Market Overview

Levi Strauss & Co. Reports Second Quarter and Year-to-Date 2019 Earnings

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  •  Second Quarter Reported Revenues up 5% on Growth Across All Regions; Constant-Currency up 9%

    Year-to-date Reported Revenues up 6%; Constant-Currency up 10%
  • Second Quarter Reported Net Income down 63% primarily due to costs associated with IPO

    Year-to-date Reported Net Income triples, reflecting last year's change in tax law
  • Second Quarter Reported Adjusted EBIT down 4% reflecting unfavorable currency and the planned deferral of higher advertising spend from the first quarter; Constant-Currency up 3%

    Year-to-date Reported Adjusted EBIT up 8% reflecting revenue growth and Adjusted EBIT margin expansion; Constant-Currency up 16%

Levi Strauss & Co. (NYSE:LEVI) today announced financial results for the second quarter ended May 26, 2019, and updated annual guidance.

"Our second quarter and first half results reflect the continued strength of our diversified business model as we delivered broad-based growth across all brands, regions and key product categories despite a challenging retail and macroeconomic environment," said Chip Bergh, president and chief executive officer of Levi Strauss & Co. "For both periods, the Levi's brand grew in all three regions across men's, women's, tops and bottoms and maintained its position at the center of culture through iconic products and consumer experiences."

Highlights include:

 

 

Three Months Ended

 

% Increase

(Decrease)

As Reported

 

Six Months Ended

 

% Increase

As Reported

($ millions)

 

May 26,

2019

 

May 27,

2018

 

 

May 26,

2019

 

May 27,

2018

 

Net revenues

 

$

 

 

1,313

 

 

$

 

 

1,246

 

 

5

%

 

$

 

 

2,747

 

 

$

 

 

2,589

 

 

6

%

Net income

 

$

 

 

29

 

 

$

 

 

77

 

 

(63

)%

 

$

 

 

175

 

 

$

 

 

58

 

 

200

%

Adjusted net income

 

$

 

 

69

 

 

$

 

 

83

 

 

(17

)%

 

$

 

 

220

 

 

$

 

 

167

 

 

32

%

Adjusted EBIT

 

$

 

 

82

 

 

$

 

 

85

 

 

(4

)%

 

$

 

 

288

 

 

$

 

 

266

 

 

8

%

Second quarter net revenues grew five percent on a reported basis and nine percent on a constant-currency basis, excluding $44 million in unfavorable currency effects.

The company's direct-to-consumer business grew reported revenues by nine percent in the second quarter, primarily due to performance and expansion of the retail network and e-commerce growth. The company had 78 more company-operated stores at the end of the second quarter of 2019 than it did a year prior. The company's wholesale business grew reported revenues by three percent, reflecting growth in all the regions.

Second quarter net income decreased $49 million, primarily due to $29 million of costs associated with the company's initial public offering (IPO), inclusive of $25 million of underwriting commissions paid on behalf of the selling stockholders. Second quarter adjusted net income decreased $14 million, primarily as a result of $10 million lower net gains on foreign exchange derivatives. Second-quarter Adjusted EBIT dropped four percent reflecting unfavorable currency, but grew three percent on a constant-currency basis, despite planned higher advertising and promotion expense. Additional information regarding adjusted net income and Adjusted EBIT, non-GAAP financial measures, is provided at the end of this press release.

Second Quarter 2019 Highlights

  • On a reported basis, gross profit for the second quarter rose four percent to $700 million from $671 million. Gross margin was 53.3 percent of net revenues compared with 53.9 percent in the same quarter of fiscal 2018, primarily due to 100 basis-points of unfavorable currency, which was partially offset by less discounted sales and the margin benefit from growth in the company's global direct-to-consumer channel.
  • Selling, general and administrative (SG&A) expenses for the second quarter were $638 million compared with $594 million in the same quarter of fiscal 2018, primarily due to higher direct-to-consumer investment and the planned deferral of advertising and promotion expense from the first quarter into the second quarter in conjunction with the launch of the company's 2019 campaign.
  • Operating income for the second quarter of $63 million was down 19 percent as higher net revenues were more than offset by higher SG&A expenses associated with higher advertising and promotion expense compared to the same quarter of fiscal 2018.
  • Diluted earnings per common share for the second quarter of 2019 was 7 cents compared to 19 cents for the same quarter of fiscal 2018 reflecting a decline in reported net income.

