10-Q 1 a3q2019form10-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 25, 2019
or
 ¨
 
TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934
Commission file number: 001-06631
_________________
LEVI STRAUSS & CO.
(Exact Name of Registrant as Specified in Its Charter)
DELAWARE
  
94-0905160
(State or Other Jurisdiction of
Incorporation or Organization)
  
(I.R.S. Employer
Identification No.)
1155 Battery Street, San Francisco, California 94111
(Address of Principal Executive Offices) (Zip Code)
(415) 501-6000
(Registrant’s Telephone Number, Including Area Code)
None
(Former Name, Former Address and Former Fiscal Year, if Changed Since Last Report)
_________________
Securities registered pursuant to Section 12(b) of the Securities Exchange Act of 1934:
Title of each class
 
Trading symbol(s)
 
Name of each exchange on which registered
Class A Common Stock, $0.001 par value per share
 
LEVI
 
New York Stock Exchange
Indicate by check mark whether the registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days.   Yes  þ  No  ¨
Indicate by check mark whether the registrant has submitted electronically every Interactive Data File required to be submitted and posted pursuant to Rule 405 of Regulation S-T (§232.405 of this chapter) during the preceding 12 months (or for such shorter period that the registrant was required to submit and post such files).    Yes  þ    No  ¨
Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, a non-accelerated filer, a smaller reporting company, or an emerging growth company. See definition of "Large accelerated filer," "accelerated filer," "smaller reporting company," and "emerging growth company" in Rule 12b-2 of the Exchange Act. (Check one):
Large accelerated filer ¨
Accelerated filer ¨
Emerging growth company ¨
Non-accelerated filer þ
 
Smaller reporting company ¨
If an emerging growth company, indicate by check mark if the registrant has elected not to use the extended transition period for complying with any new or revised financial accounting standards provided pursuant to Section 13(a) of the Exchange Act. ¨ 
Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Act).    Yes  ¨    No  þ
As of October 3, 2019, the registrant had 46,786,600 shares of Class A common stock, $0.001 par value per share and 345,929,590 shares of Class B common stock, $0.001 par value per share, outstanding.
 
 
 
 
 
 
 
 
 
 



LEVI STRAUSS & CO. AND SUBSIDIARIES
INDEX TO FORM 10-Q
FOR THE QUARTERLY PERIOD ENDED AUGUST 25, 2019
 
 
 
 
Page
Number
 
 
 
 
 
 
Item 1.
 
 
 
 
 
 
 
 
 
 
 
 
 
 
Item 2.
 
Item 3.
 
Item 4.
 
 
 
 
 
 
Item 1.
 
Item 1A.
 
Item 2.
 
Item 3.
 
Item 4.
 
Item 5.
 
Item 6.
 
 
WHERE YOU CAN FIND MORE INFORMATION
Investors and others should note that we announce material financial information to our investors using our corporate website, press releases, SEC filings and public conference calls and webcasts. We also use the following social media channels as a means of disclosing information about our company, products, planned financial and other announcements, attendance at upcoming investor and industry conferences and other matters, as well as for complying with our disclosure obligations under Regulation FD promulgated under the Securities Exchange Act of 1934, as amended:
our Investor Relations page (https://levistrauss.com/investors/financial-news);
our Twitter account (https://twitter.com/LeviStraussCo);
our company blog (https://www.levistrauss.com/unzipped-blog/);
our Facebook page (https://www.facebook.com/levistraussco/);
our LinkedIn page (https://www.linkedin.com/company/levi-strauss-&-co-);
our Instagram page (https://www.instagram.com/levistraussco/); and
our YouTube channel (https://www.youtube.com/user/levistraussvideo);.
The information we post through these channels may be deemed material. Accordingly, investors should monitor these channels in addition to following our press releases, SEC filings and public conference calls and webcasts. This list may be updated from time to time. The information we post through these channels is not a part of this Quarterly Report.




PART I — FINANCIAL INFORMATION

Item 1.
CONSOLIDATED FINANCIAL STATEMENTS
LEVI STRAUSS & CO. AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEETS
 
(Unaudited)
 
 
 
August 25,
2019
 
November 25,
2018
 
(Dollars in thousands)
ASSETS
Current Assets:
 
 
 
Cash and cash equivalents
$
863,773


$
713,120

Short-term investments in marketable securities
80,220

 

Trade receivables, net of allowance for doubtful accounts of $9,438 and $10,037
722,001


534,164

Inventories:
 


Raw materials
5,560


3,681

Work-in-process
2,754


2,977

Finished goods
927,243


877,115

Total inventories
935,557


883,773

Other current assets
212,116


157,002

Total current assets
2,813,667


2,288,059

Property, plant and equipment, net of accumulated depreciation of $1,033,729 and $974,206
498,938


460,613

Goodwill
235,630


236,246

Other intangible assets, net
42,794


42,835

Deferred tax assets, net
413,256


397,791

Other non-current assets
134,712


117,116

Total assets
$
4,138,997


$
3,542,660

 
 
 
 
LIABILITIES, TEMPORARY EQUITY AND STOCKHOLDERS’ EQUITY
Current Liabilities:
 
 
 
Short-term debt
$
27,554


$
31,935

Accounts payable
357,747


351,329

Accrued salaries, wages and employee benefits
194,291


298,990

Accrued interest payable
16,263


6,089

Accrued income taxes
47,370


15,466

Accrued sales allowances (Note 1)
125,456

 

Other accrued liabilities
417,342


348,390

Total current liabilities
1,186,023


1,052,199

Long-term debt
1,007,008


1,020,219

Postretirement medical benefits
68,783


74,181

Pension liability
187,793


195,639

Long-term employee related benefits
80,406


107,556

Long-term income tax liabilities
11,716


9,805

Other long-term liabilities
128,923


116,462

Total liabilities
2,670,652


2,576,061

Commitments and contingencies





Temporary equity (Note 1)


299,140

 

 
 
Stockholders’ Equity:

 
 
Levi Strauss & Co. stockholders’ equity


 
 
Common stock — $.001 par value; 1,200,000,000 Class A shares authorized, 43,028,267 shares and no shares issued and outstanding as of August 25, 2019 and November 25, 2018, respectively; and 422,000,000 Class B shares authorized, 349,644,520 shares and 376,028,430 shares issued and outstanding, as of August 25, 2019 and November 25, 2018, respectively
393


376

Additional paid-in capital (Note 1)
647,633

 

Accumulated other comprehensive loss
(406,450
)

(424,584
)
Retained earnings
1,219,089


1,084,321

Total Levi Strauss & Co. stockholders’ equity
1,460,665


660,113

Noncontrolling interest
7,680


7,346

Total stockholders’ equity
1,468,345


667,459

Total liabilities, temporary equity and stockholders’ equity
$
4,138,997


$
3,542,660

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


3


LEVI STRAUSS & CO. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF INCOME
 
 
Three Months Ended
 
Nine Months Ended
 
August 25,
2019
 
August 26,
2018
 
August 25,
2019
 
August 26,
2018

(Dollars in thousands, except per share amounts)
(Unaudited)
Net revenues
$
1,447,081


$
1,394,153

 
$
4,194,479

 
$
3,983,580

Cost of goods sold
680,335


652,591

 
1,944,502

 
1,833,017

Gross profit
766,746


741,562

 
2,249,977

 
2,150,563

Selling, general and administrative expenses
595,528


582,146

 
1,814,949

 
1,738,943

Operating income
171,218


159,416

 
435,028

 
411,620

Interest expense
(15,292
)

(15,697
)
 
(47,962
)
 
(45,659
)
Underwriter commission paid on behalf of selling stockholders

 

 
(24,860
)
 

Other expense, net
(4,369
)

(3,839
)
 
(2,849
)
 
