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LEVI STRAUSS & CO - Quarter Report: 2016 May (Form 10-Q)

Table of Contents

 
 
 
 
 
 
 
 
 
 
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 29, 2016
or
 ¨
 
TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934
Commission file number: 002-90139
_________________
LEVI STRAUSS & CO.
(Exact Name of Registrant as Specified in Its Charter)
DELAWARE
  
94-0905160
(State or Other Jurisdiction of
Incorporation or Organization)
  
(I.R.S. Employer
Identification No.)
1155 Battery Street, San Francisco, California 94111
(Address of Principal Executive Offices) (Zip Code)
(415) 501-6000
(Registrant’s Telephone Number, Including Area Code)
None
(Former Name, Former Address and Former Fiscal Year, if Changed Since Last Report)
_________________
Indicate by check mark whether the registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days.    Yes  ¨    No  þ
Indicate by check mark whether the registrant has submitted electronically and posted on its corporate Web site, if any, every Interactive Data File required to be submitted and posted pursuant to Rule 405 of Regulation S-T (§232.405 of this chapter) during the preceding 12 months (or for such shorter period that the registrant was required to submit and post such files).    Yes  þ    No  ¨
Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, or a non-accelerated filer or a smaller reporting company. See definition of “Large accelerated filer,” “accelerated filer” and “smaller reporting company” in Rule 12b-2 of the Exchange Act. (Check one):
 
 
 
 
 
 
 
Large accelerated filer ¨
 
Accelerated filer ¨
 
Non-accelerated filer þ
 
Smaller reporting company ¨
 
(Do not check if a smaller reporting company)
Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Act).    Yes  ¨    No  þ
The Company is privately held. Nearly all of its common equity is owned by descendants of the family of the Company’s founder, Levi Strauss, and their relatives. There is no trading in the common equity and therefore an aggregate market value based on sales or bid and asked prices is not determinable.
Indicate the number of shares outstanding of each of the issuer’s classes of common stock, as of the latest practicable date.
Common Stock $.01 par value — 37,452,319 shares outstanding on July 6, 2016
 
 
 
 
 
 
 
 
 
 


Table of Contents

LEVI STRAUSS & CO. AND SUBSIDIARIES
INDEX TO FORM 10-Q
FOR THE QUARTERLY PERIOD ENDED MAY 29, 2016
 
 
 
 
Page
Number
 
 
 
 
 
 
Item 1.
 
 
 
 
 
 
 
 
 
 
 
 
Item 2.
 
Item 3.
 
Item 4.
 
 
 
 
 
 
Item 1.
 
Item 1A.
 
Item 2.
 
Item 3.
 
Item 4.
 
Item 5.
 
Item 6.
 
 


Table of Contents

PART I — FINANCIAL INFORMATION

Item 1.
CONSOLIDATED FINANCIAL STATEMENTS
LEVI STRAUSS & CO. AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEETS
 
(Unaudited)
 
 
 
May 29,
2016
 
November 29,
2015
 
(Dollars in thousands)
ASSETS
Current Assets:
 
 
 
Cash and cash equivalents
$
359,540

 
$
318,571

Trade receivables, net of allowance for doubtful accounts of $12,598 and $11,025
334,796

 
498,196

Inventories:
 
 
 
Raw materials
3,153

 
3,368

Work-in-process
3,568

 
3,031

Finished goods
783,651

 
600,460

Total inventories
790,372

 
606,859

Other current assets
100,495

 
104,523

Total current assets
1,585,203

 
1,528,149

Property, plant and equipment, net of accumulated depreciation of $826,480 and $811,013
383,260

 
390,829

Goodwill
236,065

 
235,041

Other intangible assets, net
43,104

 
43,350

Non-current deferred tax assets, net
576,490

 
580,640

Other non-current assets
93,450

 
106,386

Total assets
$
2,917,572

 
$
2,884,395

 
 
 
 
LIABILITIES, TEMPORARY EQUITY AND STOCKHOLDERS’ EQUITY
Current Liabilities:
 
 
 
Short-term debt
$
124,247

 
$
114,978

Current maturities of long-term debt
36,439

 
32,625

Accounts payable
282,165

 
238,309

Accrued salaries, wages and employee benefits
140,005

 
182,430

Restructuring liabilities
10,853

 
20,141

Accrued interest payable
5,701

 
5,510

Accrued income taxes
23,571

 
6,567

Other accrued liabilities
242,886

 
245,607

Total current liabilities
865,867

 
846,167

Long-term debt
1,005,565

 
1,004,938

Long-term capital leases
12,504

 
12,320

Postretirement medical benefits
99,167

 
105,240

Pension liability
346,770

 
358,443

Long-term employee related benefits
64,609

 
73,342

Long-term income tax liabilities
22,039

 
26,312

Other long-term liabilities
61,542

 
56,987

Total liabilities
2,478,063

 
2,483,749

Commitments and contingencies


 


Temporary equity
71,729

 
68,783

 
 
 
 
Stockholders’ Equity:
 
 
 
Levi Strauss & Co. stockholders’ equity
 
 
 
Common stock — $.01 par value; 270,000,000 shares authorized; 37,452,319 shares and 37,460,145 shares issued and outstanding
375

 
375

Additional paid-in capital
2,119

 
3,291

Retained earnings
741,217

 
705,668

Accumulated other comprehensive loss
(378,647
)
 
(379,066
)
Total Levi Strauss & Co. stockholders’ equity
365,064

 
330,268

Noncontrolling interest
2,716

 
1,595

Total stockholders’ equity
367,780

 
331,863

Total liabilities, temporary equity and stockholders’ equity
$
2,917,572

 
$
2,884,395

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


3

Table of Contents

LEVI STRAUSS & CO. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF INCOME
 
 
Three Months Ended
 
Six Months Ended
 
May 29,
2016
 
May 31,
2015
 
May 29,
2016
 
May 31,
2015
 
(Dollars in thousands)
(Unaudited)
Net revenues
$
1,011,587

 
$
1,012,180

 
$
2,068,087

 
$
2,067,255

Cost of goods sold
494,389

 
511,949

 
991,291

 
1,029,959

Gross profit
517,198

 
500,231

 
1,076,796

 
1,037,296

Selling, general and administrative expenses
459,351

 
449,662

 
900,514

 
874,944

Restructuring, net
(191
)
 
2,954

 
1,657

 
7,292

Operating income
58,038

 
47,615

 
174,625

 
155,060

Interest expense
(20,411
)
 
(21,913
)
 
(35,313
)
 
(45,225
)
Loss on early extinguishment of debt

 
(14,002
)
 

 
(14,002
)
Other income (expense), net
4,295

 
7,639

 
2,076

 
(18,389
)
Income before income taxes
41,922

 
19,339

 
141,388

 
77,444

Income tax expense
10,862

 
7,887

 
44,037

 
27,709

Net income
31,060

 
11,452

 
97,351

 
49,735

Net (income) loss attributable to noncontrolling interest
(335
)
 
239

 
(790
)
 
348

Net income attributable to Levi Strauss & Co.
$
30,725

 
$
11,691

 
$
96,561

 
$
50,083














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


4

Table of Contents

LEVI STRAUSS & CO. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF COMPREHENSIVE INCOME
 
 
Three Months Ended
 
Six Months Ended
 
May 29,
2016
 
May 31,
2015
 
May 29,
2016
 
May 31,
2015
 
(Dollars in thousands)
(Unaudited)
Net income
$
31,060

 
$
11,452

 
$
97,351

 
$
49,735

Other comprehensive income (loss), before related income taxes:
 
 
 
 
 
 
 
Pension and postretirement benefits
3,735

 
4,328

 
7,317

 
8,935

Net investment hedge (losses) gains
(250
)
 
463

 
(914
)
 
604

Foreign currency translation gains (losses)
5,877

 
1,032

 
(1,698
)
 
(9,500
)
Unrealized gains (losses) on marketable securities
1,510

 
161

 
(319
)
 
274

Total other comprehensive income, before related income taxes
10,872

 
5,984

 
4,386

 
313

Income taxes related to items of other comprehensive income
(2,414
)
 
248

 
(3,638
)
 
(1,301
)
Comprehensive income, net of income taxes
39,518

 
17,684

 
98,099

 
48,747

Comprehensive (income) loss attributable to noncontrolling interest
(447
)
 
297

 
(1,121
)
 
429

Comprehensive income attributable to Levi Strauss & Co.
$
39,071

 
$
17,981

 
$
96,978

 
$
49,176


































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


5

Table of Contents

LEVI STRAUSS & CO. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS
 
Six Months Ended
 
May 29,
2016
 
May 31,
2015
 
(Dollars in thousands)
(Unaudited)
Cash Flows from Operating Activities:
 
 
 
Net income
$
97,351

 
$
49,735

Adjustments to reconcile net income to net cash provided by operating activities:
 
 
 
Depreciation and amortization
50,496

 
50,471

Asset impairments
680

 
1,573

Gain on disposal of assets
(6,024
)
 
(8,617
)
Unrealized foreign exchange losses (gains)
16,927

 
(2,072
)
Realized (gain) loss on settlement of forward foreign exchange contracts not designated for hedge accounting
(16,887
)
 
1,368

Employee benefit plans’ amortization from accumulated other comprehensive loss
7,487

 
8,548

Employee benefit plans’ curtailment gain, net

 

Noncash restructuring charges

 
387

Noncash loss on early extinguishment of debt

 
3,448

Amortization of premium, discount and debt issuance costs
1,256

 
881

Stock-based compensation
1,976

 
7,848

Allowance for doubtful accounts
2,209

 
1,192

Change in operating assets and liabilities:
 
 
 
Trade receivables
157,291

 
173,660

Inventories
(185,806
)
 
18,582

Other current assets
1,993

 
(1,100
)
Other non-current assets
(4,163
)
 
(1,368
)
Accounts payable and other accrued liabilities
41,392

 
(85,738
)
Restructuring liabilities
(10,691
)
 
(25,880
)
Income tax liabilities
18,397

 
(5,414
)
Accrued salaries, wages and employee benefits and long-term employee related benefits
(73,463
)
 
(72,301
)
Other long-term liabilities
2,883

 
(13,853
)
Other, net

 
1,214

Net cash provided by operating activities
103,304

 
102,564

Cash Flows from Investing Activities:
 
 
 
Purchases of property, plant and equipment
(47,231
)
 