Regional Overview

Reported regional net revenues and operating income for the quarter are set forth in the table below:

 

 

Net Revenues

 

Operating Income *

 

 

Three Months Ended

 

% Increase

 

Three Months Ended

 

% Increase

($ millions)

 

May 26, 2019

 

May 27, 2018

 

 

May 26, 2019

 

May 27, 2018

 

Americas

 

$

693

 

$

670

 

3%

 

$

102

 

$

97

 

5%

Europe

 

$

398

 

$

367

 

9%

 

$

59

 

$

53

 

10%

Asia

 

$

222

 

$

209

 

6%

 

$

17

 

$

16

 

4%

* Note: Regional operating income is equal to regional Adjusted EBIT.

  • In the Americas, net revenues grew three percent on a reported basis and four percent on a constant-currency basis, reflecting higher revenues across both wholesale and direct-to-consumer channels across the region. Operating income for the region grew five percent on both a reported and constant-currency basis as higher net revenues and a higher gross margin were partially offset by higher direct-to-consumer costs to support store growth and a planned increase in advertising and promotion expense.
  • In Europe, net revenues grew nine percent on a reported basis and 18 percent on a constant-currency basis, reflecting continued broad-based growth across both direct-to-consumer and wholesale channels across the region. The region's operating income grew ten percent on a reported basis and 22 percent on a constant-currency basis, reflecting the net revenues growth and a higher gross margin from a shift towards the direct-to-consumer channel, partially offset by an increase in advertising and promotion expense and higher direct-to-consumer and distribution costs.
  • In Asia, net revenues grew six percent on a reported basis and 12 percent on a constant-currency basis, reflecting strong performance across traditional wholesale and direct-to-consumer channels across the region. Revenue growth was broad-based across the region's markets. The region's operating income grew four percent on a reported basis and 15 percent on a constant-currency basis, reflecting higher revenues partially offset by a decline in gross margin and higher direct-to-consumer costs.

Year-to-date 2019 Highlights

  • Year-to-date, net revenues grew six percent on a reported basis and ten percent in constant-currency, excluding $92 million in unfavorable currency translation effects.
  • The company's direct-to-consumer business grew nine percent on a reported basis year to date, primarily due to performance and expansion of the retail network and e-commerce growth. Reported net revenues related to the company's wholesale business grew four percent year-to-date, reflecting growth in all regions.
  • On a reported basis, gross margin for the first six months of 2019 was 54.0 percent of net revenues compared with 54.4 percent in the same period of fiscal 2018, primarily due to 90 basis points of unfavorable currency impact, which was partially offset by the margin benefit from growth in the company's global direct-to-consumer channel.
  • SG&A expenses for the first six months of 2019 were $1,219 million compared with $1,157 million in the same period of fiscal 2018, primarily reflecting the growth and expansion of the company's direct-to-consumer business.
  • Operating income for the first six months of $264 million was up five percent compared to the same period of fiscal 2018, reflecting higher revenues partially offset by continued investments in the company's direct-to-consumer business.
  • Year-to date, net income increased to $175 million on a reported basis from $58 million in the same period of fiscal 2018, primarily due to the prior period $137 million charge from the impact of the 2017 Tax Cuts and Jobs Act in the United States (the Tax Act).
  • Year-to-date, reported adjusted net income of $220 million grew 32 percent, reflecting a $22 million increase in Adjusted EBIT, as well as the fact that last year the company recorded a $38 million tax charge on undistributed foreign earnings, in connection with the Tax Act.
  • Year-to-date, Adjusted EBIT increased eight percent on a reported basis and 16 percent in constant-currency, excluding $17 million dollars in unfavorable currency effects, as a result of higher revenues and SG&A leverage.
  • Diluted earnings per common share for the first six months of 2019 was 44 cents compared to 14 cents for the same prior year period. Lower net income in the prior period was primarily the result of a $137 million charge from the impact of the Tax Act.

Cash Flow and Balance Sheet

At May 26, 2019, cash and cash equivalents of $861 million and short-term investments of $80 million were complemented by $806 million available under the company's revolving credit facility, resulting in a total liquidity position of approximately $1.7 billion. Net debt at the end of the second quarter of 2019 was $82 million.

Cash from operations for the first six months of fiscal 2019 was $162 million, a decrease of $66 million compared to the first six months of fiscal 2018. The decrease primarily reflects higher payments for inventory and SG&A expenses to support growth, higher payments for employee incentive compensation and $25 million of underwriting commissions the company paid on behalf of the selling stockholders in its recent IPO, partially offset by an increase in cash received from customers and lower pension plan contributions.

