentives, provisions to prevent U.S. base erosion and significant changes in the taxation of international income, and provisions which allow for the repatriation of foreign earnings without U.S. tax. By operation of tax law, the Company will apply a blended U.S. statutory federal income tax rate of 22.4% for fiscal year 2018 based on the pro rata number of days in the fiscal year before and after the effective date of the Tax Act. The enactment of the Tax Act resulted in a provisional charge of $137 million to tax expense in the first half of fiscal year 2018. This charge was comprised of a $99 million re-measurement of the Company's deferred tax assets and liabilities based on the lower rates at which they are expected to reverse in the future as well as a $38 million one-time U.S. transition tax on undistributed foreign earnings.
The provisions in the Tax Act are complex and broad. All components of the provisional charge of $137 million are based on the Company’s estimates as of May 27, 2018. Specifically, the transition tax and the re-measurement of deferred tax balances are provisional and have been calculated based on existing tax law and the best information available as of May 27, 2018. The final impact of U.S. tax reform may differ, possibly materially, due to factors such as changes in interpretations of the Tax Act, legislative action to address uncertainties that arise because of the Tax Act, changes to estimates the Company has utilized to calculate the provisional impacts, and additional guidance that may be issued by the U.S. government, among other items. As these various factors are finalized, any change will be recorded as an adjustment to the provision for income taxes in the period the amounts are determined during a measurement period granted by the Securities and Exchange Commission of up to one year after the enactment date of the Tax Act to finalize the accounting of the related income tax impacts, not to exceed 12 months from the date of enactment of the Tax Act.
In addition, the Company is still evaluating the Global Intangible Low Tax Income ("GILTI") provisions of the Tax Act and their impact, if any, on the consolidated financial statements beginning fiscal year 2019, including whether the Company adopts an accounting policy to treat such taxes as a current-period expense when incurred or whether such amounts should be factored into the Company's measurement of deferred taxes. As a result, the Company has not included an estimate of the tax expense related to this item as of May 27, 2018.
The effective income tax benefit rate of 1.7% for the three months ended May 27, 2018 was driven by a 17.5% discrete tax benefit from release of reserves for uncertain tax positions due to finalization of a foreign audit in the second quarter of 2018.
The effective income tax rate was 74.0% for the six months ended May 27, 2018, compared to 16.0% for the same period ended May 28, 2017. The increase in the effective tax rate in 2018 as compared to 2017 was driven by a 61% one-time tax charge related to the impact of the U.S. tax reform described above, offset by a 5.9% discrete tax benefit from release of reserves for uncertain tax positions due to finalization of a foreign audit in the second quarter of 2018.
NOTE 11: RELATED PARTIES
Charles V. Bergh, President and Chief Executive Officer, Peter E. Haas Jr., a director of the Company, Kelly McGinnis, Senior Vice President of Corporate Affairs and Chief Communications Officer, and Elizabeth O'Neill, Senior Vice President and
Chief Supply Chain Officer, are board members of the Levi Strauss Foundation, which is not a consolidated entity of the Company. Seth R. Jaffe, Executive Vice President and General Counsel, is Vice President of the Levi Strauss Foundation. During the three-month and six-month periods ended May 27, 2018, the Company donated $0.4 million and $6.9 million, respectively, to the Levi Strauss Foundation as compared to $0.4 million and $6.7 million for the same prior-year periods.


15



LEVI STRAUSS & CO. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS — (continued)
FOR THE QUARTERLY PERIOD ENDED MAY 27, 2018

NOTE 12: 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
 
Six Months Ended
 
May 27,
2018
 
May 28,
2017
 
May 27,
2018
 
May 28,
2017
 
(Dollars in thousands)
Net revenues:
 
 
 
 
 
 
 
Americas
$
669,791

 
$
602,063

 
$
1,326,988

 
$
1,179,970

Europe
366,836

 
280,386

 
819,558

 
590,703

Asia
209,115

 
185,406

 
442,881

 
399,173

Total net revenues
$
1,245,742

 
$
1,067,855

 
$
2,589,427

 
$
2,169,846

Operating income:
 
 
 
 
 
 
 
Americas
$
97,212

 
$
101,879

 
$
208,457

 
$
192,221

Europe
53,173

 
34,703

 
168,459

 
99,242

Asia
16,410

 
9,468

 
57,119

 
45,409

Regional operating income
166,795

 
146,050

 
434,035

 
336,872

Corporate expenses
90,271

 
83,399

 
183,412

 
165,881

Total operating income
76,524

 
62,651

 
250,623

 
170,991

Interest expense
(14,465
)
 