(43,163
)
Proceeds from sales of assets
17,431

 
8,785

Proceeds (payments) on settlement of forward foreign exchange contracts not designated for hedge accounting
16,887

 
(1,368
)
Acquisitions, net of cash acquired
(47
)
 
(251
)
Other

 

Net cash used for investing activities
(12,960
)
 
(35,997
)
Cash Flows from Financing Activities:
 
 
 
Proceeds from issuance of long-term debt

 
500,000

Repayments of long-term debt and capital leases
(1,571
)
 
(526,490
)
Proceeds from senior revolving credit facility
180,000

 
265,000

Repayments of senior revolving credit facility
(174,000
)
 
(255,000
)
Proceeds from short-term credit facilities
14,216

 
11,884

Repayments of short-term credit facilities
(10,389
)
 
(8,407
)
Other short-term borrowings, net
593

 
310

Debt issuance costs

 
(3,937
)
Change in restricted cash, net
3,315

 
1,110

Repurchase of common stock
(1,393
)
 
(2,221
)
Excess tax benefits from stock-based compensation
179

 
347

Dividend to stockholders
(60,000
)
 
(50,000
)
Net cash used for financing activities
(49,050
)
 
(67,404
)
Effect of exchange rate changes on cash and cash equivalents
(325
)
 
(12,784
)
Net increase (decrease) in cash and cash equivalents
40,969

 
(13,621
)
Beginning cash and cash equivalents
318,571

 
298,255

Ending cash and cash equivalents
$
359,540

 
$
284,634

 
 
 
 
Noncash Investing Activity:
 
 
 
Purchases of property, plant and equipment not yet paid at end of period
$
22,911

 
$
10,035

 
 
 
 
Supplemental disclosure of cash flow information:
 
 
 
Cash paid for interest during the period
$
33,536

 
$
42,526

Cash paid for income taxes during the period, net of refunds
21,703

 
33,619


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 29, 2016
NOTE 1: SIGNIFICANT ACCOUNTING POLICIES
Nature of Operations
Levi Strauss & Co. (the “Company”) is one of the world’s largest brand-name apparel companies. The Company designs, markets and sells – directly or through third parties and licensees – products that include jeans, casual and dress pants, tops, shorts, skirts, jackets, footwear and related accessories for men, women and children around the world under the Levi’s®, Dockers®, Signature by Levi Strauss & Co.™ and Denizen® brands. The Company operates its business through three geographic regions: Americas, Europe and Asia.
Basis of Presentation and Principles of Consolidation
The unaudited consolidated financial statements of the Company and its wholly-owned and majority-owned foreign and domestic subsidiaries are prepared in conformity with generally accepted accounting principles in the United States (“U.S. GAAP”) for interim financial information. In the opinion of management, all adjustments necessary for a fair statement of the financial position and the results of operations for the periods presented have been included. These unaudited consolidated financial statements should be read in conjunction with the audited consolidated financial statements of the Company for the year ended November 29, 2015, included in the Annual Report on Form 10-K filed with the Securities and Exchange Commission (“SEC”) on February 11, 2016.
The unaudited consolidated financial statements include the accounts of the Company and its subsidiaries. All significant intercompany transactions have been eliminated. Management believes the disclosures are adequate to make the information presented herein not misleading. The results of operations for the three and six months ended May 29, 2016, may not be indicative of the results to be expected for any other interim period or the year ending November 27, 2016.
The Company’s fiscal year ends on the last Sunday of November in each year, although the fiscal years of certain foreign subsidiaries end on November 30. Each quarter of both fiscal years 2016 and 2015 consists of 13 weeks. All references to years relate to fiscal years rather than calendar years.
Subsequent events have been evaluated through the issuance date of these financial statements.
The Company's consolidated statements of comprehensive income for all periods presented have been conformed to show each component of other comprehensive income before related income tax effects with one amount shown for aggregate income tax expense related to the total of other comprehensive income items. Each component was previously presented net of related income tax effects. There was no change to total comprehensive income, net of income taxes, and the change was immaterial to the financial statements taken as a whole.
Use of Estimates
The preparation of financial statements in conformity with U.S. GAAP requires management to make estimates and assumptions that affect the amounts reported in the consolidated financial statements and the related notes to the consolidated financial statements. Estimates are based upon historical factors, current circumstances and the experience and judgment of the Company’s management. Management evaluates its estimates and assumptions on an ongoing basis and may employ outside experts to assist in its evaluations. Changes in such estimates, based on more accurate future information, or different assumptions or conditions, may affect amounts reported in future periods.


7




LEVI STRAUSS & CO. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS — (continued)
FOR THE QUARTERLY PERIOD ENDED MAY 29, 2016

Recently Issued Accounting Standards
There have been no developments to recently issued accounting standards, including the expected dates of adoption and estimated effects on the Company’s consolidated financial statements and footnote disclosures, from those disclosed in the Company’s 2015 Annual Report on Form 10-K, except for the following, which have been grouped by their effective dates for the Company:
First Quarter of 2018
In March 2016, the Financial Accounting Standards Board ("FASB") issued Accounting Standards Update No. ("ASU") 2016-06, Derivatives and Hedging (Topic 815) – Contingent Put and Call Options in Debt Instruments, which will reduce diversity of practice in identifying embedded derivatives in debt instruments. ASU 2016-06 clarifies that the nature of an exercise contingency is not subject to the “clearly and closely” criteria for purposes of assessing whether the call or put option must be separated from the debt instrument and accounted for separately as a derivative. The Company is currently assessing the impact that adopting this new accounting standard will have on its consolidated financial statements and footnote disclosures.
In March 2016, the FASB issued ASU 2016-09, Compensation – Stock Compensation (Topic 718). ASU 2016-09 identifies areas for simplification involving several aspects of accounting for share-based payment transactions, including the income tax consequences, classification of awards as either equity or liabilities, an option to recognize gross stock compensation expense with actual forfeitures recognized as they occur, as well as certain classifications on the statement of cash flows. The Company is currently assessing the impact that adopting this new accounting standard will have on its consolidated financial statements and footnote disclosures.
First Quarter of 2019
In March 2016, the FASB issued ASU 2016-04, Liabilities – Extinguishment of Liabilities (Subtopic 405-20): Recognition of Breakage for Certain Prepaid Stored-Value Products. ASU 2016-04 aligns recognition of the financial liabilities related to prepaid stored-value products (for example, prepaid gift cards), with Topic 606, Revenues from Contracts with Customers, for non-financial liabilities. In general, certain or these liabilities may be extinguished proportionally in earnings as redemptions occur, or when redemption is remote if issuers are not entitled to the unredeemed stored value. The Company is currently assessing the impact that adopting this new accounting standard will have on its consolidated financial statements and footnote disclosures.
The FASB has issued several more amendments to the new revenue standard ASU 2014-09, as amended by ASU 2015-14:
March 2016 - ASU 2016-08, Revenue from Contracts with Customers (Topic 606): Principal versus Agent Considerations (Reporting Revenue Gross versus Net) . ASU 2016-08 clarifies the implementation guidance on principal versus agent considerations. The guidance includes indicators to assist an entity in determining whether it controls a specified good or service before it is transferred to customers.
April 2016 - ASU 2016-10, Revenue from Contracts with Customers (Topic 606): Identifying Performance Obligations and Licensing. ASU 2016-10 covers two specific topics: performance obligations and licensing. This amendment includes guidance on immaterial promised goods or services, shipping or handling activities, separately identifiable performance obligations, functional or symbolic intellectual property licenses, sales-based and usage-based royalties, license restrictions (time, use, geographical) and licensing renewals.
May 2016 - ASU 2016-12, Revenue from Contracts with Customers (Topic 606): Narrow Scope Improvements and Practical Expedients. ASU 2016-12 clarifies certain core recognition principles including collectability, sales tax presentation, noncash consideration, contract modifications and completed contracts at transition and disclosures no longer required if the full retrospective transition method is adopted.
The Company is currently assessing the impact that adopting these new accounting standards will have on its consolidated financial statements and footnote disclosures.




8




LEVI STRAUSS & CO. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS — (continued)
FOR THE QUARTERLY PERIOD ENDED MAY 29, 2016

First Quarter of 2020
In February 2016, the FASB issued ASU 2016-02, Leases (Topic 842). ASU 2016-02 requires the identification of arrangements that should be accounted for as leases by lessees. In general, for lease arrangements exceeding a twelve month term, these arrangements must now be recognized as assets and liabilities on the balance sheet of the lessee. Under ASU 2016-02, a right-of-use asset and lease obligation will be recorded for all leases, whether operating or financing, while the income statement will reflect lease expense for operating leases and amortization/interest expense for financing leases. The balance sheet amount recorded for existing leases at the date of adoption of ASU 2016-02 must be calculated using the applicable incremental borrowing rate at the date of adoption. In addition, ASU 2016-02 requires the use of the modified retrospective method, which will require adjustment to all comparative periods presented in the consolidated financial statements. The Company is currently assessing the impact that adopting this new accounting standard will have on its consolidated financial statements and footnote disclosures.
First Quarter of 2021
In June 2016, the FASB issued ASU 2016-13, Financial Instruments - Credit Losses (Topic 326): Measurement of Credit Losses on Financial Instruments. ASU 2016-13 amends the impairment model to utilize an expected loss methodology in place of the currently used incurred loss methodology, which will result in the more timely recognition of losses. ASU 2016-13 also applies to employee benefit plan accounting, with an effective date of the first quarter of fiscal 2022. The Company is currently assessing the impact that adopting this new accounting standard will have on its consolidated financial statements, footnote disclosures and employee benefit plans’ accounting.