Adjusted free cash flow for the first six months of fiscal 2019 was $39 million, a decrease of $42 million compared to the first six months of fiscal 2018. The decrease was primarily due to less cash from operations, as well as higher capital expenditures and a higher dividend.

A reconciliation of net debt and adjusted free cash flow, non-GAAP financial measures, is provided at the end of this press release.

Annual Guidance

The company's expectations for fiscal 2019, as compared to fiscal 2018, are as follows:

  • Constant-currency net revenues growth at the high end of the mid-single digit range; and
  • Constant-currency Adjusted EBIT margin slightly up in the range of 10 basis points.

The company noted that due to the timing of its fiscal year ending the final Sunday of November, fiscal 2019 will not contain the benefit of a Black Friday, which normally represents about half-a-point of annual net revenues and an additional 25 basis-points of Adjusted EBIT margin.

Additionally, the company anticipates capital expenditures of approximately $190 - $200 million and nearly 100 new company-operated store openings in fiscal 2019.

Investor Conference Call

The company's second-quarter 2019 investor conference call will be available through a live audio webcast at https://engage.vevent.com/rt/levistraussao~8261329 on July 9, 2019, at 2 p.m. Pacific / 5 p.m. Eastern or via the following phone numbers: 800-884-6765 in the United States and Canada or +1-973-200-3064 internationally; I.D. No. 8261329. A replay is available the same day on http://www.levistrauss.com/investors/earnings-webcast and will be archived for three months. A telephone replay is also available through July 15, 2019 via the following phone numbers: 855-859-2056 in the United States and Canada or +1-404-537-3406 internationally; I.D. No. 8261329. Please see http://www.levistrauss.com/investors/earnings-webcast for a discussion and reconciliation of non-GAAP measures referenced on the investor conference call.

About Levi Strauss & Co.

Levi Strauss & Co. is one of the world's largest brand-name apparel companies and a global leader in jeanswear. The company designs and markets jeans, casual wear and related accessories for men, women and children under the Levi's®, Dockers®, Signature by Levi Strauss & Co.™, and Denizen® brands. Its products are sold in more than 110 countries worldwide through a combination of chain retailers, department stores, online sites, and a global footprint of approximately 3,000 retail stores and shop-in-shops. Levi Strauss & Co.'s reported fiscal 2018 net revenues were $5.6 billion. For more information, go to http://levistrauss.com, and for company news and announcements go to http://investors.levistrauss.com.

Forward Looking Statement

This press release and related conference call contains, in addition to historical information, forward-looking statements, including statements related to: inventory levels; gross margin; SG&A and advertising and promotion costs; revenues growth; adjusted EBIT margin; expectations for and projected capital expenditures in fiscal 2019; store openings; and currency impacts. The company has based these forward-looking statements on its current assumptions, expectations and projections about future events. Words such as, but not limited to, "believe," "will," "so we can," "when," "anticipate," "intend," "estimate," "expect," "project" and similar expressions are used to identify forward-looking statements, although not all forward-looking statements contain these words. These forward-looking statements are necessarily estimates reflecting the best judgment of senior management and involve a number of risks and uncertainties that could cause actual results to differ materially from those suggested by the forward-looking statements. Investors should consider the information contained in the company's filings with the U.S. Securities and Exchange Commission (SEC), including its Annual Report on Form 10-K for fiscal year 2018 and its Quarterly Report on Form 10-Q for the quarter ended May 26, 2019, especially in the "Management's Discussion and Analysis of Financial Condition and Results of Operations" and "Risk Factors" sections. Other unknown or unpredictable factors also could have material adverse effects on future results, performance or achievements. In light of these risks, uncertainties, assumptions and factors, the forward-looking events discussed in this press release and related conference call may not occur. You are cautioned not to place undue reliance on these forward-looking statements, which speak only as of the date stated or, if no date is stated, as of the date of this press release and related conference call. The company is not under any obligation and does not intend to update or revise any of the forward-looking statements contained in this press release and related conference call to reflect circumstances existing after the date of this press release and related conference call or to reflect the occurrence of future events, even if such circumstances or future events make it clear that any expected results expressed or implied by those forward-looking statements will not be realized.