(1,344
)
Income before income taxes
151,557


139,880

 
359,357

 
364,617

Income tax expense
27,340


10,299

 
60,182

 
176,633

Net income
124,217

 
129,581

 
299,175

 
187,984

Net loss (income) attributable to noncontrolling interest
292


543

 
141

 
(1,940
)
Net income attributable to Levi Strauss & Co.
$
124,509


$
130,124

 
$
299,316

 
$
186,044

Earnings per common share attributable to common stockholders:
 
 
 
 
 
 
 
Basic
$
0.32

 
$
0.34

 
$
0.77

 
$
0.49

Diluted
$
0.30

 
$
0.33

 
$
0.73

 
$
0.48

Weighted-average common shares outstanding:
 
 
 
 
 
 
 
Basic
394,169,688

 
377,742,492

 
387,289,913

 
377,171,010

Diluted
413,639,749

 
390,586,032

 
407,844,136

 
387,849,263













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 25,
2019
 
August 26,
2018
 
August 25,
2019
 
August 26,
2018
 
(Dollars in thousands)
(Unaudited)
Net income
$
124,217


$
129,581

 
$
299,175

 
$
187,984

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


 
 
 
 
 
Pension and postretirement benefits
3,431


3,347

 
10,317

 
9,864

Derivative instruments
9,215


8,645

 
23,619

 
14,772

Foreign currency translation losses
(6,523
)

(15,483
)
 
(11,280
)
 
(30,055
)
Unrealized gains on marketable securities
475

 
282

 
1,694

 
456

Total other comprehensive income (loss), before related income taxes
6,598

 
(3,209
)
 
24,350

 
(4,963
)
Income taxes expense related to items of other comprehensive income
(1,568
)
 
(2,050
)
 
(5,741
)
 
(4,433
)
Comprehensive income, net of income taxes
129,247

 
124,322

 
317,784

 
178,588

Comprehensive loss (income) attributable to noncontrolling interest
68

 
700

 
(334
)
 
(1,883
)
Comprehensive income attributable to Levi Strauss & Co.
$
129,315

 
$
125,022

 
$
317,450

 
$
176,705

































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


5


LEVI STRAUSS & CO. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF STOCKHOLDERS' EQUITY
 
Levi Strauss & Co. Stockholders
 
 
 
 
 
Class A & Class B Common Stock
 
Additional Paid-In Capital
 
Retained Earnings
 
Accumulated Other Comprehensive (Loss)/Income
 
Noncontrolling Interest
 
Total Stockholders' Equity
 
(Dollars in thousands)
(Unaudited)
Balance at November 26, 2017
$
375

 
$

 
$
1,100,916

 
$
(404,381
)
 
$
5,478

 
$
702,388

Net (loss) income

 

 
(19,012
)
 

 
383

 
(18,629
)
Other comprehensive income, net of tax

 

 

 
5,167

 
261

 
5,428

Stock-based compensation and dividends, net
2

 
5,254

 

 

 

 
5,256

Reclassification to temporary equity

 
9,590

 
(42,589
)
 

 

 
(32,999
)
Repurchase of common stock

 
(14,844
)
 

 

 

 
(14,844
)
Cash dividends declared ($0.24 per share)

 

 
(90,000
)
 

 

 
(90,000
)
Balance at February 25, 2018
377

 

 
949,315

 
(399,214
)
 
6,122

 
556,600

Net income

 

 
74,932

 

 
2,100

 
77,032

Other comprehensive loss, net of tax

 

 

 
(9,405
)
 
(161
)
 
(9,566
)
Stock-based compensation and dividends, net

 
5,566

 

 

 

 
5,566

Reclassification to temporary equity

 
(2,438
)
 
(27,796
)
 

 

 
(30,234
)
Repurchase of common stock

 
(3,128
)
 
(4,055
)
 

 

 
(7,183
)
Balance at May 27, 2018
377

 

 
992,396

 
(408,619
)
 
8,061

 
592,215

Net income

 

 
130,124

 

 
(543
)
 
129,581

Other comprehensive loss, net of tax

 

 

 
(5,102
)
 
(157
)
 
(5,259
)
Stock-based compensation and dividends, net
1

 
4,266

 
(64
)
 

 

 
4,203

Reclassification to temporary equity

 
7,230

 
(42,052
)
 

 

 
(34,822
)
Repurchase of common stock
(2
)
 
(11,496
)
 
(20,246
)
 

 

 
(31,744
)
Balance at August 26, 2018
$
376

 
$

 
$
1,060,158

 
$
(413,721
)
 
$
7,361

 
$
654,174

 
 
 
 
 
 
 
 
 
 
 
 
Balance at November 25, 2018
$
376


$


$
1,084,321


$
(424,584
)

$
7,346

 
$
667,459

Net income (loss)




146,577




(126
)
 
146,451

Other comprehensive income, net of tax






8,214


180

 
8,394

Stock-based compensation and dividends, net


1,497







 
1,497

Reclassification to temporary equity


(506
)

(23,339
)




 
(23,845
)
Repurchase of common stock


(991
)

(2,923
)




 
(3,914
)
Cash dividends declared ($0.29 per share)




(110,000
)




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

 

 
1,094,636

 
(416,370
)
 
7,400

 
686,042

Net income

 

 
28,230

 

 
277

 
28,507

Other comprehensive income, net of tax

 

 

 
5,114

 
71

 
5,185

Stock-based compensation and dividends, net
2

 
12,515

 

 

 

 
12,517

Repurchase of common stock

 
(24,696
)
 

 

 

 
(24,696
)
Reclassification from temporary equity in connection with initial public offering (Note 1)

 
351,185

 
(28,200
)
 

 

 
322,985

Issuance of Class A common stock in connection with initial public offering (Note 1)
14

 
234,569

 

 

 

 
234,583

Cancel liability-settled awards and replace with equity-settled awards in connection with initial public offering (Note 1)

 
56,130

 

 

 

 
56,130

Balance at May 26, 2019
392

 
629,703

 
1,094,666

 
(411,256
)
 
7,748

 
1,321,253

Net income

 

 
124,509

 

 
(292
)
 
124,217

Other comprehensive income, net of tax

 

 

 
4,806

 
224

 
5,030

Stock-based compensation and dividends, net
1

 
17,930

 
(86
)
 

 

 
17,845

Balance at August 25, 2019
$
393

 
$
647,633

 
$
1,219,089

 
$
(406,450
)
 
$
7,680

 
$
1,468,345

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


6


LEVI STRAUSS & CO. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS
 
Nine Months Ended
 
August 25,
2019

August 26,
2018

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



Net income
$
299,175


$
187,984

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




Depreciation and amortization
90,305


92,130

Unrealized foreign exchange losses (gains)
19,625


(13,827
)
Realized (gain) loss on settlement of forward foreign exchange contracts not designated for hedge accounting
(9,309
)

20,446

Employee benefit plans’ amortization from accumulated other comprehensive loss and settlement loss
10,317


9,865

Stock-based compensation
31,859


15,025

Other, net
3,380


3,678

(Benefit from) provision for deferred income taxes
(20,352
)

127,626

Change in operating assets and liabilities:




Trade receivables
(21,387
)

(11,692
)
Inventories
(79,355
)

(202,822
)
Other current assets
(40,926
)

(36,122
)
Other non-current assets
(7,070
)

(6,045
)
Accounts payable and other accrued liabilities
(26,293
)

111,164

Restructuring liabilities
(248
)

(306
)
Income tax liabilities
34,918


11,479

Accrued salaries, wages and employee benefits and long-term employee related benefits
(88,817
)

(101,758
)
Other long-term liabilities
9,715


(2,066
)
Net cash provided by operating activities
205,537


204,759

Cash Flows from Investing Activities:




Purchases of property, plant and equipment
(128,041
)