9




LEVI STRAUSS & CO. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS — (continued)
FOR THE QUARTERLY PERIOD ENDED MAY 29, 2016

NOTE 2: FAIR VALUE OF FINANCIAL INSTRUMENTS
The following table presents the Company’s financial instruments that are carried at fair value:
 
May 29, 2016
 
November 29, 2015
 
 
 
Fair Value Estimated
Using
 
 
 
Fair Value Estimated
Using
 
Fair Value
 
Level 1 Inputs(1)
 
Level 2 Inputs(2)
 
Fair Value
 
Level 1 Inputs(1)
 
Level 2 Inputs(2)
 
(Dollars in thousands)
Financial assets carried at fair value
 
 
 
 
 
 
 
 
 
 
 
Rabbi trust assets
$
26,402

 
$
26,402

 
$

 
$
26,013

 
$
26,013

 
$

Forward foreign exchange contracts, net(3)
11,901

 

 
11,901

 
27,131

 

 
27,131

Total
$
38,303

 
$
26,402

 
$
11,901

 
$
53,144

 
$
26,013

 
$
27,131

Financial liabilities carried at fair value
 
 
 
 
 
 
 
 
 
 
 
Forward foreign exchange contracts, net(3)
$
7,236

 
$

 
$
7,236

 
$
7,809

 
$

 
$
7,809

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

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

(3)
The Company’s over-the-counter forward foreign exchange contracts are subject to International Swaps and Derivatives Association, Inc. master agreements. These agreements permit the net settlement of these contracts on a per-institution basis.
The following table presents the carrying value – including related accrued interest – and estimated fair value of the Company’s financial instruments that are carried at adjusted historical cost:
 
May 29, 2016
 
November 29, 2015
 
Carrying
Value
 
Estimated Fair Value
 
Carrying
Value
 
Estimated Fair Value
 
(Dollars in thousands)
Financial liabilities carried at adjusted historical cost
 
 
 
 
 
 
 
Senior revolving credit facility
$
105,128

 
105,128

 
$
99,020

 
$
99,020

4.25% Yen-denominated Eurobonds due 2016(1)
36,565

 
37,111

 
32,736

 
33,593

6.875% senior notes due 2022(1)
527,488

 
562,242

 
527,715

 
570,355

5.00% senior notes due 2025(1)
482,998

 
482,998

 
482,145

 
480,945

Short-term borrowings
19,377

 
19,377

 
15,996

 
15,996

Total
$
1,171,556

 
$
1,206,856

 
$
1,157,612

 
$
1,199,909

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



10




LEVI STRAUSS & CO. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS — (continued)
FOR THE QUARTERLY PERIOD ENDED MAY 29, 2016

NOTE 3: DERIVATIVE INSTRUMENTS AND HEDGING ACTIVITIES
As of May 29, 2016, the Company had forward foreign exchange contracts to buy $887.2 million and to sell $405.4 million against various foreign currencies. These contracts are at various exchange rates and expire at various dates through February 2018.
The table below provides data about the carrying values of derivative instruments and non-derivative instruments: 
 
May 29, 2016
 
November 29, 2015
 
Assets
 
(Liabilities)
 
Derivative Net Carrying Value
 
Assets
 
(Liabilities)
 
Derivative Net Carrying Value
 
Carrying
Value
 
Carrying
Value
 
 
Carrying
Value
 
Carrying
Value
 
 
(Dollars in thousands)
Derivatives not designated as hedging instruments
 
 
 
 
 
 
 
 
 
 
 
Forward foreign exchange contracts(1)
$
17,669

 
$
(5,768
)
 
$
11,901

 
$
31,808

 
$
(4,677
)
 
$
27,131

Forward foreign exchange contracts(2)
1,805

 
(9,041
)
 
(7,236
)
 
253

 
(8,062
)
 
(7,809
)
Total
$
19,474

 
$
(14,809
)
 
 
 
$
32,061

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

 
$
(8,746
)
 
 
 
$

 
$
(7,832
)
 
 
_____________
 
(1)
Included in “Other current assets” or “Other non-current assets” on the Company’s consolidated balance sheets.
(2)
Included in “Other accrued liabilities” on the Company’s consolidated balance sheets.
The Company's over-the-counter forward foreign exchange contracts are subject to International Swaps and Derivatives Association, Inc. master agreements. These agreements permit the net settlement of these contracts on a per-institution basis. The table below presents, by type of financial instrument, the gross amounts of the Company's derivative instruments, amounts offset due to master netting arrangements with the Company's various counterparties, and the net amounts recognized on the Company's consolidated balance sheets:
 
May 29, 2016
 
November 29, 2015
 
Gross Amounts of Recognized Assets / (Liabilities)
 
Gross Amounts Offset in the Statement of Financial Position
 
Net Amounts of Assets / (Liabilities) Presented in the Statement of Financial Position
 
Gross Amounts of Recognized Assets / (Liabilities)
 
Gross Amounts Offset in the Statement of Financial Position
 
Net Amounts of Assets / (Liabilities) Presented in the Statement of Financial Position
 
 
 
 
 
 
(Dollars in thousands)
Over-the-counter forward foreign exchange contracts
 
 
 
 
 
 
 
 
 
 
 
Financial assets
$
17,273

 
$
(7,572
)
 
$
9,701

 
$
30,837

 
$
(4,930
)
 
$
25,907

Financial liabilities
(11,129
)
 
7,572

 
(3,557
)
 
(7,599
)
 
4,930

 
(2,669
)
Total
 
 
 
 
$
6,144

 
 
 
 
 
$
23,238

Embedded derivative contracts
 
 
 
 
 
 
 
 
 
 
 
Financial assets
$
2,200

 
$

 
$
2,200

 
$
1,224

 
$

 
$
1,224

Financial liabilities
(3,679
)
 

 
(3,679
)
 
(5,140
)
 

 
(5,140
)
Total
 
 
 
 
$
(1,479
)
 
 
 
 
 
$
(3,916
)



11




LEVI STRAUSS & CO. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS — (continued)
FOR THE QUARTERLY PERIOD ENDED MAY 29, 2016

The table below provides data about the amount of gains and losses related to derivative instruments and non-derivative instruments designated as net investment hedges included in “Accumulated other comprehensive loss” (“AOCI”) on the Company’s consolidated balance sheets, and in “Other income (expense), net” in the Company’s consolidated statements of income:
 
Gain or (Loss)
Recognized in AOCI
(Effective Portion)
 
Gain or (Loss) Recognized in Other Income (Expense), net (Ineffective Portion and Amount Excluded from Effectiveness Testing)
 
As of
 
As of
 
Three Months Ended
 
Six Months Ended
May 29,
2016
November 29,
2015
May 29,
2016
 
May 31,
2015
 
May 29,
2016
 
May 31,
2015
 
(Dollars in thousands)
Forward foreign exchange contracts
$
4,637

 
$
4,637

 

 


 


 


Yen-denominated Eurobonds
(19,896
)
 
(18,982
)
 
$
(792
)
 
$
1,250

 
$
(2,895
)
 
$
1,596

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

 

 

 

Cumulative income taxes
12,200

 
11,849

 
 
 
 
 
 
 
 
Total
$
(18,810
)
 
$
(18,247
)
 
 
 
 
 
 
 
 
The table below provides data about the amount of gains and losses related to derivatives not designated as hedging instruments included in “Other income (expense), net” in the Company’s consolidated statements of income:
 
Gain or (Loss)
 
Three Months Ended
 
Six Months Ended
 
May 29,
2016
 
May 31,
2015
 
May 29,
2016
 
May 31,
2015
 
(Dollars in thousands)
Forward foreign exchange contracts:
 
 
 
 
 
 
 
Realized
$
3,920

 
$
2,592

 
$
16,887

 
$
(1,368
)
Unrealized
(5,038
)
 
11,355

 
(14,269
)
 
23,223

Total
$
(1,118
)
 
$
13,947

 
$
2,618

 
$
21,855




12




LEVI STRAUSS & CO. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS — (continued)
FOR THE QUARTERLY PERIOD ENDED MAY 29, 2016

NOTE 4: DEBT 
 
May 29,
2016
 
November 29,
2015
 
(Dollars in thousands)
Long-term debt
 
 
 
Unsecured:
 
 
 
6.875% senior notes due 2022
$
524,581

 
$
524,807

5.00% senior notes due 2025
480,984

 
480,131

Total unsecured long-term debt
$
1,005,565

 
$
1,004,938

Short-term debt and current maturities of long-term debt
 
 
 
Secured:
 
 
 
Senior revolving credit facility
$
105,000

 
$
99,000

Unsecured:
 
 
 
Current maturities of 4.25% Yen-denominated Eurobonds due 2016
36,439

 
32,625

Short-term borrowings
19,247

 
15,978

Total short-term debt and current maturities of long-term debt
$
160,686

 
$
147,603

Total debt
$
1,166,251

 
$
1,152,541

Senior Revolving Credit Facility
The Company’s unused availability under its senior secured revolving credit facility was $610.8 million at May 29, 2016, as the Company’s total availability of $665.8 million was reduced by $55.0 million of letters of credit and other credit usage allocated under the credit facility.
Interest Rates on Borrowings
The Company’s weighted-average interest rate on average borrowings outstanding during the three and six months ended May 29, 2016, was 6.41% and 6.33% respectively, as compared to 6.91% and 7.22% , respectively, in the same periods of 2015.



13




LEVI STRAUSS & CO. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS — (continued)
FOR THE QUARTERLY PERIOD ENDED MAY 29, 2016

NOTE 5: EMPLOYEE BENEFIT PLANS
The following table summarizes the components of net periodic benefit cost and the changes recognized in “Accumulated other comprehensive loss” for the Company’s defined benefit pension plans and postretirement benefit plans: 
 
 
 
 
 
 
 
 
 
Pension Benefits
 
Postretirement Benefits
 
Three Months Ended
 
Three Months Ended
 
May 29,
2016
 
May 31,
2015
 
May 29,
2016
 
May 31,
2015
 
(Dollars in thousands)
Net periodic benefit cost:
 
 
 
 
 
 
 
Service cost
$
2,072

 
$
2,090

 
$
50

 
$
62

Interest cost(1)
9,490

 
11,790

 
806

 
1,147

Expected return on plan assets
(12,162
)
 
(12,716
)
 

 

Amortization of prior service benefit
(16
)
 
(15
)
 

 

Amortization of actuarial loss
3,028

 
3,163

 
741

 
1,128

Curtailment loss

 
52

 

 

Net periodic benefit cost
2,412

 
4,364

 
1,597

 
2,337

Changes in accumulated other comprehensive loss:
 
 
 
 
 
 
 
Actuarial loss
18

 

 

 

Amortization of prior service benefit
16

 
15

 

 

Amortization of actuarial loss
(3,028
)
 
(3,163
)
 
(741
)
 
(1,128
)
Curtailment loss

 
(52
)
 

 

Total recognized in accumulated other comprehensive loss
(2,994
)
 
(3,200
)
 
(741
)
 
(1,128
)
Total recognized in net periodic benefit cost and accumulated other comprehensive loss
$
(582
)
 
$
1,164

 
$
856

 
$
1,209

_____________
 
(1)
The decrease in interest cost is primarily due to the election made at the end of 2015 to adopt the spot-rate approach to determine the interest cost component of pension and postretirement expense.