(17,895
)
 
(29,962
)
 
(37,829
)
Loss on early extinguishment of debt

 
(22,793
)
 

 
(22,793
)
Other income (expense), net
13,653

 
(18,087
)
 
4,076

 
(17,679
)
Income before income taxes
$
75,712

 
$
3,876

 
$
224,737

 
$
92,690



16


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 in the United States primarily through chain retailers and department stores; and outside of the United States primarily through department stores, specialty retailers and approximately 2,100 franchised or other brand-dedicated stores and shop-in-shops. We also distribute our Levi’s® and Dockers® products through 776 company-operated retail stores located in 32 countries, including the United States, and through the e-commerce sites we operate. Our company-operated retail stores and e-commerce sites generated approximately 32% of our net revenues in both the first six months of 2018 and the same period in 2017, with our e-commerce sites representing approximately 15% of this company-operated revenue in both 2018 and 2017. In addition, we distribute our Levi’s® and Dockers® products through e-commerce 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 49% of our net revenues and 52% of our regional operating income in the first six months of 2018, as compared to 46% of our net revenues and 43% of our regional operating income in the same period in 2017. Sales of Levi’s® brand products represented approximately 87% of our total net sales in both the first six-month periods of 2018 and 2017.
Trends Affecting Our Business
We believe the key business and marketplace factors that are impacting our business include the following:
Factors that impact consumer discretionary spending, which remains volatile globally, continue to create a complex and challenging retail environment for us and our customers, characterized by unpredictable traffic patterns and a general promotional environment. In developed economies, mixed real wage growth and shifting in consumer spending also continue to pressure global discretionary spending. Consumers continue to focus on value pricing and convenience with the off-price retail channel remaining strong and increased expectation for real-time delivery.
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 may provide consumers discretionary purchase alternatives or lower-priced apparel offerings.
Wholesaler/retailer dynamics and wholesale channels remain challenged by mixed growth prospects due to increased competition from e-commerce shopping, pricing transparency enabled by proliferation of online technologies, and vertically-integrated specialty stores. Retailers, including our top customers, may decide to consolidate, undergo restructurings or rationalize their stores which could result in reduction in the number of stores that carry our products.
Many apparel companies that have traditionally relied on wholesale distribution channels have invested in expanding their own retail store and e-commerce distribution and consumer-facing technologies, which has increased competition in the retail market.
Competition for, and price volatility of, resources throughout the supply chain have increased, causing us and other apparel manufacturers to continue to seek alternative sourcing channels and create new efficiencies in our global supply chain. Trends affecting the supply chain include the proliferation of lower-cost sourcing alternatives, resulting in reduced barriers to entry for new competitors, and the impact of fluctuating prices of labor and raw materials as well as the consolidation of suppliers. Trends such as these can bring additional pressure on us and other wholesalers and retailers to shorten lead-times, reduce costs and raise product prices.
Foreign currencies continue to be volatile. Significant fluctuations of the U.S. Dollar against various foreign currencies, including the Euro, Mexican Peso and British Pound, will impact our financial results, affecting translation, and revenue, operating margins and net income.
The current environment has introduced greater uncertainty with respect to potential tax and trade regulations. Most recently, the U.S. enacted new tax legislation, which is intended to stimulate economic growth and capital investments


17


in the U.S. by, amongst its other provisions, lowering tax rates for both corporations and individuals alike. In addition, the current domestic and international political environment, including potential changes to other U.S. policies related to global trade and tariffs, have also resulted in uncertainty surrounding the future state of the global economy. Such changes may require us to modify our current sourcing practices, which may impact our product costs, and, if not mitigated, could have a material adverse effect on our business and results of operations. For more information on the risk factors affecting our business, see Item 1A "Risk Factors" in this Quarterly Report on Form 10-Q.
These factors contribute to a global market environment of intense competition, constant product innovation and continuing cost pressure, and combine with the continuing global economic conditions to create a challenging commercial and economic environment. We evaluate these factors as we develop and execute our strategies. For more information on the risk factors affecting our business, see our 2017 Annual Report on Form 10-K, Item 1A "Risk Factors".
Our Second Quarter 2018 Results
 