(99,260
)
Proceeds (payments) on settlement of forward foreign exchange contracts not designated for hedge accounting
9,309


(20,446
)
Payments to acquire short-term investments
(94,702
)
 

Proceeds from sale, maturity and collection of short-term investments
15,057

 

Net cash used for investing activities
(198,377
)

(119,706
)
Cash Flows from Financing Activities:




Proceeds from short-term credit facilities
25,259


27,737

Repayments of short-term credit facilities
(38,280
)

(24,196
)
Other short-term borrowings, net
9,486


49

Proceeds from issuance of Class A common stock
254,329

 

Payments for underwriter commission and other offering costs
(19,746
)
 

Repurchase of common stock, including shares surrendered for tax withholdings on equity award exercises
(28,610
)

(53,773
)
Dividend to stockholders
(55,000
)

(45,000
)
Other financing, net
(643
)

(989
)
Net cash provided by (used for) financing activities
146,795


(96,172
)
Effect of exchange rate changes on cash and cash equivalents and restricted cash
(3,357
)

(10,512
)
Net increase (decrease) in cash and cash equivalents and restricted cash
150,598


(21,631
)
Beginning cash and cash equivalents, and restricted cash
713,698


634,691

Ending cash and cash equivalents, and restricted cash
864,296


613,060

Less: Ending restricted cash
(523
)

(554
)
Ending cash and cash equivalents
$
863,773


$
612,506





Noncash Investing Activity:



Property, plant and equipment acquired and not yet paid at end of period
$
21,573


$
13,093

Property, plant and equipment additions due to build-to-suit lease transactions
10,861


2,750

Supplemental disclosure of cash flow information:



Cash paid for interest during the period
$
29,621


$
27,511

Cash paid for income taxes during the period, net of refunds
80,159


67,221


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


7


LEVI STRAUSS & CO. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
FOR THE QUARTERLY PERIOD ENDED AUGUST 25, 2019
NOTE 1: SIGNIFICANT ACCOUNTING POLICIES
Nature of Operations
Levi Strauss & Co. (the "Company") is one of the world’s largest brand-name apparel companies. The Company designs, markets and sells – directly or through third parties and licensees – products that include jeans, casual and dress pants, tops, shorts, skirts, jackets, footwear and related accessories for men, women and children around the world under the Levi’s®, Dockers®, Signature by Levi Strauss & Co.™ and Denizen® brands. The Company operates its business through three geographic regions: Americas, Europe and Asia.
Basis of Presentation and Principles of Consolidation
The unaudited consolidated financial statements of the Company and its wholly-owned and majority-owned foreign and domestic subsidiaries are prepared in conformity with generally accepted accounting principles in the United States ("U.S. GAAP") for interim financial information. In the opinion of management, all adjustments necessary for a fair statement of the financial position and the results of operations for the periods presented have been included. The unaudited consolidated financial statements should be read in conjunction with the audited consolidated financial statements of the Company for the year ended November 25, 2018, included in the Company's final prospectus related to its initial public offering ("IPO"), dated March 20, 2019 (File No. 333-229630) (the "Prospectus"), filed with the Securities and Exchange Commission ("SEC") pursuant to Rule 424(b) under the Securities Act of 1933, as amended.
The unaudited consolidated financial statements include the accounts of the Company and its subsidiaries. All significant intercompany transactions have been eliminated. Management believes the disclosures are adequate to make the information presented in the unaudited consolidated financial statements not misleading. The results of operations for the three and nine months ended August 25, 2019 may not be indicative of the results to be expected for any other interim period or the year ending November 24, 2019.
The Company’s fiscal year ends on the last Sunday of November in each year, although the fiscal years of certain foreign subsidiaries end on November 30. Each quarter of both fiscal years 2019 and 2018 consists of 13 weeks. All references to years and quarters relate to fiscal years and quarters rather than calendar years and quarters.
Reclassification
Certain insignificant amounts on the consolidated statements of cash flows have been conformed to the August 25, 2019 presentation.
Stock Split
On February 12, 2019, the Company’s stockholders approved an amendment to the Company’s certificate of incorporation (the "Amendment") to effect a ten-for-one stock split of shares of the Company’s outstanding common stock, such that each share of common stock, $0.01 par value, became ten shares of common stock, $0.001 par value per share. In addition, the Amendment increased the number of authorized shares of the Company's common stock by 930,000,000 to 1,200,000,000. The Amendment became effective on March 4, 2019 when filed with the Secretary of State of the State of Delaware. All share and per-share data in the unaudited consolidated financial statements and notes has been retroactively adjusted to reflect the stock split for all periods presented.
Initial Public Offering
In March 2019, the Company completed its IPO in which it issued and sold 14,960,557 shares of Class A common stock at a public offering price of $17.00 per share. The Company received net proceeds of $234.6 million after deducting underwriting discounts and commissions of $13.6 million and other direct and incremental offering expenses of $6.1 million. The Company agreed to pay all underwriting discounts and commissions applicable to the sales of shares of Class A common stock by the selling stockholders. This amount, $24.9 million, was paid at completion of the IPO in March 2019 and was recorded as non-operating expense in the second quarter of 2019. Additionally, the Company incurred $3.5 million of other costs associated with the IPO that were recorded in selling, general and administrative expenses ("SG&A").


8


LEVI STRAUSS & CO. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS — (continued)
FOR THE QUARTERLY PERIOD ENDED AUGUST 25, 2019


In connection with the IPO, on March 19, 2019 the Company's Board of Directors approved the cancellation of the majority of the outstanding unvested cash-settled restricted stock units ("RSU's") and their concurrent replacement with similar equity-settled RSUs ("Replacement Awards"), pursuant to the Company's 2016 Equity Incentive Plan (the "2016 Plan"). RSUs for certain foreign affiliates will continue to be cash-settled. Other than the form of settlement, all other terms of the awards (including their vesting schedules) are the same. Prior to this modification, the cash-settled awards were classified as liabilities and stock-based compensation expense was measured using the fair value at the end of each reporting period. After the modification, the stock-based compensation expense for these awards was measured using the modification date fair value. As a result of the modification, accrued stock-based compensation expense of $45.8 million and $10.3 million were reclassified on the Company's consolidated balance sheets from accrued salaries, wages and employee benefits and other long-term liabilities, respectively, to additional paid in capital. Refer to Note 6 for more information.
Prior to the IPO, the holders of shares issued under the 2016 Plan could require the Company to repurchase such shares at the then-current market value pursuant to a contractual put right. Equity-classified stock-based awards that may be settled in cash at the option of the holder were presented on the Company's consolidated balance sheets outside of permanent equity. Accordingly, temporary equity on the Company's consolidated balance sheets included the redemption value of these awards generally related to the elapsed service period since the grant date reflecting patterns of compensation cost recognition, as well as the fair value of the Company's common stock issued pursuant to the 2016 Plan. Upon the completion of the IPO in the second quarter of 2019, this contractual put right was terminated and these awards are no longer presented as temporary equity. As a result, the balance in temporary equity as of immediately prior to the IPO of $351.2 million was reclassified to additional paid in capital. Refer to Note 6 for more information.
On February 12, 2019, the Company’s stockholders also approved the adoption of an amended and restated certificate of incorporation (the "IPO Certificate") and amended and restated bylaws. The IPO Certificate provides for two classes of common stock: Class A common stock, par value $0.001 per share, and Class B common stock, par value $0.001 per share. All common stock outstanding at the time of the IPO converted automatically into Class B common stock, each having ten votes per share. Shares of Class A common stock, each having one vote per share, were sold in the IPO. Shares of Class B common stock sold by selling stockholders in the IPO automatically converted into shares of Class A common stock in connection with such sale. Holders of Class B common stock can voluntarily convert their shares into Class A common stock if and when they wish to do so in order to sell their shares to the public.
On February 12, 2019, the Company’s stockholders approved the Company's 2019 Equity Incentive Plan (the "2019 Plan") and the Company's 2019 Employee Stock Purchase Plan (the "2019 ESPP"), each of which became effective on March 20, 2019, the effective date of the IPO registration statement. The maximum number of shares of the Company’s Class A common stock that may be issued under the 2019 Plan is 40,000,000. The 2019 ESPP authorizes the issuance of 12,000,000 shares of the Company’s Class A common stock and is subject to automatic annual increases.
Use of Estimates
The preparation of financial statements in conformity with U.S. GAAP requires management to make estimates and assumptions that affect the amounts reported in the consolidated financial statements and the related notes to the consolidated financial statements. Estimates are based upon historical factors, current circumstances and the experience and judgment of the Company’s management. Management evaluates its estimates and assumptions on an ongoing basis and may employ outside experts to assist in its evaluations. Changes in such estimates, based on more accurate future information, or different assumptions or conditions, may affect amounts reported in future periods.