14




LEVI STRAUSS & CO. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS — (continued)
FOR THE QUARTERLY PERIOD ENDED MAY 29, 2016


 
Pension Benefits
 
Postretirement Benefits
 
Six Months Ended
 
Six Months Ended
 
May 29,
2016
 
May 31,
2015
 
May 29,
2016
 
May 31,
2015
 
(Dollars in thousands)
Net periodic benefit cost:
 
 
 
 
 
 
 
Service cost
$
4,130

 
$
4,218

 
$
100

 
$
125

Interest cost(1)
18,962

 
23,630

 
1,612

 
2,294

Expected return on plan assets
(24,296
)
 
(25,433
)
 

 

Amortization of prior service benefit
(31
)
 
(31
)
 

 

Amortization of actuarial loss
6,035

 
6,323

 
1,483

 
2,256

Curtailment loss

 
387

 

 

Net periodic benefit cost
4,800

 
9,094

 
3,195

 
4,675

Changes in accumulated other comprehensive loss:
 
 
 
 
 
 
 
Actuarial loss
170

 

 

 

Amortization of prior service benefit
31

 
31

 

 

Amortization of actuarial loss
(6,035
)
 
(6,323
)
 
(1,483
)
 
(2,256
)
Curtailment loss

 
(387
)
 

 

Total recognized in accumulated other comprehensive loss
(5,834
)
 
(6,679
)
 
(1,483
)
 
(2,256
)
Total recognized in net periodic benefit cost and accumulated other comprehensive loss
$
(1,034
)
 
$
2,415

 
$
1,712

 
$
2,419

_____________
 
(1)
The decrease in interest cost is primarily due to the election made at the end of 2015 to adopt the spot-rate approach to determine the interest cost component of pension and postretirement expense.


15




LEVI STRAUSS & CO. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS — (continued)
FOR THE QUARTERLY PERIOD ENDED MAY 29, 2016

NOTE 6: RESTRUCTURING
In 2014, the Company announced and began to implement a global productivity initiative designed to streamline operations and fuel long-term profitable growth. The Company expects that the majority of the actions related to the global productivity initiative will be implemented through the end of 2016, with a focus on redesigning business processes and identifying opportunities to reduce costs, increase efficiencies and further streamline processes in supporting functions, supply chain and planning.
For the three and six months ended May 29, 2016, the Company recognized net restructuring reversals and charges, of $0.2 million and $1.7 million, respectively, as compared to net restructuring charges of $3.0 million and $7.3 million, respectively, for the same periods in 2015. These net restructuring reversals and charges were recorded in "Restructuring, net" in the Company's consolidated statements of income. Related charges of $3.0 million and $4.5 million for the three and six months ended May 29, 2016, as compared to $12.4 million and $20.4 million for the same periods in 2015, consist primarily of consulting fees for the Company's centrally-led cost-savings and productivity projects, as well as transition costs associated with the Company's decision to outsource certain global business service activities. These related charges represent costs incurred associated with ongoing operations which are expected to benefit future periods and thus were recorded in "Selling, general and administrative expenses" in the Company's consolidated statements of income. Cash payments for charges recognized to date are expected to continue through 2017.
The table below summarizes the components of charges included in “Restructuring, net” in the Company’s consolidated statements of income:
 
Three Months Ended
 
Six Months Ended
 
May 29,
2016
 
May 31,
2015
 
May 29,
2016
 
May 31,
2015
 
(Dollars in thousands)
Restructuring, net:
 
 
 
 
 
 
 
Severance and employee-related benefits(1)
$
400

 
$
2,436

 
$
1,845

 
$
7,756

Adjustments to severance and employee-related benefits
(683
)
 
(514
)
 
(404
)
 
(1,763
)
Other(2)
92

 
965

 
216

 
1,379

Adjustments to other

 
15

 

 
(467
)
Noncash pension and postretirement curtailment losses, net(3)

 
52

 

 
387

Total
$
(191
)
 
$
2,954

 
$
1,657

 
$
7,292

_____________

(1)
Severance and employee-related benefits relate to items such as severance, based on separation benefits provided by Company policy or statutory benefit plans, out-placement services and career counseling for employees affected by the global productivity initiative.

(2)
Other restructuring costs are expensed as incurred and primarily relate to consulting fees and legal expenses associated with the execution of the restructuring initiative.

(3)
Noncash pension and postretirement curtailment gains or losses resulting from the global productivity initiative are included in restructuring charges, with the associated liabilities included in "Pension liability" and "Postretirement medical benefits" on the Company's consolidated balance sheets.
The Company is unable at this time to make a good faith determination of cost estimates, or ranges of cost estimates, for additional actions associated with the global productivity initiative.


16




LEVI STRAUSS & CO. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS — (continued)
FOR THE QUARTERLY PERIOD ENDED MAY 29, 2016

The following table summarizes the activities associated with restructuring liabilities for the three and six months ended May 29, 2016, and May 31, 2015. In the table below, "Charges" represents the initial charge related to the restructuring activity. "Adjustments" includes revisions of estimates related to severance, employee-related benefits, lease and other contract termination costs, and other restructuring costs. "Payments" consists of cash payments for severance, employee-related benefits, lease and other contract termination costs, and other restructuring costs.
 
Three Months Ended May 29, 2016
 
Liabilities
 
 
 
Adjustments
 
 
 
Foreign Currency Fluctuation
 
Liabilities
 
February 28, 2016
 
Charges
 
 
Payments
 
 
May 29, 2016
 
(Dollars in thousands)
 
 
 
 
 
 
 
 
 
 
 
 
Severance and employee-related benefits
$
15,674

 
$
400

 
$
(683
)
 
$
(3,829
)
 
$
206

 
$
11,768

Other
964

 
92

 

 
(1,056
)
 

 

Total
$
16,638

 
$
492

 
$
(683
)
 
$
(4,885
)
 
$
206

 
$
11,768

 
 
 
 
 
 
 
 
 
 
 
 
Current portion
$
15,736

 
 
 
 
 
 
 
 
 
$
10,853

Long-term portion
902

 
 
 
 
 
 
 
 
 
915

Total
$
16,638

 
 
 
 
 
 
 
 
 
$
11,768

 
 
 
 
 
 
 
 
 
 
 
 
 
Three Months Ended May 31, 2015
 
Liabilities
 
 
 
Adjustments
 
 
 
Foreign Currency Fluctuation
 
Liabilities
 
March 1, 2015
 
Charges
 
 
Payments
 
 
May 31, 2015
 
(Dollars in thousands)
 
 
 
 
 
 
 
 
 
 
 
 
Severance and employee-related benefits
$
43,615

 
$
2,436

 
$
(514
)
 
$
(11,792
)
 
$
(618
)
 
$
33,127

Other
1

 
965

 
15

 
(981
)
 

 

Total
$
43,616

 
$
3,401

 
$
(499
)
 
$
(12,773
)
 
$
(618
)
 
$
33,127

 
 
 
 
 
 
 
 
 
 
 
 
Current portion
$
42,596

 
 
 
 
 
 
 
 
 
$
32,472

Long-term portion
1,020

 
 
 
 
 
 
 
 
 
655

Total
$
43,616

 
 
 
 
 
 
 
 
 
$
33,127



17




LEVI STRAUSS & CO. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS — (continued)
FOR THE QUARTERLY PERIOD ENDED MAY 29, 2016

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

 
$
1,845

 
$
(404
)
 
$
(11,168
)
 
$
721

 
$
11,768

Other
964

 
216

 

 
(1,180
)
 

 

Total
$
21,738

 
$
2,061

 
$
(404
)
 
$
(12,348
)
 
$
721

 
$
11,768

 
 
 
 
 
 
 
 
 
 
 
 
Current portion
$
20,141

 
 
 
 
 
 
 
 
 
$
10,853

Long-term portion
1,597

 
 
 
 
 
 
 
 
 
915

Total
$
21,738

 
 
 
 
 
 
 
 
 
$
11,768

 
 
 
 
 
 
 
 
 
 
 
 
 
Six Months Ended May 31, 2015
 
Liabilities
 
 
 
Adjustments
 
 
 
Foreign Currency Fluctuation
 
Liabilities
 
November 30, 2014
 
Charges
 
 
Payments
 
 
May 31, 2015
 
(Dollars in thousands)
Severance and employee-related benefits
$
56,963

 
$
7,756

 
$
(1,763
)
 
$
(25,473
)
 
$
(4,356
)
 
$
33,127

Other
6,400

 
1,379

 
(467
)
 
(7,312
)
 

 

Total
$
63,363

 
$
9,135

 
$
(2,230
)
 
$
(32,785
)
 
$
(4,356
)
 
$
33,127

 
 
 
 
 
 
 
 
 
 
 
 
Current portion
$
57,817

 
 
 
 
 
 
 
 
 
$
32,472

Long-term portion
5,546

 
 
 
 
 
 
 
 
 
655

Total
$
63,363

 
 
 
 
 
 
 
 
 
$
33,127




18




LEVI STRAUSS & CO. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS — (continued)
FOR THE QUARTERLY PERIOD ENDED MAY 29, 2016

NOTE 7: COMMITMENTS AND CONTINGENCIES
Forward Foreign Exchange Contracts
The Company uses over-the-counter derivative instruments to manage its exposure to foreign currencies. The Company is exposed to credit loss in the event of nonperformance by the counterparties to the forward foreign exchange contracts. However, the Company believes that its exposures are appropriately diversified across counterparties and that these counterparties are creditworthy financial institutions. Please see Note 3 for additional information.
Other Contingencies
Litigation.  There have been no material developments with respect to the information previously reported in the Company’s 2015 Annual Report on Form 10-K related to legal proceedings.

In the ordinary course of business, the Company has various pending cases involving contractual matters, facility and employee-related matters, distribution matters, product liability claims, trademark infringement and other matters. The Company does not believe any of these pending legal proceedings will have a material impact on its financial condition, results of operations or cash flows.

NOTE 8: DIVIDEND
The Company paid a cash dividend of $60.0 million in the second quarter of 2016. The Company does not have an established annual dividend policy. The Company will continue to review its ability to pay cash dividends at least annually, and dividends may be declared at the discretion of the Company's Board of Directors depending upon, among other factors, the Company's financial condition and compliance with the terms of the Company's debt agreements.