Net revenues. Compared to the second quarter of 2017, consolidated net revenues increased 17% on a reported basis and increased 13% on a constant-currency basis driven by broad-based growth across all regions.
Gross margin. Compared to the second quarter of 2017, consolidated gross margin percentage increased 1.6% primarily due to revenue growth in our company-operated retail network and favorable transactional currency impacts.
Operating income. Compared to the second quarter of 2017, consolidated operating income increased by 22% and operating margin increased to 6.1%, primarily reflecting higher net revenues and improved gross margin, partially offset by higher selling, general and administrative expenses ("SG&A") associated with the expansion of our company-operated retail network and higher advertising and promotion expense.
Net income. Compared to the second quarter of 2017, consolidated net income increased $59.3 million, primarily due to an increase in net gains on foreign exchange contracts and the $22.8 million loss on early extinguishment of debt in the second quarter of 2017.
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 2018 and 2017 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 e-commerce sites and stores and at our company-operated shop-in-shops located within department stores. Net revenues include discounts, allowances for estimated returns and incentives.
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 e-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, among other things, 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.


18


Results of Operations for Three and Six Months Ended May 27, 2018, as Compared to Same Periods in 2017
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
 
Six Months Ended
 
May 27,
2018
 
May 28,
2017
 
%
Increase
(Decrease)
 
May 27,
2018
 
May 28,
2017
 
May 27,
2018
 
May 28,
2017
 
%
Increase
(Decrease)
 
May 27,
2018
 
May 28,
2017
 
 
 
% of Net
Revenues
 
% of Net
Revenues
 
 
 
% of Net
Revenues
 
% of Net
Revenues
 
(Dollars in millions)
Net revenues
$
1,245.7

 
$
1,067.9

 
16.6
 %
 
100.0
 %
 
100.0
 %
 
$
2,589.4

 
$
2,169.9

 
19.3
 %
 
100.0
 %
 
100.0
 %
Cost of goods sold
574.8

 
509.5

 
12.8
 %
 
46.1
 %
 
47.7
 %
 
1,180.4

 
1,047.0

 
12.7
 %
 
45.6
 %
 
48.2
 %
Gross profit
670.9

 
558.4

 
20.1
 %
 
53.9
 %
 
52.3
 %
 
1,409.0

 
1,122.9

 
25.5
 %
 
54.4
 %
 
51.8
 %
Selling, general and administrative expenses
594.4

 
495.7

 
19.9
 %
 
47.7
 %
 
46.4
 %
 
1,158.4

 
952.0

 
21.7
 %
 
44.7
 %
 
43.9
 %
Operating income
76.5

 
62.7

 
22.0
 %
 
6.1
 %
 
5.9
 %
 
250.6

 
170.9

 
46.6
 %
 
9.7
 %
 
7.9
 %
Interest expense
(14.5
)
 
(17.9
)
 
(19.0
)%
 
(1.2
)%
 
(1.7
)%
 
(30.0
)
 
(37.8
)
 
(20.6
)%
 
(1.2
)%
 
(1.7
)%
Loss on early extinguishment of debt

 
(22.8
)
 
(100.0
)%
 

 
(2.1
)%
 

 
(22.8
)
 
(100.0
)%
 

 
(1.1
)%
Other income (expense), net
13.7

 
(18.1
)
 
(175.7
)%
 
1.1
 %
 
(1.7
)%
 
4.1

 
(17.7
)
 
(123.2
)%
 
0.2
 %
 
(0.8
)%
Income before income taxes
75.7

 
3.9

 
*

 
6.1
 %
 
0.4
 %
 
224.7

 
92.6

 
142.7
 %
 
8.7
 %
 
4.3
 %
Income tax (benefit) expense
(1.3
)
 
(13.8
)
 
(90.6
)%
 
(0.1
)%
 
(1.3
)%
 
166.3

 
14.8

 
*

 
6.4
 %
 
0.7
 %
Net income
77.0

 
17.7

 
*

 
6.2
 %
 
1.7
 %
 
58.4

 
77.8

 
(24.9
)%
 
2.3
 %
 
3.6
 %
Net income attributable to noncontrolling interest
(2.1
)
 
(0.2
)
 
*

 
(0.2
)%
 

 
(2.5
)
 
(0.2
)
 
*

 
(0.1
)%
 

Net income attributable to Levi Strauss & Co.
$
74.9

 
$
17.5

 
*

 
6.0
 %
 
1.6
 %
 
$
55.9

 
$
77.6

 
(28.0
)%
 
2.2
 %
 
3.6
 %
_____________
 
* Not meaningful



19


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
 
Six Months Ended
 
 
 
 
 
% Increase
 
 
 
 
 