9


LEVI STRAUSS & CO. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS — (continued)
FOR THE QUARTERLY PERIOD ENDED AUGUST 25, 2019


Changes in Accounting Principles
In May 2014, the Financial Accounting Standards Board ("FASB") issued Accounting Standard Update ("ASU") 2014-09, Revenue from Contracts with Customers (Topic 606). ASU 2014-09 outlines a single comprehensive model for entities to use in accounting for revenue arising from contracts with customers. Under the new standard and its related amendments (collectively known as Accounting Standards Codification 606 ("ASC 606")), an entity recognizes revenue when its customer obtains control of promised goods or services, in an amount that reflects the consideration which the entity expects to receive in exchange for those goods or services. Enhanced disclosures are required regarding the nature, amount, timing and uncertainty of revenue and cash flows arising from contracts with customers.
The Company has identified certain changes in balance sheet classification under ASC 606. Allowances for estimated returns, discounts and retailer promotions and other similar incentives are presented as other accrued liabilities rather than netted within accounts receivable and the estimated cost of inventory associated with allowances for estimated returns are included as other current assets rather than inventories. The Company adopted the standard as of November 26, 2018 using the modified retrospective approach and determined there is no impact to retained earnings upon adoption. Refer to Note 10 for more information.
The following table presents the related effect of the adoption of Topic 606 on the Consolidated Balance Sheets:
 
August 25, 2019
 
As Reported
 
Remove Effect of Adoption
 
Balances Without Adoption of Topic 606
 
(Dollars in thousands)
Trade receivables, net of allowance for doubtful accounts
$
722,001

 
$
176,740

 
$
545,261

Inventories: Finished goods
927,243

 
(17,352
)
 
944,595

Other current assets
212,116

 
17,352

 
194,764

Total current assets
2,813,667

 
176,740

 
2,636,927

Total assets
4,138,997

 
176,740

 
3,962,257

Accrued sales allowances
125,456

 
125,456

 

Other accrued liabilities
417,342

 
51,284

 
366,058

Total current liabilities
1,186,023

 
176,740

 
1,009,283

Total liabilities, temporary equity and stockholders' equity
$
4,138,997

 
$
176,740

 
$
3,962,257

In November 2016, the FASB issued ASU No. 2016-18, Statement of Cash Flows (Topic 230): Restricted Cash, which requires that restricted cash be included with cash and cash equivalents when reconciling the beginning-of-period and end-of-period total amounts shown in the statement of cash flows. Restricted cash is reported in Other non-current assets in the Company's Consolidated Balance Sheets. The Company adopted this standard in the first quarter of 2019, and other than the change in presentation within the Consolidated Statements of Cash Flows, the adoption of ASU 2016-18 did not have an impact on the Company's consolidated financial statements.
In March 2017, the FASB issued ASU 2017-07, Compensation-Retirement Benefits (Topic 715) Improving the Presentation of Net Periodic Cost and Net Periodic Postretirement Benefit Cost. ASU 2017-07 changes the income statement presentation of net periodic benefit costs requiring separation between operating expense (service cost component) and non-operating expense (all other components, including interest cost, expected return on plan assets, amortization of prior service costs or credits, curtailments and settlements, actuarial gains and losses, etc.). Accordingly, the Company determined this impacts the Company's Consolidated Statements of Income, as the service cost components of net periodic benefit costs are reported within operating income and the other components of net periodic benefit costs are reported in the Other Expense, Net line item. The presentation change in the Consolidated Statements of Income requires application on a retrospective basis. A practical expedient is permitted under the guidance which allows the Company to use information previously disclosed in the pension and other postretirement benefit plans footnote as the basis to apply the retrospective presentation requirements. As a result of the Company's adoption of this standard, other components of net periodic benefit


10


LEVI STRAUSS & CO. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS — (continued)
FOR THE QUARTERLY PERIOD ENDED AUGUST 25, 2019


costs, primarily interest costs and investment earnings, of $4.0 million and $0.8 million for the three months ended August 25, 2019 and August 26, 2018, respectively, and $12.0 million and $2.4 million for the nine months ended August 25, 2019 and August 26, 2018, respectively, were included in Other Expense, Net line item rather than SG&A expenses in the Company's Consolidated Statements of Income. This reclassified amount is $3.4 million for the year ended November 25, 2018.
In August 2017, the FASB issued ASU 2017-12, Derivatives and Hedging (Topic 815) Targeted Improvements to Accounting for Hedging Activities. ASU 2017-12 refines and expands hedge accounting for both financial and commodity risks. This ASU creates more transparency around how economic results are presented, both on the face of the financial statements and in the footnotes. In addition, this ASU makes certain targeted improvements to simplify the application of hedge accounting guidance. The Company adopted this standard during the first quarter of 2019 upon entering into foreign exchange risk contracts designated as hedges.
Recently Issued Accounting Standards
There have been no developments to recently issued accounting standards, including the expected dates of adoption and estimated effects on the Company’s consolidated financial statements and footnote disclosures, from those disclosed in the Prospectus, except for the following:
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 12-month term, a right-of-use asset and a lease obligation will be recognized on the balance sheet of the lessee while the income statement will reflect lease expense for operating leases and amortization and interest expense for financing leases. The Company has identified leases for real estate, personal property and other arrangements. The new standard is required to be applied using a modified retrospective approach with two adoption methods permissible. The Company expects to elect the transition method that applies the new lease standard at the adoption date instead of the earliest period presented. The Company plans to elect the practical expedient to not separate lease components from nonlease components for all leases. Additionally, the Company plans to make an accounting policy election to keep leases with an initial 12-month term or less off of the balance sheet and recognize these lease payments within the consolidated statements of income on a straight-line basis over the term of the lease. The Company continues to assess whether to elect the package of transition practical expedients which would allow the Company to carry forward prior conclusions related to: (i) whether any expired or existing contracts contain leases, (ii) the lease classification for any expired or existing leases and (iii) initial direct costs for existing leases. Given the significant number of leases, the Company anticipates the new guidance will have a material impact on the consolidated balance sheets.