NOTE 9: ACCUMULATED OTHER COMPREHENSIVE LOSS
The following is a summary of the components of “Accumulated other comprehensive loss,” net of related income taxes: 
 
May 29,
2016
 
November 29,
2015
 
(Dollars in thousands)
Pension and postretirement benefits
$
(231,842
)
 
$
(236,340
)
Net investment hedge losses
(18,810
)
 
(18,247
)
Foreign currency translation losses
(120,383
)
 
(117,394
)
Unrealized gains on marketable securities
1,684

 
1,880

Accumulated other comprehensive loss
(369,351
)
 
(370,101
)
Accumulated other comprehensive income attributable to noncontrolling interest
9,296

 
8,965

Accumulated other comprehensive loss attributable to Levi Strauss & Co.
$
(378,647
)
 
$
(379,066
)

No material amounts were reclassified out of "Accumulated other comprehensive loss" into net income other than those that pertain to the Company's pension and postretirement benefit plans. Please see Note 5 for additional information. These amounts are included in "Selling, general and administrative expenses" in the Company's consolidated statements of income.



19




LEVI STRAUSS & CO. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS — (continued)
FOR THE QUARTERLY PERIOD ENDED MAY 29, 2016

NOTE 10: OTHER INCOME (EXPENSE), NET
The following table summarizes significant components of “Other income (expense), net”: 
 
Three Months Ended
 
Six Months Ended
 
May 29,
2016
 
May 31,
2015
 
May 29,
2016
 
May 31,
2015
 
(Dollars in thousands)
Foreign exchange management (losses) gains(1)
$
(1,118
)
 
$
13,947

 
$
2,618

 
$
21,855

Foreign currency transaction gains (losses)(2)
4,398

 
(7,325
)
 
(3,806
)
 
(43,284
)
Interest income
281

 
199

 
490

 
659

Investment income

 

 
708

 
439

Other
734

 
818

 
2,066

 
1,942

Total other income (expense), net
$
4,295

 
$
7,639

 
$
2,076

 
$
(18,389
)
_____________
 
(1)
Gains and losses on forward foreign exchange contracts primarily result from currency fluctuations relative to negotiated contract rates. Gains in the six-month period ended May 29, 2016 and May 31, 2015 were primarily due to favorable currency fluctuations relative to negotiated contract rates on positions to sell the Mexican Peso, partially offset by unfavorable currency fluctuations relative to negotiated contract rates on positions to sell the Euro.

(2)
Foreign currency transaction gains and losses reflect the impact of foreign currency fluctuation on the Company's foreign currency denominated balances. Losses in 2015 were primarily due to the weakening of various foreign currencies, particularly the Euro, against the U.S. Dollar.
  
NOTE 11: INCOME TAXES
The effective income tax rate was 31.1% for the six months ended May 29, 2016, compared to 35.8% for the same period ended May 31, 2015.
The decrease in the effective tax rate in 2016 as compared to 2015 primarily reflected a higher proportion of 2016 earnings in jurisdictions where the Company is subject to lower tax rates.

NOTE 12: RELATED PARTIES
Robert D. Haas, Chairman Emeritus of the Company, Charles V. Bergh, President and Chief Executive Officer, Peter E. Haas Jr., a director of the Company, and Kelly McGinnis, Senior Vice President of Corporate Affairs and Chief Communications Officer, are board members of the Levi Strauss Foundation, which is not a consolidated entity of the Company. Seth R. Jaffe, Senior Vice President and General Counsel, is Vice President of the Levi Strauss Foundation. During the three- and six-month period ended May 29, 2016, the Company donated $0.3 million and $0.6 million to the Levi Strauss Foundation as compared to $0.5 million and $6.4 million for the same prior-year period.



20




LEVI STRAUSS & CO. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS — (continued)
FOR THE QUARTERLY PERIOD ENDED MAY 29, 2016

NOTE 13: BUSINESS SEGMENT INFORMATION
The Company manages its business according to three regional segments: the Americas, Europe and Asia. The Company considers its chief executive officer to be the Company’s chief operating decision maker. The Company’s chief operating decision maker manages business operations, evaluates performance and allocates resources based on the regional segments’ net revenues and operating income.
Business segment information for the Company is as follows: 
 
Three Months Ended
 
Six Months Ended
 
May 29,
2016
 
May 31,
2015
 
May 29,
2016
 
May 31,
2015
 
(Dollars in thousands)
Net revenues:
 
 
 
 
 
 
 
Americas
$
589,311

 
$
621,776

 
$
1,160,496

 
$
1,195,863

Europe
240,626

 
222,150

 
517,112

 
499,638

Asia
181,650

 
168,254

 
390,479

 
371,754

Total net revenues
$
1,011,587

 
$
1,012,180

 
$
2,068,087

 
$
2,067,255

Operating income:
 
 
 
 
 
 
 
Americas
$
89,286

 
$
103,326

 
$
171,035

 
$
205,618

Europe(1)
37,633

 
33,482

 
99,342

 
91,671

Asia
15,874

 
15,031

 
62,479

 
62,371

Regional operating income
142,793

 
151,839

 
332,856

 
359,660

Corporate:
 
 
 
 
 
 
 
Restructuring, net
(191
)
 
2,954

 
1,657

 
7,292

Restructuring-related charges
3,034

 
12,366

 
4,531

 
20,373

Other corporate staff costs and expenses
81,912

 
88,904

 
152,043

 
176,935

Corporate expenses
84,755

 
104,224

 
158,231

 
204,600

Total operating income
58,038

 
47,615

 
174,625

 
155,060

Interest expense
(20,411
)
 
(21,913
)
 
(35,313
)
 
(45,225
)
Loss on early extinguishment of debt

 
(14,002
)
 

 
(14,002
)
Other income (expense), net
4,295

 
7,639

 
2,076

 
(18,389
)
Income before income taxes
$
41,922

 
$
19,339

 
$
141,388

 
$
77,444

_____________
 
(1)
Included in Europe's operating income for the three- and six-month periods ended May 29, 2016 is a gain of $6.1 million related to the sale-leaseback of the Company's distribution center in the United Kingdom in the second quarter of 2016. Included in Europe's operating income for the three- and six-month periods ended May 31, 2015 is a gain of $7.5 million related to the sale of the Company's finishing and distribution facility in Turkey in the second quarter of 2015.



21

Table of Contents

Item 2.
MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS 
Overview
We design, market and sell – directly or through third parties and licensees – products that include jeans, casual and dress pants, tops, shorts, skirts, jackets, footwear and related accessories for men, women and children around the world under our Levi’s®, Dockers®, Signature by Levi Strauss & Co.™ (“Signature”) and Denizen® brands.
Our business is operated through three geographic regions: Americas, Europe and Asia. Our products are sold in approximately 50,000 retail locations in more than 110 countries. We support our brands through a global infrastructure, developing, sourcing and marketing our products around the world. We distribute our Levi’s® and Dockers® products primarily through chain retailers and department stores in the United States and primarily through department stores, specialty retailers and approximately 2,100 franchised or other brand-dedicated stores and shop-in-shops outside of the United States. We also distribute our Levi’s® and Dockers® products through 662 company-operated stores located in 31 countries, including the United States, and through the ecommerce sites we operate. Our company-operated stores and ecommerce sites generated approximately 29% of our net revenues in the first half of 2016, as compared to 27% in the same period in 2015, with our ecommerce sites representing approximately 14% of this revenue in 2016, as compared to 13% in the same period in 2015. In addition, we distribute our Levi’s® and Dockers® products through ecommerce sites operated by certain of our key wholesale customers and other third parties. We distribute products under our Signature and Denizen® brands primarily through mass channel retailers in the Americas.
Our Europe and Asia businesses, collectively, contributed approximately 44% of our net revenues and 49% of our regional operating income in the first six months of 2016, as compared to 42% of our net revenues and 43% of our regional operating income in the same period in 2015. Sales of Levi’s® brand products represented approximately 86% of our total net sales in the first six-month periods in 2016, as compared to 84% in the same period in 2015.
Trends Affecting Our Business
Our key long-term objectives are to strengthen our brands globally in order to deliver sustainable profitable growth, generate strong cash flow and reduce our debt. Critical strategies to achieve these objectives include driving our profitable core business; expanding the reach of our global brands and building a more balanced product portfolio; elevating the performance of our retail channel, including ecommerce; and leveraging our global scale to improve our cost structure.
Consumer discretionary spending, which remains mixed globally, continues to result in a challenging retail environment for us and our customers, characterized by declining traffic patterns and contributing to a generally promotional environment.  In developed economies, slow real wage growth and a shift in consumer spending to interest-rate sensitive durable goods and other non-apparel categories also continue to pressure global discretionary spending.  Given consumers’ increasing focus on value pricing amid the slowly recovering economy, the off-price retail channel remains strong, partially to the detriment of traditional broadline retailers, particularly at the mid-tier. These trends are partially offset by continued economic growth in developing economies such as Mexico and China, where rising incomes and an expanding middle class create new consumers for our products. Both our wholesale and retail channels continue to face competition from ecommerce shopping enabled by the proliferation of online technologies, which constitutes an increasing proportion of global apparel sales, particularly around key selling seasons.  Some competitors also continue to expand their global footprints in both brick-and-mortar retail and online.  Currency values continue to be in a state of constant flux. The appreciation of the U.S. Dollar against various foreign currencies, particularly the Euro, will continue to impact our financial results, affecting translation, margins, as well as traffic in stores located in or near major domestic tourist destinations. The recent announcement of the Referendum of the United Kingdom’s Membership of the European Union (referred to as Brexit) has introduced additional volatility and uncertainty in global stock markets and currency exchange rates.
Our Second Quarter 2016 Results
 
Net revenues. Compared to the second quarter of 2015, consolidated net revenues was flat on a reported basis and increased 1% on a constant-currency basis. Higher retail revenues from improved performance and expansion of our retail network in Europe and Asia were mostly offset by lower sales at wholesale in the United States.
Operating income. Compared to the second quarter of 2015, consolidated operating income increased by approximately 22% and operating margin improved to 6%, primarily reflecting an improvement in our gross margin and higher constant-currency revenues, partially offset by increased investments in retail and advertising and the effects of currency.
Cash flows. Cash flows provided by operating activities were $103.3 million for the six-month period in 2016 as compared to $102.6 million for the same period in 2015; the slight increase reflected higher trade receivable collections and lower payments to vendors, offset by increased investment in inventory levels.