% Increase
 
May 27,
2018
 
May 28,
2017
 
As
Reported
 
Constant
Currency
 
May 27,
2018
 
May 28,
2017
 
As
Reported
 
Constant
Currency
 
(Dollars in millions)
Net revenues:
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
Americas
$
669.7

 
$
602.1

 
11.2
%
 
11.0
%
 
$
1,326.9

 
$
1,180.1

 
12.4
%
 
11.7
%
Europe
366.9

 
280.4

 
30.8
%
 
19.0
%
 
819.6

 
590.7

 
38.8
%
 
24.7
%
Asia
209.1

 
185.4

 
12.8
%
 
9.0
%
 
442.9

 
399.1

 
11.0
%
 
6.6
%
Total net revenues
$
1,245.7

 
$
1,067.9

 
16.6
%
 
12.9
%
 
$
2,589.4

 
$
2,169.9

 
19.3
%
 
14.6
%
Total net revenues increased on both a reported and constant-currency basis for the three-month and six-month periods ended May 27, 2018, as compared to the same prior-year periods.
Americas.    On both a reported basis and constant-currency basis, net revenues in our Americas region increased for the three-month and six-month periods ended May 27, 2018. Currency translation did not have a significant impact on net revenues for the three-month period and had a favorable impact of approximately $7 million for the six-month period ended May 27, 2018.
Excluding the effects of currency, the increase in net revenues for the three-month and six-month periods ended May 27, 2018 was due to the strong performance of our company-operated retail network, primarily outlet, and higher wholesales revenues in our Signature, Levi's® and Denizen® brands. The increase reflects strong growth in Levi's® womens products as well as continued improvement in the retail environment, especially the first quarter of 2018 holiday season in the U.S.
Europe.    Net revenues in Europe increased on both a reported basis and constant-currency basis for the three-month and six-month periods ended May 27, 2018, with currency affecting net revenues favorably by approximately $28 million and $67 million, respectively.
Constant-currency net revenues increased for the three-month and six-month periods ended May 27, 2018 as a result of strong performance in all channels largely driven by our expanded tops and womens products.
Asia.    Net revenues in Asia increased on both a reported and constant-currency basis for the three-month and six-month periods ended May 27, 2018, with currency affecting net revenues favorably by approximately $6 million and $16 million, respectively.
Excluding the effects of currency, the increase in net revenues for the three-month and six-month periods ended May 27, 2018 was primarily due to the expansion of our company-operated retail network and higher wholesale revenues, partially offset by lower franchised store revenues.


20


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
 
Six Months Ended
 
May 27,
2018
 
May 28,
2017
 
%
Increase
 
May 27,
2018
 
May 28,
2017
 
%
Increase
 
(Dollars in millions)
Net revenues
$
1,245.7

 
$
1,067.9

 
16.6
%
 
$
2,589.4

 
$
2,169.9

 
19.3
%
Cost of goods sold
574.8

 
509.5

 
12.8
%
 
1,180.4

 
1,047.0

 
12.7
%
Gross profit
$
670.9

 
$
558.4

 
20.1
%
 
$
1,409.0

 
$
1,122.9

 
25.5
%
Gross margin
53.9
%
 
52.3
%
 
 
 
54.4
%
 
51.8
%
 
 
Currency translation favorably impacted gross profit by approximately $22 million and $54 million for the three-month and six-month periods ended May 27, 2018, respectively. Gross margin increased primarily due to revenue growth in our company-operated retail network and favorable transactional currency impacts.
Selling, general and administrative expenses
The following table shows SG&A for the periods indicated, the changes in these items from period to period and these items expressed as a percentage of net revenues:
 
 
Three Months Ended
 
Six Months Ended
 
May 27,
2018
 
May 28,
2017
 
%
Increase
 
May 27,
2018
 
May 28,
2017
 
May 27,
2018
 
May 28,
2017
 
%
Increase
 
May 27,
2018
 
May 28,
2017
 
 
 
% of Net
Revenues
 
% of Net
Revenues
 
 
 