11


LEVI STRAUSS & CO. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS — (continued)
FOR THE QUARTERLY PERIOD ENDED AUGUST 25, 2019


NOTE 2: FAIR VALUE OF FINANCIAL INSTRUMENTS
Beginning the first quarter of 2019, the Company invested in short-term investments. Changes in the fair value of these marketable securities are recognized in accumulated other comprehensive loss.
The following table presents the Company’s financial instruments that are carried at fair value:
 
August 25, 2019
 
November 25, 2018
 
 
 
Fair Value Estimated
Using
 
 
 
Fair Value Estimated
Using
 
Fair Value
 
Level 1 Inputs(1)
 
Level 2 Inputs(2)
 
Fair Value
 
Level 1 Inputs(1)
 
Level 2 Inputs(2)
 
(Dollars in thousands)
Financial assets carried at fair value
 
 
 
 
 
 
 
 
 
 
 
Rabbi trust assets
$
46,477

 
$
46,477

 
$

 
$
34,385

 
$
34,385

 
$

Short-term investments in marketable securities
80,220

 

 
80,220

 

 

 

Derivative instruments(3)
21,448

 

 
21,448

 
18,372

 

 
18,372

Total
$
148,145

 
$
46,477

 
$
101,668

 
$
52,757

 
$
34,385

 
$
18,372

Financial liabilities carried at fair value
 
 
 
 
 
 
 
 
 
 
 
Derivative instruments(3)
7,135

 

 
7,135

 
4,447

 

 
4,447

Total
$
7,135

 
$

 
$
7,135

 
$
4,447

 
$

 
$
4,447

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

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

(3)
The Company’s cash flow hedges are subject to International Swaps and Derivatives Association, Inc. master agreements. These agreements permit the net settlement of these contracts on a per-institution basis. Refer to Note 3 for more information.
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 25, 2019
 
November 25, 2018
 
Carrying
Value
 
Estimated Fair Value
 
Carrying
Value
 
Estimated Fair Value
 
(Dollars in thousands)
Financial liabilities carried at adjusted historical cost
 
 
 
 
 
 
 
5.00% senior notes due 2025(1)
$
495,073

 
$
515,165

 
$
487,272

 
$
478,774

3.375% senior notes due 2027(1)
527,938

 
567,582

 
538,219

 
546,238

Short-term borrowings
27,556

 
27,556

 
32,470

 
32,470

Total
$
1,050,567

 
$
1,110,303

 
$
1,057,961

 
$
1,057,482

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


12


LEVI STRAUSS & CO. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS — (continued)
FOR THE QUARTERLY PERIOD ENDED AUGUST 25, 2019


NOTE 3: DERIVATIVE INSTRUMENTS AND HEDGING ACTIVITIES
Accounting Policy
Financial Statement Presentation
The Company records all derivatives on the balance sheet at fair value, which are included in "Other current assets", "Other non-current assets", "Other accrued liabilities" or "Other long-term liabilities" on the Company’s consolidated balance sheets. The portion of the fair value that represents cash flow occurring within one year are classified as current and the portion related to cash flows occurring beyond one year are classified as non-current. The cash flows from the designated derivative instruments used as hedges are classified in the Company's consolidated statements of cash flows in the same section as the cash flows of the hedged item.
Cash Flow Hedges
The Company's cash flow hedges are recorded in "Other comprehensive income" and are not reclassified to earnings until the related net investment position has been liquidated. As a result of ASU 2017-12, for foreign exchange forward contracts accounted for as cash flow hedges, the ineffective portion (if any) will not be separately recorded. The classification of effective hedge results on the Company's consolidated statements of income is the same as that of the underlying exposure. For foreign exchange risk cash flow hedges, forward points are excluded from the assessment of hedge effectiveness and are recognized in "Net Revenues" or "Costs of goods sold" on a straight-line basis over the life of the contract. In each accounting period, differences between the change in fair value of the forward points and the amount recognized on a straight-line basis is recognized in "Other comprehensive income".
Net Investment Hedges
The Company designates certain non-derivative instruments as net investment hedges to hedge the Company's net investment position in certain of its foreign subsidiaries. For these instruments, the Company documents the hedge designation by identifying the hedging instrument, the nature of the risk being hedged and the approach for measuring hedge effectiveness. The ineffective portions of these hedges are recorded in "Other expense, net" in the Company's consolidated statements of income. The effective portions of these hedges are recorded in "Accumulated other comprehensive loss" on the Company's consolidated balance sheets and are not reclassified to earnings until the related net investment position has been liquidated.
No Hedging Designation
The Company may also enter into derivative instruments that are not designated as hedges and do not qualify for hedge accounting. For derivatives not designated for hedge accounting, changes in the fair value are recorded in "Other expense, net" in the Company’s consolidated statements of income.
The Company's foreign currency management objective is to minimize the effect of fluctuations in foreign exchange rates on nonfunctional currency cash flows and selected assets or liabilities without exposing the Company to additional risk associated with transactions that could be regarded as speculative. The Company manages certain forecasted foreign currency exposures and uses a centralized currency management operation to take advantage of potential opportunities to naturally offset foreign currency exposures against each other.
Designated Cash Flow Hedges
The Company actively manages the risk of changes in functional currency equivalent cash flows resulting from anticipated non-functional currency denominated purchases and sales. The Company’s global sourcing organization uses the U.S. dollar as its functional currency and is primarily exposed to changes in functional currency equivalent cash flows from anticipated inventory purchases, as it procures inventory on behalf of subsidiaries with Euro functional currencies. Additionally, a European subsidiary uses Euros as its functional currency and is exposed to anticipated non-functional currency denominated sales. The Company manages these risks by using currency forward contracts formally designated and effective as cash flow hedges. Hedge effectiveness is generally determined by evaluating the ability of a hedging instrument's cumulative change in fair value to offset the cumulative


13


LEVI STRAUSS & CO. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS — (continued)
FOR THE QUARTERLY PERIOD ENDED AUGUST 25, 2019


change in the present value of expected cash flows on the underlying exposures. For forward contracts, forward points are excluded from the determination of hedge effectiveness and are included in current Cost of sales for hedges of anticipated inventory purchases and in Net Revenues for hedges of anticipated sales on a straight-line basis over the life of the contract. In each accounting period, differences between the change in fair value of the forward points and the amount recognized on a straight-line basis is recognized in other comprehensive income. There was no hedge ineffectiveness for the nine months ended August 25, 2019.
Net Investment Hedges
The Company has designated a portion of its outstanding Euro-denominated senior notes as a net investment hedge to manage foreign currency exposures in its foreign operations.
Non-designated Cash Flow Hedges
The Company enters into derivative instruments not designated as hedges. These derivative instruments are not speculative and are used to manage the Company’s exposure to certain product sourcing activities, some intercompany sales, foreign subsidiaries' royalty payments, interest payments, earnings repatriations, net investment in foreign operations and funding activities but the Company has not elected to apply hedge accounting. Changes in the fair value of derivatives not designated in hedging relationships are recorded directly in "Other expense, net" in the Company’s consolidated statements of income.
As of August 25, 2019, the Company had forward foreign exchange contracts derivatives that were not designated as hedges in qualifying hedging relationships, of which $1.0 billion were contracts to buy and $444.1 million were contracts to sell various foreign currencies. These contracts are at various exchange rates and expire at various dates through February 2021. The table below provides data about the carrying values of derivative instruments and non-derivative instruments: 
 
August 25, 2019
 
November 25, 2018
 
Assets
 
(Liabilities)
 
Derivative Net Carrying Value
 
Assets
 
(Liabilities)
 
Derivative Net Carrying Value
 
Carrying
Value
 
Carrying
Value
 
 
Carrying
Value
 
Carrying
Value
 
 
(Dollars in thousands)
Derivatives designated as hedging instruments
 
 
 
 
 
 
 
 
 
 
 
Foreign exchange risk cash flow hedges(1)
$
10,228

 
$

 
$
10,228

 
$

 
$

 
$

Foreign exchange risk cash flow hedges(2)

 
(358
)
 
(358
)
 

 

 

Total
$
10,228

 
$
(358
)
 
 
 
$

 
$

 
 
Derivatives not designated as hedging instruments
 
 
 
 
 
 
 
 
 
 
 
Forward foreign exchange contracts(1)
21,448

 
(10,228
)
 
11,220

 
18,372

 

 
18,372

Forward foreign exchange contracts(2)
358

 
(7,135
)
 
(6,777
)
 

 
(4,447
)
 
(4,447
)
Total
$
21,806

 
$
(17,363
)
 
 
 
$
18,372

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

 
$
(526,253
)
 
 
 
$

 
$
(541,500
)
 
 
_____________
 
(1)
Included in "Other current assets" or "Other non-current assets" on the Company’s consolidated balance sheets.
(2)
Included in "Other accrued liabilities" or "Other long-term liabilities" on the Company’s consolidated balance sheets.