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Table of Contents

Financial Information Presentation
Fiscal year.    Our fiscal year ends on the last Sunday of November in each year, although the fiscal years of certain foreign subsidiaries end on November 30. Each quarter of fiscal years 2016 and 2015 consists of 13 weeks.
Segments.    We manage our business according to three regional segments: the Americas, Europe and Asia.
Classification.    Our classification of certain significant revenues and expenses reflects the following:
 
Net revenues is primarily comprised of sales of products to wholesale customers, including franchised stores, and direct sales to consumers at our company-operated ecommerce sites and stores and at our company-operated shop-in-shops located within department stores. It includes discounts, allowances for estimated returns and incentives. Net revenues also includes royalties earned from the use of our trademarks by third-party licensees in connection with the manufacturing, advertising and distribution of trademarked products.
Cost of goods sold is primarily comprised of product costs, labor and related overhead, sourcing costs, inbound freight, internal transfers, and the cost of operating our remaining manufacturing facilities, including the related depreciation expense.
Selling costs include, among other things, all occupancy costs and depreciation associated with our company-operated stores and commissions associated with our company-operated shop-in-shops, as well as costs associated with our ecommerce operations.
We reflect substantially all distribution costs in selling, general and administrative expenses, including costs related to receiving and inspection at distribution centers, warehousing, shipping to our customers, handling, and certain other activities associated with our distribution network.
Gross margins may not be comparable to those of other companies in our industry since some companies may include costs related to their distribution network and occupancy costs associated with company-operated stores in cost of goods sold.
Constant currency.    Constant-currency comparisons are based on translating local currency amounts in the prior-year period at actual foreign exchange rates for the current year. We routinely evaluate our financial performance on a constant-currency basis in order to facilitate period-to-period comparisons without regard to the impact of changing foreign currency exchange rates.


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Table of Contents

Results of Operations for Three and Six Months Ended May 29, 2016, as Compared to Same Periods in 2015
The following table summarizes, for the periods indicated, our consolidated statements of income, the changes in these items from period to period and these items expressed as a percentage of net revenues:
 
 
Three Months Ended
 
Six Months Ended
 
May 29,
2016
 
May 31,
2015
 
%
Increase
(Decrease)
 
May 29,
2016
 
May 31,
2015
 
May 29,
2016
 
May 31,
2015
 
%
Increase
(Decrease)
 
May 29,
2016
 
May 31,
2015
 
 
 
% of Net
Revenues
 
% of Net
Revenues
 
 
 
% of Net
Revenues
 
% of Net
Revenues
 
(Dollars in millions)
Net revenues
$
1,011.6

 
$
1,012.2

 
(0.1
)%
 
100.0
 %
 
100.0
 %
 
$
2,068.1

 
$
2,067.3

 

 
100.0
 %
 
100.0
 %
Cost of goods sold
494.4

 
512.0

 
(3.4
)%
 
48.9
 %
 
50.6
 %
 
991.3

 
1,030.0

 
(3.8
)%
 
47.9
 %
 
49.8
 %
Gross profit
517.2

 
500.2

 
3.4
 %
 
51.1
 %
 
49.4
 %
 
1,076.8

 
1,037.3

 
3.8
 %
 
52.1
 %
 
50.2
 %
Selling, general and administrative expenses
459.4

 
449.6

 
2.2
 %
 
45.4
 %
 
44.4
 %
 
900.5

 
874.9

 
2.9
 %
 
43.5
 %
 
42.3
 %
Restructuring, net
(0.2
)
 
3.0

 
(106.5
)%
 

 
0.3
 %
 
1.7

 
7.3

 
(77.3
)%
 
0.1
 %
 
0.4
 %
Operating income
58.0

 
47.6

 
21.9
 %
 
5.7
 %
 
4.7
 %
 
174.6

 
155.1

 
12.6
 %
 
8.4
 %
 
7.5
 %
Interest expense
(20.4
)
 
(21.9
)
 
(6.9
)%
 
(2.0
)%
 
(2.2
)%
 
(35.3
)
 
(45.3
)
 
(21.9
)%
 
(1.7
)%
 
(2.2
)%
Loss on early extinguishment of debt

 
(14.0
)
 
(100.0
)%
 

 
(1.4
)%
 

 
(14.0
)
 
(100.0
)%
 

 
(0.7
)%
Other income (expense), net
4.3

 
7.6

 
(43.8
)%
 
0.4
 %
 
0.8
 %
 
2.1

 
(18.4
)
 
(111.3
)%
 
0.1
 %
 
(0.9
)%
Income before income taxes
41.9

 
19.3

 
116.8
 %
 
4.1
 %
 
1.9
 %
 
141.4

 
77.4

 
82.6
 %
 
6.8
 %
 
3.7
 %
Income tax expense
10.9

 
7.8

 
37.7
 %
 
1.1
 %
 
0.8
 %
 
44.0

 
27.7

 
58.9
 %
 
2.1
 %
 
1.3
 %
Net income
31.0

 
11.5

 
171.2
 %
 
3.1
 %
 
1.1
 %
 
97.4

 
49.7

 
95.7
 %
 
4.7
 %
 
2.4
 %
Net (income) loss attributable to noncontrolling interest
(0.3
)
 
0.2

 
(240.2
)%
 

 

 
(0.8
)
 
0.4

 
(327.0
)%
 

 

Net income attributable to Levi Strauss & Co.
$
30.7

 
$
11.7

 
162.8
 %
 
3.0
 %
 
1.2
 %
 
$
96.6

 
$
50.1

 
92.8
 %
 
4.7
 %
 
2.4
 %


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Table of Contents

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
(Decrease)
 
 
 
 
 
% Increase
(Decrease)
 
May 29,
2016
 
May 31,
2015
 
As
Reported
 
Constant
Currency
 
May 29,
2016
 
May 31,
2015
 
As
Reported
 
Constant
Currency
 
(Dollars in millions)
Net revenues:
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
Americas
$
589.3

 
$
621.8

 
(5.2
)%
 
(4.0
)%
 
$
1,160.5

 
$
1,195.9

 
(3.0
)%
 
(1.4
)%
Europe
240.6

 
222.1

 
8.3
 %
 
8.2
 %
 
517.1

 
499.6

 
3.5
 %
 
8.2
 %
Asia
181.7

 
168.3

 
8.0
 %
 
12.1
 %
 
390.5

 
371.8

 
5.0
 %
 
10.8
 %
Total net revenues
$
1,011.6

 
$
1,012.2

 
(0.1
)%
 
1.3
 %
 
$
2,068.1

 
$
2,067.3

 

 
3.0
 %
Total net revenues remained relatively flat on a reported basis for the three- and six-month period ended May 29, 2016, as compared to the same prior-year period. On a constant-currency basis, total revenues increased for both the three- and six-month period ended May 29, 2016, as compared to the same period last year.
Americas.    Net revenues in our Americas region decreased on both a reported basis and constant-currency basis for the three- and six-month period ended May 29, 2016, with currency affecting net revenues unfavorably by approximately $8 million and $19 million, respectively.
The decline in net revenues for both periods was largely attributed to lower wholesale revenues in the United States due to a continued weak environment for apparel retailers and lower volume to certain large wholesale customers, partially offset by an increase in net revenues in Mexico in retail and wholesale. Net revenues were also unfavorably impacted as a result of a transition of Dockers products.
Europe.    Net revenues in Europe increased both on a reported basis and constant-currency basis for each of the three- and six-month period ended May 29, 2016, with currency affecting net revenues minimally during the three-month period ended May 29, 2016 and unfavorably by approximately $22 million during the six-month period ended May 29, 2016.
Constant-currency net revenues increased as a result of strong performance and expansion of our company-operated retail network.
Asia.    Net revenues in Asia increased on both a reported and constant-currency basis for the three- and six-month period ended May 29, 2016, with currency affecting net revenues unfavorably by approximately $6 million and $19 million, respectively.
The increase in net revenues was primarily due to the performance and expansion of our company-operated retail network, particularly in China, and improved performance in Japan.


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Table of Contents

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 29,
2016
 
May 31,
2015
 
%
Increase
(Decrease)
 
May 29,
2016
 
May 31,
2015
 
%
Increase
(Decrease)
 
(Dollars in millions)
Net revenues
$
1,011.6

 
$
1,012.2

 
(0.1
)%
 
$
2,068.1

 
$
2,067.3

 

Cost of goods sold
494.4

 
512.0

 
(3.4
)%
 
991.3

 
1,030.0

 
(3.8
)%
Gross profit
$
517.2

 
$
500.2

 
3.4
 %
 
$
1,076.8

 
$
1,037.3

 
3.8
 %
Gross margin
51.1
%
 
49.4
%
 
 
 
52.1
%
 
50.2
%
 
 
Currency translation unfavorably impacted gross profit by approximately $5 million and $29 million for the three- and six-month period ended May 29, 2016, respectively. Gross margin improved primarily due to our international retail growth, lower negotiated product costs, streamlined supply chain operations and price increases, partially offset by the unfavorable transactional impact of currency.
Selling, general and administrative expenses
The following table shows our selling, general and administrative expenses (“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 29,
2016
 
May 31,
2015
 
%
Increase
(Decrease)
 
May 29,
2016
 
May 31,
2015
 
May 29,
2016
 
May 31,
2015
 
%
Increase
(Decrease)
 
May 29,
2016
 
May 31,
2015
 
 
 
% of Net
Revenues
 
% of Net
Revenues
 
 
 
% of Net
Revenues
 
% of Net
Revenues
 
(Dollars in millions)
Selling
$
188.2

 
$
179.2

 
5.0
 %
 
18.6
%
 
17.7
%
 
$
377.6

 
$
360.1

 
4.8
 %
 
18.3
%
 
17.4
%
Advertising and promotion
70.5

 
63.5

 
10.9
 %
 
7.0
%
 
6.3
%
 
128.0

 
113.8

 
12.5
 %
 
6.2
%
 
5.5
%
Administration
91.9

 
97.8

 
(6.1
)%
 
9.1
%
 
9.7
%
 
176.2

 
181.4

 
(2.8
)%
 
8.5
%
 
8.8
%
Other
105.8

 
96.7

 
9.4
 %
 
10.5
%
 
9.6
%
 
214.2

 
199.2

 
7.5
 %
 
10.4
%
 
9.6
%
Restructuring-related charges
3.0

 
12.4

 
(75.5
)%
 
0.3
%
 
1.2
%
 
4.5

 
20.4

 
(77.8
)%
 
0.2
%
 
1.0
%
Total SG&A
$
459.4

 
$
449.6

 
2.2
 %
 
45.4
%
 
44.4
%
 
$
900.5

 
$
874.9

 
2.9
 %
 
43.5
%
 
42.3
%

Currency impacted SG&A favorably by approximately $4 million and $19 million for the three- and six-month period ended May 29, 2016, respectively.
Selling.  Currency impacted selling expenses favorably by approximately $3 million and $12 million for the three- and six-month period ended May 29, 2016. Higher selling expenses primarily reflected costs associated with the expansion of our company-operated store network and investment in our ecommerce business. We had 66 more company-operated stores at the end of the second quarter of 2016 than we did at the end of the second quarter of 2015.
Advertising and promotion.   Currency did not have a significant impact on advertising and promotion expenses for the three- and six-month period ended May 29, 2016. The increase in advertising and promotion expenses primarily reflected increased investment in strengthening our brands through advertising as well as a difference in the timing of our campaigns.