% of Net
Revenues
 
% of Net
Revenues
 
(Dollars in millions)
Selling
$
254.2

 
$
208.3

 
22.0
%
 
20.4
%
 
19.5
%
 
$
508.2

 
$
418.4

 
21.5
%
 
19.6
%
 
19.3
%
Advertising and promotion
96.9

 
76.4

 
26.8
%
 
7.8
%
 
7.2
%
 
173.1

 
129.1

 
34.1
%
 
6.7
%
 
5.9
%
Administration
114.1

 
97.4

 
17.1
%
 
9.2
%
 
9.1
%
 
222.7

 
182.0

 
22.4
%
 
8.6
%
 
8.4
%
Other
129.2

 
113.6

 
13.7
%
 
10.4
%
 
10.6
%
 
254.4

 
222.5

 
14.3
%
 
9.8
%
 
10.3
%
Total SG&A
$
594.4

 
$
495.7

 
19.9
%
 
47.7
%
 
46.4
%
 
$
1,158.4

 
$
952.0

 
21.7
%
 
44.7
%
 
43.9
%

Currency impacted SG&A unfavorably by approximately $16 million and $34 million for the three-month and six-month periods ended May 27, 2018, respectively.
Selling.  Currency impacted selling expenses unfavorably by approximately $9 million and $20 million for the three-month and six-month periods ended May 27, 2018, respectively. Higher selling expenses primarily reflected costs associated with the increase in performance and expansion of our company-operated retail network. We had 53 more company-operated stores at the end of the second quarter of 2018 than we did at the end of the second quarter of 2017.
Advertising and promotion.   Currency impacted advertising and promotion expenses unfavorably by approximately $3 million and $5 million for the three-month and six-month periods ended May 27, 2018, respectively. Advertising and promotion expenses increased due to incremental investments in advertising.
Administration.    Administration expenses include functional administrative and organization costs. Currency impacted administration expenses unfavorably by approximately $2 million and $5 million for the three-month and six-month periods ended May 27, 2018, respectively. As compared to the same prior-year period, administration expenses in 2018 reflect higher stock-based and incentive compensation reflecting outperformance against our internally set objectives.
Other.   Other SG&A includes distribution, information resources and marketing organization costs. Currency impacted SG&A other costs unfavorably by approximately $2 million and $5 million for the three-month and six-month periods ended May 27, 2018, respectively. The increase in SG&A other costs is primarily due to higher distribution costs as a result of increased volume, and higher information technology expenses.


21


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
 
Six Months Ended
 
 
May 27,
2018
 
May 28,
2017
 
%
Increase / Decrease
 
May 27,
2018
 
May 28,
2017
 
May 27,
2018
 
May 28,
2017
 
%
Increase
 
May 27,
2018
 
May 28,
2017
 
 
% of Net
Revenues
 
% of Net
Revenues
% of Net
Revenues
 
% of Net
Revenues
 
(Dollars in millions)
Operating income:
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
Americas
$
97.2

 
$
101.9

 
(4.6
)%
 
14.5
%
 
16.9
%
 
$
208.4

 
$
192.2

 
8.4
%
 
15.7
%
 
16.3
%
 
Europe
53.2

 
34.7

 
53.3
 %
 
14.5
%
 
12.4
%
 
168.5

 
99.2

 
69.9
%
 
20.6
%
 
16.8
%
 
Asia
16.4

 
9.5

 
72.6
 %
 
7.8
%
 
5.1
%
 
57.1

 
45.4

 
25.8
%
 
12.9
%
 
11.4
%
 
Total regional operating income
166.8

 
146.1

 
14.2
 %
 
13.4
%
*
13.7
%
*
434.0

 
336.8

 
28.9
%
 
16.8
%
*
15.5
%
*
Corporate expenses
90.3

 
83.4

 
8.3
 %
 
7.2
%
*
7.8
%
*
183.4

 
165.9

 
10.5
%
 
7.1
%
*
7.6
%
*
Total operating income
$
76.5

 
$
62.7

 
22.0
 %
 
6.1
%
*
5.9
%
*
$
250.6

 
$
170.9

 
46.6
%
 
9.7
%
*
7.9
%
*
Operating margin
6.1
%
 
5.9
%
 
 
 
 
 
 
 
9.7
%
 
7.9
%
 
 
 
 
 
 
 