14


LEVI STRAUSS & CO. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS — (continued)
FOR THE QUARTERLY PERIOD ENDED AUGUST 25, 2019


The Company's over-the-counter forward foreign exchange contracts are subject to International Swaps and Derivatives Association, Inc. master agreements. These agreements permit the net settlement of these contracts on a per-institution basis; however, the Company records the fair value on a gross basis on its consolidated balance sheets based on maturity dates, including those subject to master netting arrangements. The table below presents the gross and net amounts of these contracts recognized on the Company's consolidated balance sheets by type of financial instrument:
 
August 25, 2019
 
November 25, 2018
 
Gross Amounts of Assets / (Liabilities) Presented in the Balance Sheet
 
Gross Amounts Not Offset in the Balance Sheet
 
Net Amounts of Assets / (Liabilities)
 
Gross Amounts of Assets / (Liabilities) Presented in the Balance Sheet
 
Gross Amounts Not Offset in the Balance Sheet
 
Net Amounts of Assets / (Liabilities)
 
 
 
 
 
 
(Dollars in thousands)
Foreign exchange risk contracts and forward foreign exchange contracts
 
 
 
 
 
 
 
 
 
 
 
Financial assets
$
29,675

 
$
(4,516
)
 
$
25,159

 
$
16,417

 
$
(1,756
)
 
$
14,661

Financial liabilities
(15,958
)
 
4,516

 
(11,442
)
 
(2,181
)
 
1,756

 
(425
)
Total
 
 
 
 
$
13,717

 
 
 
 
 
$
14,236

Embedded derivative contracts
 
 
 
 
 
 
 
 
 
 
 
Financial assets
$
2,359

 
$

 
$
2,359

 
$
1,955

 
$

 
$
1,955

Financial liabilities
(1,763
)
 

 
(1,763
)
 
(2,266
)
 

 
(2,266
)
Total
 
 
 
 
$
596

 
 
 
 
 
$
(311
)

The table below provides data about the amount of gains and losses related to derivative instruments designated as cash flow hedges and non-derivative instruments designated as net investment hedges included in "Accumulated other comprehensive loss" ("AOCI") on the Company’s consolidated balance sheets:
 
Amount of Gain (Loss)
Recognized in OCI
(Effective Portion)
 
Amount of Gain (Loss) Reclassified from AOCI into Net Income(1)
 
As of
 
As of
 
Three Months Ended
 
Nine Months Ended
August 25,
2019
November 25,
2018
August 25,
2019
 
August 26,
2018
 
August 25,
2019
 
August 26,
2018
 
(Dollars in thousands)
Foreign exchange risk contracts
$
8,372

 
$

 
$
869

 
$

 
$
1,586

 
$

Realized forward foreign exchange swaps (2)
4,637

 
4,637

 

 

 

 

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

 

 

 

Euro-denominated senior notes
(39,169
)
 
(54,416
)
 

 

 

 

Cumulative income taxes
24,266

 
29,703

 

 

 

 

Total
$
(21,705
)
 
$
(39,887
)
 
 
 
 
 
 
 
 
_____________
(1)    Amounts reclassified from AOCI were classified as net revenues and costs of goods sold on the consolidated statements of income.
(2)    Prior to and during 2005, the Company used foreign exchange currency swaps to hedge the net investment in its foreign operations. For hedges that qualified for hedge accounting, the net gains were included in AOCI and are not reclassified to earnings until the related net investment position has been liquidated.


15


LEVI STRAUSS & CO. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS — (continued)
FOR THE QUARTERLY PERIOD ENDED AUGUST 25, 2019


Within the next 12 months, a $7.3 million gain from cash flow hedges is expected to be reclassified from AOCI into net income.
The table below presents the effects of the Company's cash flow hedges of foreign exchange risk contracts on the Consolidated Statements of Income for the three and nine months ended August 25, 2019:
 
August 25,
2019
 
Three Months Ended
 
Nine Months Ended
Amount of Gain (Loss) on Cash Flow Hedge Activity:
(Dollars in thousands)
Revenues
$
(812
)
 
$
(3,257
)
Cost of Goods Sold
$
1,681

 
$
4,843

The table below provides data about the amount of gains and losses related to derivatives instruments included in "Other expense, net" in the Company's consolidated statements of income:
 
Three Months Ended
 
Nine Months Ended
 
August 25,
2019
 
August 26,
2018
 
August 25,
2019
 
August 26,
2018
 
(Dollars in thousands)
Realized gain (loss)
$
979

 
$
(2,298
)
 
$
8,739

 
$
(20,446
)
Unrealized gain (loss)
535

 
6,835

 
(9,102
)
 
22,607

Total
$
1,514

 
$
4,537

 
$
(363
)
 
$
2,161


NOTE 4: DEBT 
The following table presents the Company's debt: 
 
August 25,
2019
 
November 25,
2018
 
(Dollars in thousands)
Long-term debt
 
 
 
5.00% senior notes due 2025
$
487,086

 
$
485,605

3.375% senior notes due 2027
519,922

 
534,614

Total long-term debt
$
1,007,008


$
1,020,219

Short-term debt
 
 
 
Short-term borrowings
$
27,554

 
$
31,935

Total debt
$
1,034,562

 
$
1,052,154

Senior Revolving Credit Facility
The Company's unused availability under its senior secured revolving credit facility was $734.7 million at August 25, 2019, as the Company's total availability of $765.3 million was reduced by $30.6 million of letters of credit and other credit usage allocated under the credit facility.


16


LEVI STRAUSS & CO. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS — (continued)
FOR THE QUARTERLY PERIOD ENDED AUGUST 25, 2019


Interest Rates on Borrowings
The Company’s weighted-average interest rate on average borrowings outstanding during the three and nine months ended August 25, 2019 was 5.30% and 5.28%, respectively, as compared to 5.04% and 5.00%, respectively, during the same periods of 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
 
Nine Months Ended
 
August 25,
2019
 
August 26,
2018
 
August 25,
2019
 
August 26,
2018
 
(Dollars in thousands)
Net periodic benefit cost:
 
 
 
 
 
 
 
Pension benefits
$
3,975

 
$
819

 
$
11,968

 
$
2,434

Postretirement benefits
893

 
925

 
2,679

 
2,777

Net periodic benefit cost
$
4,868

 
$
1,744

 
$
14,647

 
$
5,211

NOTE 6: STOCK-BASED INCENTIVE COMPENSATION PLANS
Equity Awards
Service and performance RSU activity during the nine months ended August 25, 2019 was as follows:
 
Service RSUs
 
Performance RSUs
 
Units
 
Weighted-Average Grant Date Fair Value
 
Weighted-Average Remaining Contractual Life (Years)
 
Units
 
Weighted-Average Grant Date Fair Value
 
Weighted-Average Remaining Contractual Life (Years)
 
(Units in thousands)
Outstanding at November 25, 2018
1,030

 
$
8.17

 
1.7
 
1,744

 
$
8.08

 
1.4
Granted
425

 
16.31

 
 
 
594

 
15.93

 
 
Vested
(109
)
 
8.80

 
 
 

 

 
 
Granted Replacement Awards
6,542

 
16.67

 
 
 
2,083

 
22.71

 
 
Forfeited
(201
)
 
16.65

 
 
 
(59
)
 
22.55

 
 