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Table of Contents

Administration.    Administration expenses include functional administrative and organization costs. Currency had a favorable impact on administration expenses by approximately $1 million and $3 million for the three- and six-month period ended May 29, 2016. As compared to the same prior-year periods, administration expenses in 2016 reflect lower organization costs including salaries, benefits and long-term incentive compensation.
Other.   Other SG&A includes distribution, information resources, and marketing organization costs.  Currency did not have a significant impact on other SG&A expenses for the three months ended May 29, 2016 and had a favorable impact of approximately $2 million for the six months ended May 29, 2016. Higher other SG&A costs primarily reflected increased distribution and information technology expenses. We recorded a gain of $6.1 million in conjunction with the sale-leaseback of our distribution center in the United Kingdom in the second quarter of 2016 as compared to a $7.5 million gain recognized related to the sale of our finishing and distribution facility in Turkey in 2015.
Restructuring-related charges.  Restructuring-related charges consist primarily of consulting fees incurred for our centrally-led cost-savings and productivity projects, as well as transition costs associated with our decision to outsource certain global business service activities. These related charges represent costs incurred associated with ongoing operations which are expected to benefit future periods and thus were recorded in SG&A in the Company's consolidated statements of income.


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Table of Contents

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 29,
2016
 
May 31,
2015
 
%
Increase
(Decrease)
 
May 29,
2016
 
May 31,
2015
 
May 29,
2016
 
May 31,
2015
 
%
Increase
(Decrease)
 
May 29,
2016
 
May 31,
2015
 
 
 
 
% of Net
Revenues
 
% of Net
Revenues
 
 
 
% of Net
Revenues
 
% of Net
Revenues
 
 
(Dollars in millions)
Operating income:
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
Americas
$
89.3

 
$
103.3

 
(13.6
)%
 
15.2
 %
 
16.6
%
 
$
171.0

 
$
205.6

 
(16.8
)%
 
14.7
%
 
17.2
%
 
Europe
37.6

 
33.5

 
12.3
 %
 
15.6
 %
 
15.1
%
 
99.3

 
91.7

 
8.4
 %
 
19.2
%
 
18.3
%
 
Asia
15.9

 
15.0

 
5.8
 %
 
8.8
 %
 
8.9
%
 
62.5

 
62.4

 
0.2
 %
 
16.0
%
 
16.8
%
 
Total regional operating income
142.8

 
151.8

 
(6.0
)%
 
14.1
 %
*
15.0
%
*
332.8

 
359.7

 
(7.5
)%
 
16.1
%
*
17.4
%
*
Corporate:
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
Restructuring, net
(0.2
)
 
3.0

 
(106.5
)%
 

*
0.3
%
*
1.7

 
7.3

 
(77.3
)%
 
0.1
%
*
0.4
%
*
Restructuring-related charges
3.0

 
12.4

 
(75.7
)%
 
0.3
 %
*
1.2
%
*
4.5

 
20.4

 
(77.8
)%
 
0.2
%
*
1.0
%
*
Other corporate staff costs and expenses
81.9

 
88.8

 
(7.8
)%
 
8.1
 %
*
8.8
%
*
152.0

 
176.9

 
(14.1
)%
 
7.4
%
*
8.6
%
*
Corporate expenses
84.7

 
104.2

 
(18.7
)%
 
8.4
 %
*
10.3
%
*
158.2

 
204.6

 
(22.7
)%
 
7.6
%
*
9.9
%
*
Total operating income
$
58.1

 
$
47.6

 
22.1
 %
 
5.7
 %
*
4.7
%
*
$
174.6

 
$
155.1

 
12.6
 %
 
8.4
%
*
7.5
%
*
Operating margin
5.7
%
 
4.7
%
 
 
 
 
 
 
 
8.4
%
 
7.5
%
 
 
 
 
 
 
 
______________
 * Percentage of consolidated net revenues
Currency translation unfavorably affected total operating income by approximately $1 million and $10 million for the three- and six-month period ended May 29, 2016, respectively.


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Table of Contents

Regional operating income.    
Americas. Currency translation unfavorably affected operating income in the region by approximately $1 million and $3 million for the three- and six-month period ended May 29, 2016, respectively. For both periods ended May 29, 2016, the decline in operating income is primarily due to lower net revenues in the region and higher advertising expenses. For the three months, these results were partially offset by an improvement in the region's gross margin.
Europe. Currency translation favorably affected operating income in the region by approximately $1 million and unfavorably affected operating income in the region by approximately $3 million for the three- and six-month period ended May 29, 2016, respectively. Excluding the effect of currency, operating income and operating margin increased in both periods due to the region's higher net revenues and an improvement in the region's gross margin, partially offset by an increased investment in retail and advertising in the region.
Asia. Currency translation unfavorably affected operating income in the region by approximately $1 million and $5 million for the three- and six-month period ended May 29, 2016, respectively. Excluding the effect of currency, operating income increased due to the region's higher net revenues, partially offset by increased investment in retail in the region.
Corporate.    Corporate expenses represent costs that are not attributed to any of our regional operating segments. Included in corporate expenses are restructuring charges, the consulting fees incurred for our centrally-led cost-savings and productivity projects, and other corporate staff costs. Currency translation did not have a significant impact on corporate expenses for the three- and six-month period ended May 29, 2016. As compared to the same prior-year period, corporate expenses primarily reflected lower restructuring and restructuring-related charges as well as lower global sourcing organization costs.
Interest expense
Interest expense was $20.4 million and $35.3 million for the three- and six-month period ended May 29, 2016, respectively, as compared to $21.9 million and $45.3 million for the same periods in 2015. The decrease in interest expense was due to lower average borrowing rates in 2016, resulting from our debt refinancing activities in 2015, 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 29, 2016, was 6.41% and 6.33%, respectively, as compared to 6.91% and 7.22%, respectively, in the same periods of 2015.
Loss on early extinguishment of debt
During the three months ended May 31, 2015, we recorded a $14.0 million loss on early extinguishment of debt as a result of our debt refinancing activities during the period. The loss was comprised of tender and redemption premiums of $7.5 million, the write-off of $3.5 million of unamortized debt issuance costs, and $3.0 million of other costs.
Other income (expense), net
Other income (expense), net, primarily consists of foreign exchange management activities and transactions. For the three- and six-month period ended May 29, 2016, we recorded income of $4.3 million and $2.1 million, respectively, as compared to income of $7.6 million and expense of $18.4 million for the same prior-year periods. The income in the three-month period in 2016 primarily reflected net gains on our foreign currency denominated balances. Income in the six-month period in 2016 primarily reflected gains on our foreign exchange contracts and other income. The income in the three-month period in 2015 reflected net gains on our embedded derivatives and over-the-counter forward foreign exchange contracts. The income in the six-month period in 2015 primarily reflected net losses on foreign currency denominated balances.
Income tax expense
The effective income tax rate was 31.1% for the six months ended May 29, 2016, compared to 35.8% for the same period ended May 31, 2015.
The decrease in the effective tax rate in 2016 as compared to 2015 primarily reflected a higher proportion of 2016 earnings in jurisdictions where we are subject to lower tax rates.



29

Table of Contents

Liquidity and Capital Resources
Liquidity outlook
We believe we will have adequate liquidity over the next twelve months to operate our business and to meet our cash requirements.
Cash sources
We are a privately-held corporation. We have historically relied primarily on cash flows from operations, borrowings under credit facilities, issuances of notes and other forms of debt financing. We regularly explore financing and debt reduction alternatives, including new credit agreements, unsecured and secured note issuances, equity financing, equipment and real estate financing, securitizations and asset sales.
We are borrowers under a senior secured revolving credit facility. The facility is an asset-based facility, in which the borrowing availability is primarily based on the value of our U.S. Levi’s® trademarks and the levels of accounts receivable and inventory in the United States and Canada. The maximum availability under the facility is $850 million, of which $800 million is available to us for revolving loans in U.S. Dollars and $50 million is available to us for revolving loans either in U.S. Dollars or Canadian Dollars.
As of May 29, 2016, we had borrowings of $105.0 million under the credit facility, all of which is classified as short-term debt. Unused availability under the credit facility was $610.8 million, as our total availability of $665.8 million, based on collateral levels as defined by the agreement, was reduced by $55.0 million of other credit-related instruments.
As of May 29, 2016, we had cash and cash equivalents totaling approximately $359.5 million, resulting in a total liquidity position (unused availability and cash and cash equivalents) of approximately $1.0 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 2006 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 2016 from those disclosed in our 2015 Annual Report on Form 10-K, except that potential payments in 2016 under the terms of the EIP are now estimated to be insignificant.
Cash flows
The following table summarizes, for the periods indicated, selected items in our consolidated statements of cash flows:
 
 
 
Six Months Ended
 
 
 
May 29,
2016
 
May 31,
2015
 
 
 
(Dollars in millions)
 
 
Cash provided by operating activities
$
103.3

 
$
102.6

 
 
Cash used for investing activities
(13.0
)
 
(36.0
)
 
 
Cash used for financing activities
(49.1
)
 
(67.4
)
 
 
Cash and cash equivalents
359.5

 
284.6

 
Cash flows from operating activities
Cash provided by operating activities was $103.3 million for the six-month period in 2016, as compared to $102.6 million for the same period in 2015. The slight increase reflected higher trade receivable collections and lower payments to vendors, offset by increased investment in inventory levels.