______________
 * Percentage of consolidated net revenues
Currency translation favorably affected total operating income by approximately $6 million and $20 million for the three-month and six-month periods ended May 27, 2018, respectively.
Regional operating income.    
Americas. Currency did not have a significant impact on operating income in the region for the three-month period ended May 27, 2018 and had a favorable impact of approximately $2 million for the six-month period ended May 27, 2018. For the three-month period ended May 27, 2018, the decrease in operating income is primarily due to continued investments in our company-operated retail network and incremental advertising and promotion costs, partially offset by higher net revenues. For the six-month period ended May 27, 2018, the increase in operating income is due to higher net revenues and gross margin, partially offset by higher SG&A expense.
Europe. Currency translation favorably affected operating income in the region by approximately $5 million and $16 million for the three-month and six-month periods ended May 27, 2018, respectively. The increase in operating income is due to higher net revenues, partially offset by increased investment in retail expansion and advertising.
Asia. Currency did not have a significant impact on operating income in the region for the three-month period ended May 27, 2018 and had a favorable impact of approximately $3 million for the six-month period ended May 27, 2018. The increase in operating income is due to higher net revenues and gross margin, partially offset by higher SG&A expense to support retail expansion.
Corporate.  Corporate expenses represent costs that management does not attribute to any of our regional operating segments. Included in corporate expenses are other corporate staff costs and costs associated with our global inventory sourcing organization. Currency translation did not have a significant impact on corporate expenses for the three-month and six-month periods ended May 27, 2018. The increase in corporate expense for the three-month and six-month periods ended May 27, 2018 is primarily due to an increase in administration expenses relating to incentive compensation, partially offset by purchasing variances related to our global sourcing organization's procurement of inventory on behalf of our regions.
Interest expense
Interest expense was $14.5 million and $30.0 million for the three-month and six-month periods ended May 27, 2018, respectively, as compared to $17.9 million and $37.8 million for the same prior-year periods. The decrease in interest expense was primarily related to lower average borrowing rates in 2018 resulting from our 2017 debt refinancing activities, and lower interest expense on our deferred compensation plans.
Our weighted-average interest rate on average borrowings outstanding during the three and six months ended May 27, 2018 was 5.19% and 5.00%, respectively, as compared to 5.66% and 6.17% in the same periods in 2017.


22


Loss on early extinguishment of debt
During the three-month and six-month periods ended May 28, 2017, we recorded a $22.8 million loss on early extinguishment of debt as a result of our debt refinancing activities during the period. The loss included $21.9 million of tender and call premiums on the retirement of the debt.
Other income (expense), net
Other income (expense), net, primarily consists of foreign exchange management activities and transactions. For the three-month and six-month periods ended May 27, 2018, we recorded income of $13.7 million and $4.1 million, respectively, as compared to expense of $18.1 million and $17.7 million for the same prior-year periods. The income in the three-month period in 2018 primarily reflected net gains on our foreign exchange derivatives. The income in the six-month period in 2018 primarily reflected investment interest generated from money market funds as the net losses on our foreign exchange derivatives were offset by net gains on our foreign currency denominated balances. The expense in the three-month period in 2017 primarily reflected net losses on our foreign exchange derivatives. The expense in the six-month period in 2017 primarily reflected net losses on our foreign exchange derivatives, partially offset by net gains on our foreign currency denominated balances.
Income tax expense
On December 22, 2017, the 2017 Tax Cuts and Jobs Act was enacted in the U.S. (the "Tax Act"). The Tax Act introduced many changes, including lowering the U.S. corporate tax rate from 35% to 21%, changes in incentives, provisions to prevent U.S. base erosion and significant changes in the taxation of international income, and provisions which allow for the repatriation of foreign earnings without U.S. tax. By operation of tax law, we will apply a blended U.S. statutory federal income tax rate of 22.4% for fiscal year 2018 based on the pro rata number of days in the fiscal year before and after the effective date of the Tax Act. The enactment of the Tax Act resulted in a provisional charge of $137 million to tax expense in the first-half of fiscal year 2018. This charge was comprised of a $99 million re-measurement of our deferred tax assets and liabilities based on the lower rates at which they are expected to reverse in the future as well as a $38 million one-time U.S. transition tax on undistributed foreign earnings.
The provisions in the Tax Act are complex and broad. All components of the provisional charge of $137 million are based on our estimates as of May 27, 2018. Specifically, the transition tax and the re-measurement of deferred tax balances are provisional and have been calculated based on existing tax law and the best information available as of May 27, 2018. The final impact of U.S. tax reform may differ, possibly materially, due to factors such as changes in interpretations of the Tax Act, legislative action to address uncertainties that arise because of the Tax Act, changes to estimates we have utilized to calculate the provisional impacts, and additional guidance that may be issued by the U.S. government, among other items. As these various factors are finalized, any change will be recorded as an adjustment to the provision for income taxes in the period the amounts are determined during a measurement period granted by the Securities and Exchange Commission of up to one year after the enactment date of the Tax Act to finalize the accounting of the related income tax impacts, not to exceed 12 months from the date of enactment of the Tax Act.
In addition, we are still evaluating the Global Intangible Low Tax Income ("GILTI") provisions of the Tax Act and their impact, if any, on the consolidated financial statements beginning fiscal year 2019, including whether we adopt an accounting policy to treat such taxes as a current-period expense when incurred or whether such amounts should be factored into our measurement of deferred taxes. As a result, we have not included an estimate of the tax expense related to this item as of May 27, 2018.
The effective income tax benefit rate of 1.7% for the three months ended May 27, 2018 was driven by a 17.5% discrete tax benefit from release of reserves for uncertain tax positions due to finalization of a foreign audit in the second quarter of 2018.
The effective income tax rate was 74.0% for the six months ended May 27, 2018, compared to 16.0% for the same period ended May 28, 2017. The increase in the effective tax rate in 2018 as compared to 2017 was driven by a 61% one-time tax charge related to the impact of the U.S. tax reform described above, offset by a 5.9% discrete tax benefit from release of reserves for uncertain tax positions due to finalization of a foreign audit in the second quarter of 2018.