Outstanding at August 25, 2019
7,687

 
$
15.57

 
1.8
 
4,362

 
$
16.08

 
1.3


17


LEVI STRAUSS & CO. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS — (continued)
FOR THE QUARTERLY PERIOD ENDED AUGUST 25, 2019


Liability Awards
Liability award activity during the nine months ended August 25, 2019 was as follows:
 
Phantom Service RSUs
 
Phantom Performance RSUs
 
Units
 
Weighted-Average Grant Date Fair Value
 
Fair Value At Period End
 
Units
 
Weighted-Average Grant Date Fair Value
 
Fair Value At Period End
 
(Units in thousands)
Outstanding at November 25, 2018
9,100

 
$
7.59

 
$
14.60

 
1,710

 
$
8.22

 
$
14.60

Granted
1,810

 
14.95

 
 
 
504

 
14.88

 
 
Vested
(3,595
)
 
6.84

 
 
 

 

 
 
Canceled
(6,542
)
 
9.81

 
 
 
(2,083
)
 
9.69

 
 
Forfeited
(215
)
 
8.59

 
 
 
(64
)
 
9.45

 
 
Outstanding at August 25, 2019
558

 
$
9.90

 
$
16.66

 
67

 
$
11.66

 
$
16.66

Expected to vest at August 25, 2019
519

 
$
9.75

 
$
16.66

 
59

 
$
11.50

 
$
16.66

NOTE 7: COMMITMENTS AND CONTINGENCIES
Forward Foreign Exchange Contracts
The Company uses cash flow hedge derivative instruments to manage its exposure to foreign currencies. The Company is exposed to credit loss in the event of nonperformance by the counterparties to the forward foreign exchange contracts. However, the Company believes that its exposures are appropriately diversified across counterparties and that these counterparties are creditworthy financial institutions. See Note 3 for additional information.
Other Contingencies
Litigation.  In the ordinary course of business, the Company has various pending cases involving contractual matters, facility and employee-related matters, distribution matters, product liability claims, trademark infringement and other matters. The Company does not believe any of these pending legal proceedings will have a material impact on its financial condition, results of operations or cash flows.
Customs Duty Audits. The Company imports both raw materials and finished garments into all of its operating regions and as such, is subject to numerous countries complex customs laws and regulations with respect to its import and export activity. The Company has various pending audit assessments in connection with these activities. While the Company is vigorously defending its position and does not believe any of the claims for customs duty and related charges have merit, the ultimate resolution of these assessments and legal proceedings are subject to risk and uncertainty.
NOTE 8: DIVIDEND
In January 2019, the Company's Board of Directors declared two cash dividends of $55 million each. The first dividend was paid in the first quarter of 2019. Subsequent to the Company's third quarter ended August 25, 2019, the Company's Board of Directors increased the second dividend to a fixed amount of $0.15 per share for a total dividend payment of approximately $59 million, payable in the fourth quarter of 2019 to the holders of record of the Company's Class A common stock and Class B common stock at the close of business on October 5, 2019. The increased second dividend will be recorded in "Other accrued liabilities" in the Company's consolidated balance sheets in the fourth quarter of 2019.
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.


18


LEVI STRAUSS & CO. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS — (continued)
FOR THE QUARTERLY PERIOD ENDED AUGUST 25, 2019


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 25,
2019
 
November 25,
2018
 
August 26,
2018
 
(Dollars in thousands)
Pension and postretirement benefits
$
(221,278
)
 
$
(229,023
)
 
$
(225,013
)
Derivative instruments
(21,705
)
 
(39,887
)
 
(44,759
)
Foreign currency translation losses
(157,980
)
 
(149,318
)
 
(138,850
)
Unrealized gains on marketable securities
4,291

 
2,948

 
4,383

Accumulated other comprehensive loss
(396,672
)
 
(415,280
)
 
(404,239
)
Accumulated other comprehensive income attributable to noncontrolling interest
9,778

 
9,304

 
9,482

Accumulated other comprehensive loss attributable to Levi Strauss & Co.
$
(406,450
)
 
$
(424,584
)
 
$
(413,721
)

Refer to Note 3 for insignificant amounts reclassified out of "Accumulated other comprehensive loss" into net income related to the Company's derivative instruments. Other insignificant amounts that pertain to the Company's pension and postretirement benefit plans were also reclassified out of "Accumulated other comprehensive loss" into "Other Expense, net" in the Company's consolidated statements of income.
NOTE 10: NET REVENUES
Disaggregated Revenue
The table below provides the Company's revenues disaggregated by segment and channel.
 
Three Months Ended August 25, 2019
 
Americas
 
Europe
 
Asia
 
Total
 
(Dollars in thousands)
Net revenues by channel:
 
 
 
 
 
 
 
Wholesale
$
548,214

 
$
272,484

 
$
122,114

 
$
942,812

Direct-to-consumer
222,603

 
190,774

 
90,892

 
504,269

Total net revenues
$
770,817

 
$
463,258

 
$
213,006

 
$
1,447,081


 
Nine Months Ended August 25, 2019
 
Americas
 
Europe
 
Asia
 
Total
 
(Dollars in thousands)
Net revenues by channel:
 
 
 
 
 
 
 
Wholesale
$
1,519,973

 
$
733,397

 
$
370,425

 
$
2,623,795

Direct-to-consumer
660,806

 
592,906

 
316,972

 
1,570,684

Total net revenues
$
2,180,779

 
$
1,326,303

 
$
687,397

 
$
4,194,479




19


LEVI STRAUSS & CO. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS — (continued)
FOR THE QUARTERLY PERIOD ENDED AUGUST 25, 2019


 
Three Months Ended August 26, 2018
 
Americas
 
Europe
 
Asia
 
Total
 
(Dollars in thousands)
Net revenues by channel:
 
 
 
 
 
 
 
Wholesale
$
588,683

 
$
237,920

 
$
107,509

 
$
934,112

Direct-to-consumer
204,149

 
167,817

 
88,075

 
460,041

Total net revenues
$
792,832

 
$
405,737

 
$
195,584

 
$
1,394,153


 
Nine Months Ended August 26, 2018
 
Americas
 
Europe
 
Asia
 
Total
 
(Dollars in thousands)
Net revenues by channel:
 
 
 
 
 
 
 
Wholesale
$
1,518,105

 
$
694,366

 
$
335,835

 
$
2,548,306

Direct-to-consumer
601,715

 
530,929

 
302,630

 
1,435,274

Total net revenues
$
2,119,820

 
$
1,225,295

 
$
638,465

 
$
3,983,580


Wholesale channel revenues includes sales through third-party retailers such as department stores, specialty retailers, leading third-party e-commerce sites and franchise locations dedicated to the Company's brands. The Company also sells products directly to consumers, which are reflected in the direct-to-consumer ("DTC") channel, through a variety of formats, including company-operated mainline and outlet stores, company-operated e-commerce sites and select shop-in-shops located in department stores and other third-party retail locations.
Revenue transactions generally comprise a single performance obligation which consists of the sale of products to customers either through wholesale or direct-to-consumer channels. The Company satisfies the performance obligation and records revenues when transfer of control has passed to the customer, based on the terms of sale. Transfer of control passes to wholesale customers upon shipment or upon receipt depending on the agreement with the customer. Within the Company's DTC channel, control generally transfers to the customer at the time of sale within company-operated retail stores and upon delivery to the customer with respect to e-commerce transactions.
Licensing revenues are included in the Company's wholesale channel and represent approximately 2% of total revenues which are recognized over time based on the contractual term with variable amounts recognized only when royalties exceed contractual minimum royalty guarantees.
Payment terms for wholesale transactions depend on the country of sale or agreement with the customer, and payment is generally required after shipment or receipt by the wholesale customer. Payment is due at the time of sale for retail store and e-commerce transactions.
At August 25, 2019, the Company did not have any material contract assets and or contract liabilities recorded in the consolidated balance sheets.
Net revenues are recognized when the Company's performance obligations are satisfied upon transfer of control of promised goods. A customer is deemed to have control once they are able to direct the use and receive substantially all of the benefits of the product. This includes a present obligation to payment, the transfer of legal title, physical possession, the risks and rewards of ownership, and customer acceptance.
Consideration promised in the Company’s contracts with customers includes a variable amount related to anticipated sales returns, discounts and miscellaneous claims from customers. Estimates of discretionary authorized returns, discounts and claims are based on (1) historical rates, (2) specific identification of outstanding returns not yet received from customers and outstanding discounts and claims and (3) expected returns, discounts and claims not yet finalized with customers. Actual returns, discounts and claims in any future period are inherently uncertain and thus may differ from estimates recorded.