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Cash flows from investing activities
Cash used for investing activities was $13.0 million for the six-month period in 2016, as compared to $36.0 million for the same period in 2015. The decrease in cash used for investing activities as compared to the prior year primarily reflected realized gains on the settlement of our forward foreign exchange contracts and cash received from the sale-leaseback of our distribution center in the United Kingdom, partially offset by increased investment in information technology systems and distribution.
Cash flows from financing activities
Cash used for financing activities was $49.1 million for the six-month period in 2016, as compared to $67.4 million for the same period in 2015. Cash used in 2016 primarily reflected the payment of a $60 million cash dividend in the second quarter of 2016, partially offset by net borrowing on our senior revolving credit facility and other short-term borrowings. Cash used in 2015 primarily reflected the payment of a $50 million cash dividend as well as our refinancing activities and debt reduction during the period.
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 $1.2 billion as of May 29, 2016, we had fixed-rate debt of $1.1 billion (90% of total debt), net of capitalized debt issuance costs, and variable-rate debt of $112.7 million (10% of total debt). As of May 29, 2016, our required aggregate debt principal payments on our unsecured long-term debt were $1.0 billion in years after 2021. Current maturities of our 4.25% Yen-denominated Eurobonds due 2016 will be paid in 2016. Short-term debt of $105.0 million borrowed under our senior secured revolving credit facility was expected to be repaid over the next twelve months, and short-term borrowings of $19.2 million at various foreign subsidiaries were expected to be either paid over the next twelve months or refinanced at the end of their applicable terms.
Our long-term debt agreements contain customary covenants restricting our activities as well as those of our subsidiaries. We were in compliance with all of these covenants as of May 29, 2016.
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 2015 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 2015 Annual Report on Form 10-K.
Recently Issued Accounting Standards
See Note 1 to our unaudited consolidated financial statements included in this report for recently issued accounting standards, including the expected dates of adoption and estimated effects on our consolidated financial statements.
FORWARD-LOOKING STATEMENTS
Certain matters discussed in this report, including (without limitation) statements under “Management’s Discussion and Analysis of Financial Condition and Results of Operations” contain forward-looking statements. Although we believe that, in making any such statements, our expectations are based on reasonable assumptions, any such statement may be influenced by factors that could cause actual outcomes and results to be materially different from those projected.
These forward-looking statements include statements relating to our anticipated financial performance and business prospects, including profitable growth, strong cash flow, debt reduction, currency values and financial impact, the benefits and timing of our global productivity initiative, the impact of pending legal proceedings, 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.


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These risks and uncertainties, including those disclosed under “Risk Factors” in our Annual Report on Form 10-K for the fiscal year ended November 29, 2015, 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 trends fluctuations, and our ability to plan for and respond to the impact of those changes;
our ability to timely and effectively implement our global productivity initiative as planned, which is 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 a significant decline in a wholesale customer's financial condition, leading to restructuring actions, bankruptcies, liquidations or other unfavorable events for our wholesale customers, caused by factors such as inability to secure financing, decreased discretionary consumer spending, inconsistent traffic patterns and an increase in promotional activity as a result of decreased traffic, pricing fluctuations, general economic and financial conditions and changing consumer preferences;
our and our wholesale customers' decisions to modify strategies and adjust product mix and pricing, and our ability to manage any resulting product transition costs, including liquidating inventory or increasing promotional activity;
our ability to purchase products through our independent contract manufacturers that are made with quality raw materials and our ability to mitigate the variability of costs related to manufacturing, sourcing, and raw materials supply and to manage consumer response to such mitigating actions;
our ability to gauge and adapt to changing U.S. and international retail environments and fashion trends and changing consumer preferences in product, price-points, as well as in-store and digital shopping experiences;
our ability to respond to price, innovation and other competitive pressures in the global apparel industry, on and from our key customers and in our key markets;
our ability to increase the number of dedicated stores for our products, including through opening and profitably operating company-operated stores;
consequences of foreign currency exchange and interest rate fluctuations;
our ability to successfully prevent or mitigate the impacts of data security breaches;
our ability to attract and retain key executives and other key employees;
our ability to protect our trademarks and other intellectual property;
the impact of the variables that affect the net periodic benefit cost and future funding requirements of our postretirement benefits and pension plans;
our dependence on key distribution channels, customers and suppliers;
our ability to utilize our tax credits and net operating loss carryforwards;
ongoing or future litigation matters and disputes and regulatory developments;
changes in or application of trade and tax laws; 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. 
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 2015 Annual Report on Form 10-K.



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Item 4.
CONTROLS AND PROCEDURES
Evaluation of Disclosure Controls and Procedures
We maintain disclosure controls and procedures (as defined in Rules 13a-15(e) and 15d-15(e) under the Securities and Exchange Act of 1934) that are designed to provide reasonable assurance that information required to be disclosed in the reports we file or submit to the SEC is recorded, processed, summarized and reported within the time periods specified in the SEC’s rules and forms, and that such information is accumulated and communicated to our management, including our chief executive officer and chief financial officer, as appropriate to allow timely decisions regarding required disclosure.
We have evaluated, under the supervision and with the participation of management, including our chief executive officer and our chief financial officer, the effectiveness of the design and operation of our disclosure controls and procedures as of May 29, 2016. Based on that evaluation, our chief executive officer and our chief financial officer concluded that as of May 29, 2016, our disclosure controls and procedures were effective at the reasonable assurance level.
Changes in Internal Controls
We maintain a system of internal control over financial reporting that is designed to provide reasonable assurance that our books and records accurately reflect our transactions and that our established policies and procedures are followed. We continued the transition of certain global business service activities to our outsourced service provider during our last fiscal quarter, and this resulted in a change to our processes and control environment. There were no other changes to our internal control over financial reporting during our last fiscal quarter that have materially affected, or are reasonably likely to materially affect, our internal control over financial reporting.


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PART II — OTHER INFORMATION
 
Item 1.
LEGAL PROCEEDINGS
Litigation.    There have been no material developments with respect to the information previously reported in our 2015 Annual Report on Form 10-K related to legal proceedings.
In the ordinary course of business, we have various pending cases involving contractual matters, facility and employee-related matters, distribution matters, product liability claims, trademark infringement and other matters. We do not believe any of these pending legal proceedings will have a material impact on our financial condition, results of operations or cash flows.

Item 1A.
RISK FACTORS
There have been no material changes in our risk factors from those disclosed in our 2015 Annual Report on Form 10-K.

Item 2.
UNREGISTERED SALES OF EQUITY SECURITIES AND USE OF PROCEEDS
We repurchased a total of 17,142 shares of our common stock during the quarter in connection with the exercise of call and put rights under our 2016 Equity Incentive Plan, as amended and restated to date; of the total shares repurchased during the quarter, all were repurchased in March 2016.
 
We are a privately-held corporation; there is no public trading of our common stock. As of July 6, 2016, we had 37,452,319 shares outstanding.

Item 3.
DEFAULTS UPON SENIOR SECURITIES
None.
 
Item 4.
MINE SAFETY DISCLOSURES
Not applicable.
 
Item 5.
OTHER INFORMATION
None.



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Item 6.
EXHIBITS
 
10.1

Separation Agreement and General Release between Anne Rohosy and the Company, effective as of March 4, 2016. Incorporated by reference to Exhibit 10.1 to Registrant’s Current Report on Form 8-K filed with the Commission on March 10, 2016.*



10.2
 
Levi Strauss & Co. 2016 Equity Incentive Plan, as amended and restated effective April 13, 2016. Incorporated by reference to Exhibit 10.1 to Registrant’s Current Report on Form 8-K filed with the Commission on April 19, 2016.*



10.3

Agreement with Roy Bagattini, effective as of May 2, 2016. Incorporated by reference to Exhibit 10.1 to Registrant’s Current Report on Form 8-K filed with the Commission on May 6, 2016.*
 
 
 
31.1
  
Certification of Chief Executive Officer pursuant to Section 302 of the Sarbanes-Oxley Act of 2002. Filed herewith.
 
 
 
31.2
  
Certification of Chief Financial Officer pursuant to Section 302 of the Sarbanes-Oxley Act of 2002. Filed herewith.
 
 
 
32
  
Certification of Chief Executive Officer and Chief Financial Officer pursuant to Section 18 U.S.C. 1350, as adopted pursuant to Section 906 of the Sarbanes-Oxley Act of 2002. Furnished herewith.
 
 
 
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.

 



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SIGNATURE
Pursuant to the requirements of the Securities Exchange Act of 1934, the registrant has duly caused this report to be signed on its behalf by the undersigned thereunto duly authorized.
 
Date:
July 11, 2016
 
LEVI STRAUSS & Co.
 
 
 
(Registrant)
 
 
 
 
 
 
 
 
 
 
By:
/s/    WADE W. WEBSTER
 
 
 
Wade W. Webster
Senior Vice President and Controller
(Principal Accounting Officer)



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EXHIBIT INDEX
 

10.1
 
Separation Agreement and General Release between Anne Rohosy and the Company, effective as of March 4, 2016. Incorporated by reference to Exhibit 10.1 to Registrant’s Current Report on Form 8-K filed with the Commission on March 10, 2016.*
 
 
 
10.2
 
Levi Strauss & Co. 2016 Equity Incentive Plan, as amended and restated effective April 13, 2016. Incorporated by reference to Exhibit 10.1 to Registrant’s Current Report on Form 8-K filed with the Commission on April 19, 2016.*
 
 
 
10.3
 
Agreement with Roy Bagattini, effective as of May 2, 2016. Incorporated by reference to Exhibit 10.1 to Registrant’s Current Report on Form 8-K filed with the Commission on May 6, 2016.*
 
 
 
31.1
 
Certification of Chief Executive Officer pursuant to Section 302 of the Sarbanes-Oxley Act of 2002. Filed herewith.
 
 
 
31.2
 
Certification of Chief Financial Officer pursuant to Section 302 of the Sarbanes-Oxley Act of 2002. Filed herewith.
 
 
 
32
 
Certification of Chief Executive Officer and Chief Financial Officer pursuant to Section 18 U.S.C. 1350, as adopted pursuant to Section 906 of the Sarbanes-Oxley Act of 2002. Furnished herewith.
 
 
 
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.

  



37