23


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 have entered into 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 May 27, 2018, we did not have any borrowings under the credit facility. Unused availability under the credit facility was $698.1 million, as our total availability of $744.3 million, based on collateral levels as defined by the agreement, was reduced by $46.2 million of other credit-related instruments.
As of May 27, 2018, we had cash and cash equivalents totaling approximately $698.7 million, resulting in a total liquidity position (unused availability and cash and cash equivalents) of approximately $1.4 billion.
Cash uses
Our principal cash requirements include working capital, capital expenditures, payments of principal and interest on our debt, payments of taxes, contributions to our pension plans and payments for postretirement health benefit plans, settlement of shares issued under our 2016 Equity Incentive Plan, as amended to date ("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 2018 from those disclosed in our 2017 Annual Report on Form 10-K, except that estimated pension plan payments for fiscal year 2018 have increased from $95 million to $124 million.
Cash flows
The following table summarizes, for the periods indicated, selected items in our consolidated statements of cash flows:
 
 
Six Months Ended
 
May 27,
2018
 
May 28,
2017
 
(Dollars in millions)
Cash provided by operating activities
$
227.6

 
$
217.1

Cash used for investing activities
(79.3
)
 
(48.8
)
Cash used for financing activities
(79.8
)
 
(112.5
)
Cash and cash equivalents
698.7

 
437.5

Cash flows from operating activities
Cash provided by operating activities was $227.6 million for the six-month period in 2018, as compared to $217.1 million for the same period in 2017. The increase primarily reflects an increase in cash received from customers, partially offset by higher payments for inventory and SG&A to support our growth, as well as additional contributions to our pension plans.


24


Cash flows from investing activities
Cash used for investing activities was $79.3 million for the six-month period in 2018, as compared to $48.8 million for the same period in 2017. The increase in cash used for investing activities primarily reflects increased payments on the settlement of our forward foreign exchange contracts and increased payments for capital expenditures.
Cash flows from financing activities
Cash used for financing activities was $79.8 million for the six-month period in 2018, as compared to $112.5 million for the same period in 2017. Cash used in 2018 primarily reflects the payment of a $45.0 million cash dividend and payments made for equity award exercises. Cash used in 2017 primarily reflects the payment of a $35.0 million cash dividend as well as our refinancing activities and debt reduction during the period, including debt extinguishment costs and debt issuance costs.
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 $1.06 billion as of May 27, 2018, we had fixed-rate debt of $1.04 billion (98.6% of total debt), net of capitalized debt issuance costs, and variable-rate debt of $15 million (1.4% of total debt). As of May 27, 2018, our required aggregate debt principal payments on our unsecured long-term debt were $1.05 billion in years after 2022. Short-term borrowings of $23.1 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 May 27, 2018.
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 2017 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 2017 Annual Report on Form 10-K, except for as follow:
On December 22, 2017, the Tax Act was enacted into law and the new legislation contains several key tax provisions that affected us, including a one-time mandatory transition tax on accumulated foreign earnings and a reduction of the corporate income tax rate to 21% effective January 1, 2018, among others. We are required to recognize the effect of the tax law changes in the period of enactment, such as determining the transition tax, remeasuring our U.S. deferred tax assets and liabilities as well as reassessing the net realizability of our deferred tax assets and liabilities. In December 2017, the SEC staff issued Staff Accounting Bulletin No. 118, Income Tax Accounting Implications of the Tax Cuts and Jobs Act ("SAB 118"), which allows us to record provisional amounts during a measurement period not to extend beyond one year of the enactment date. We have provided the provisional amounts of the income tax effects of the Tax Act for the transition tax and deferred tax re-measurements. Since the Tax Act was passed in the first quarter of 2018, and ongoing guidance and accounting interpretation are expected over the next 12 months, we expect to complete our analysis within the measurement period in accordance with SAB 118.
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.