20


LEVI STRAUSS & CO. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS — (continued)
FOR THE QUARTERLY PERIOD ENDED AUGUST 25, 2019


The Company treats all shipping to the Company's customers, handling and certain other distribution activities as a fulfillment cost and recognizes these costs as SG&A.
Sales and value-added taxes collected from customers and remitted to governmental authorities are presented on a net basis in the consolidated statements of income.
NOTE 11: OTHER EXPENSE, NET
The following table summarizes significant components of "Other expense, net": 
 
Three Months Ended
 
Nine Months Ended
 
August 25,
2019
 
August 26,
2018
 
August 25,
2019
 
August 26,
2018
 
(Dollars in thousands)
Foreign exchange management gains (losses)
$
1,514

 
$
4,537

 
$
(363
)
 
$
2,161

Foreign currency transaction losses(1)
(6,671
)
 
(11,147
)
 
(9,634
)
 
(10,528
)
Interest income
4,986

 
2,672

 
12,644

 
6,502

Investment income
493

 
306

 
1,506

 
734

Other, net(2)
(4,691
)
 
(207
)
 
(7,002
)
 
(213
)
Total other expense, net(2)
$
(4,369
)
 
$
(3,839
)
 
$
(2,849
)
 
$
(1,344
)
_____________
 
(1)
Foreign currency transaction losses reflect the impact of foreign currency fluctuation on the Company's foreign currency denominated balances. Losses in the three-month and nine-month periods ended August 25, 2019 were primarily due to the weakening of the Euro against the US dollar. Losses in the three-month and nine-month periods ended August 26, 2018 were primarily due to the weakening of the Euro and Brazilian Real against the US dollar.
(2)
The amounts in Other expense, net have been conformed to reflect the adoption of ASU 2017-07, "Compensation-Retirement Benefits (Topic 715) Improving the Presentation of Net Periodic Cost and Net Periodic Postretirement Benefit Cost" and include non-service cost component of net periodic benefit costs. Refer to Note 1 for more information.
NOTE 12: INCOME TAXES
On December 22, 2017, the U.S. enacted the Tax Cuts and Jobs Act (the "Tax Act"), which significantly changed U.S. tax law. The Tax Act lowered the Company’s U.S. statutory federal income tax rate from 35% to 21% effective on November 26, 2018. Beginning the first quarter of 2019, the Company's effective tax rate reflected a provision to tax Global Intangible Low-Taxed Income ("GILTI") of foreign subsidiaries and a tax benefit for Foreign Derived Intangible Income ("FDII"). The Company accounted for GILTI in the period in which it is incurred.
The effective income tax rate was 18.0% for the three months ended August 25, 2019, compared to 7.4% for the same prior-year period. The increase in the effective tax rate was driven by less discrete tax benefits in 2019 as compared to 2018, including 4.8% ($6.5 million) from a less favorable true-up of book-tax adjustments upon finalization of the U.S. tax return, and a 5.1% ($7.1 million) in 2018 mostly from the re-measurement of the Company's deferred tax assets and liabilities subject to the Tax Act rate reduction. There was also a 3.4% ($4.7 million) tax benefit in the prior year period attributable to exercising stock-based equity awards.
The Company's effective income tax rate was 16.7% for the nine months ended August 25, 2019, compared to 48.4% for the same prior-year period. The decrease in the effective tax rate in 2019 as compared to 2018 was primarily driven by a 36% ($129.6 million) one-time tax charge in 2018 related to the impact of the Tax Act. Of the impact, 25% ($91.5 million) was due to remeasurement of deferred tax assets and liabilities and 11% ($38.1 million) was related to transition charges on undistributed foreign earnings.


21


LEVI STRAUSS & CO. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS — (continued)
FOR THE QUARTERLY PERIOD ENDED AUGUST 25, 2019


NOTE 13: EARNINGS PER SHARE ATTRIBUTABLE TO COMMON STOCKHOLDERS
Basic earnings per share attributable to common stockholders is calculated by dividing net income attributable to common stockholders by the weighted-average number of common shares outstanding. Diluted earnings per share attributable to common stockholders adjusts the basic earnings per share attributable to common stockholders and the weighted-average number of common shares outstanding for the potentially dilutive impact of RSUs and stock appreciation rights using the treasury stock method. The following table sets forth the computation of the Company's basic and diluted earnings per share:
 
Three Months Ended
 
Nine Months Ended
 
August 25,
2019
 
August 26,
2018
 
August 25,
2019
 
August 26,
2018
 
(Dollars in thousands, except per share amounts)
Numerator:
 
 
 
 
 
 
 
Net income attributable to Levi Strauss & Co.
$
124,509

 
$
130,124

 
$
299,316

 
$
186,044

Denominator:
 
 
 
 
 
 
 
Weighted-average common shares outstanding - basic
394,169,688

 
377,742,492

 
387,289,913

 
377,171,010

Dilutive effect of stock awards
19,470,061

 
12,843,540

 
20,554,223

 
10,678,253

Weighted-average common shares outstanding - diluted
413,639,749

 
390,586,032

 
407,844,136

 
387,849,263

Earnings per common share attributable to common stockholders:
 
 
 
 
 
 
 
Basic
$
0.32

 
$
0.34

 
$
0.77

 
$
0.49

Diluted
$
0.30

 
$
0.33

 
$
0.73

 
$
0.48

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

 

 

 
1,379,464


NOTE 14: RELATED PARTIES
Charles V. Bergh, President and Chief Executive Officer, Peter E. Haas Jr., a director of the Company who retired in September 2019, and Marc Rosen, Executive Vice President and President of Direct-to-Consumer, are board members of the Levi Strauss Foundation, which is not a consolidated entity of the Company. Seth R. Jaffe, Executive Vice President and General Counsel, is Vice President of the Levi Strauss Foundation. During the three and nine months ended August 25, 2019, the Company donated $0.4 million and $9.3 million, respectively, to the Levi Strauss Foundation as compared to $0.4 million and $7.3 million for the same prior-year periods.


22


LEVI STRAUSS & CO. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS — (continued)
FOR THE QUARTERLY PERIOD ENDED AUGUST 25, 2019


NOTE 15: BUSINESS SEGMENT INFORMATION
The Company manages its business according to three regional segments: the Americas, Europe and Asia. The Company considers its chief executive officer to be the Company’s chief operating decision maker. The Company’s chief operating decision maker manages business operations, evaluates performance and allocates resources based on the regional segments’ net revenues and operating income.
Business segment information for the Company is as follows: 
 
Three Months Ended
 
Nine Months Ended
 
August 25,
2019
 
August 26,
2018
 
August 25,
2019
 
August 26,
2018
 
(Dollars in thousands)
Net revenues:
 
 
 
 
 
 
 
Americas
$
770,817

 
$
792,832

 
$
2,180,779

 
$
2,119,820

Europe
463,258

 
405,737

 
1,326,303

 
1,225,295

Asia
213,006

 
195,584

 
687,397

 
638,465

Total net revenues
$
1,447,081