25


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 debt reduction, currency values and financial impact, foreign exchange counterparty exposures, 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", "intend", "estimate", "expect", "project", "could", "plans", "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 26, 2017, 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 trend fluctuations, and our ability to plan for and respond to the impact of those changes;
our ability to effectively manage any global productivity and outsourcing actions as planned, which are 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;


26


ongoing or future litigation matters and disputes and regulatory developments;
the impact of the recently passed Tax Act in the U.S., including related changes to our deferred tax assets and liabilities, tax obligations and effective tax rate in future periods, as well as the provisional charge recorded in the first quarter of 2018 based on a reasonable estimate, and are subject to change;
changes in or application of trade and tax laws, potential increases in import tariffs or taxes and the potential renegotiation of NAFTA; 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. 


27


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 2017 Annual Report on Form 10-K.

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 May 27, 2018. Based on that evaluation, our chief executive officer and our chief financial officer concluded that as of May 27, 2018, 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. There were no 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.


28


PART II — OTHER INFORMATION
 
Item 1.
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.

Item 1A.
RISK FACTORS
There have been no material changes in our risk factors from those disclosed in our 2017 Annual Report on Form 10-K, except for the following:
Potential tariffs or a global trade war could increase the cost of our products, which could adversely impact the competitiveness of our products and our financial results.
Recently, the Trump Administration announced tariffs on certain steel and aluminum products imported into the United States, which has resulted in reciprocal tariffs from the European Union on goods, including denim products, imported from the United States. These reciprocal tariffs are not expected to have a material impact on our business because we manufacture most of our products outside of the United States. The Trump Administration has also triggered $34 million in tariffs on goods imported from China in connection with China's intellectual property practices and has announced a potential additional $200 billion in tariffs on goods imported from China. The Trump Administration has also indicated that the United States may withdraw from or renegotiate the North American Free Trade Agreement (NAFTA) with Mexico and Canada. Approximately 15% to 20% of the products that we sell in the United States are manufactured in China and Mexico. If the Trump Administration follows through on its proposed China tariffs, withdraws from or renegotiates NAFTA, or if additional tariffs or trade restrictions are implemented by the United States or other countries in connection with a global trade war, the cost of our products manufactured in China, Mexico, or other countries and imported into the United States or other countries could increase, which in turn could adversely affect the demand for these products and have a material adverse effect on our business and results of operations.
Item 2.
UNREGISTERED SALES OF EQUITY SECURITIES AND USE OF PROCEEDS
We repurchased a total of 47,050 shares of our common stock during the quarter ended May 27, 2018 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, 38,085 shares were purchased in March and 8,965 shares were purchased in May.
We are a privately-held corporation; there is no public trading of our common stock. As of July 5, 2018, we had 37,667,623 shares outstanding.
Item 3.
DEFAULTS UPON SENIOR SECURITIES
None.
 
Item 4.
MINE SAFETY DISCLOSURES
Not applicable.
 
Item 5.
OTHER INFORMATION
None.


29


Item 6.
EXHIBITS
 
 
 
 
31.1
  
 
 
 
31.2
  
 
 
 
32
  
 
 
 
101.INS
  
XBRL Instance Document. Filed herewith.
 
 
 
101.SCH
  
XBRL Taxonomy Extension Schema Document. Filed herewith.
 
 
 
101.CAL
  
XBRL Taxonomy Extension Calculation Linkbase Document. Filed herewith.
 
 
 
101.DEF
 
XBRL Taxonomy Extension Definition Linkbase Document. Filed herewith.
 
 
 
101.LAB
  
XBRL Taxonomy Extension Label Linkbase Document. Filed herewith.
 
 
 
101.PRE
  
XBRL Taxonomy Extension Presentation Linkbase Document. Filed herewith.
 
 
 
 
 
* Management contract, compensatory plan or arrangement.


30


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.
 
Date:
July 10, 2018
 
LEVI STRAUSS & Co.
 
 
 
(Registrant)
 
 
 
 
 
 
 
 
 
 
By:
/s/ GAVIN BROCKETT