Non-GAAP Financial Measures

The company reports its financial results in accordance with generally accepted accounting principles in the United States (GAAP) and the rules of the SEC. To supplement its financial statements prepared and presented in accordance with GAAP, the company uses certain non-GAAP financial measures, such as Adjusted EBIT, adjusted net income, net debt, adjusted free cash flow, constant-currency net revenues and constant-currency Adjusted EBIT, to provide investors with additional useful information about its financial performance, to enhance the overall understanding of its past performance and future prospects and to allow for greater transparency with respect to important metrics used by management for financial and operating decision-making. The company presents these non-GAAP financial measures to assist investors in seeing its financial performance from management's view and because it believes they provide an additional tool for investors to use in computing the company's core financial performance over multiple periods with other companies in its industry. The tables found below present Adjusted EBIT, adjusted net income, net debt, adjusted free cash flow, constant-currency net revenues and constant-currency Adjusted EBIT and corresponding reconciliations of these non-GAAP financial measures to the most directly comparable financial measures calculated in accordance with GAAP. Non-GAAP financial measures have limitations in their usefulness to investors because they have no standardized meaning prescribed by GAAP and are not prepared under any comprehensive set of accounting rules or principles. Certain items that may be excluded or included in non-GAAP financial measures may be significant items that could impact the company's financial position, results of operations and cash flows and should therefore be considered in assessing the company's actual financial condition and performance. Non-GAAP financial measures are subject to inherent limitations as they reflect the exercise of judgment by management in determining how they are formulated. Some specific limitations include but are not limited to, the fact that such non-GAAP financial measures: (a) do not reflect cash outlays for capital expenditures, contractual commitments or liabilities including pension obligations, post-retirement health benefit obligations and income tax liabilities, (b) do not reflect changes in, or cash requirements for, working capital requirements; and (c) they do not reflect the interest expense, or the cash requirements necessary to service interest or principal payments, on indebtedness. In addition, non-GAAP financial measures may be calculated differently from, and therefore may not be directly comparable to, similarly titled measures used by other companies. As a result, non-GAAP financial measures should be viewed as supplementing, and not as an alternative or substitute for, the company's financial results prepared in accordance with GAAP. The company urges investors to review the reconciliation of these non-GAAP financial measures to the most directly comparable GAAP financial measures included in this press release, and not to rely on any single financial measure to evaluate its business. See "RECONCILIATION OF GAAP TO NON-GAAP FINANCIAL MEASURES FOR THE SECOND QUARTER OF 2019" below for reconciliation to the most comparable GAAP financial measures.

Constant-currency

The company reports operating results in accordance with GAAP, as well as on a constant-currency basis in order to facilitate period-to-period comparisons of its results without regard to the impact of fluctuating foreign currency exchange rates. The term foreign currency exchange rates refers to the exchange rates used to translate the company's operating results for all countries where the functional currency is not the U.S. Dollar into U.S. Dollars. Because the company is a global company, foreign currency exchange rates used for translation may have a significant effect on its reported results. In general, the company's financial results are affected positively by a weaker U.S. Dollar and are affected negatively by a stronger U.S. Dollar as compared to the foreign currencies in which it conducts its business. References to operating results on a constant-currency basis mean operating results without the impact of foreign currency exchange rate fluctuations.

The company believes disclosure of constant-currency results is helpful to investors because it facilitates period-to-period comparisons of its results by increasing the transparency of the underlying performance by excluding the impact of fluctuating foreign currency exchange rates. However, constant-currency results are non-GAAP financial measures and are not meant to be considered as an alternative or substitute for comparable measures prepared in accordance with GAAP. Constant-currency results have no standardized meaning prescribed by GAAP, are not prepared under any comprehensive set of accounting rules or principles and should be read in conjunction with the company's consolidated financial statements prepared in accordance with GAAP. Constant-currency results have limitations in their usefulness to investors and may be calculated differently from, and therefore may not be directly comparable to, similarly titled measures used by other companies.

The company calculates constant-currency amounts by translating local currency amounts in the prior-year period at actual foreign exchange rates for the current period. The company's constant-currency results do not eliminate the transaction currency impact of purchases and sales of products in a currency other than the functional currency.

Source: Levi Strauss & Co. Investor Relations

LEVI STRAUSS & CO. AND SUBSIDIARIES

CONSOLIDATED BALANCE SHEETS

 

 

(Unaudited)

 

 

 

May 26,

2019

 

November 25,

2018

 

(Dollars in thousands)

ASSETS

Current Assets:

 

 

 

Cash and cash equivalents

$

 

860,933

 

 

$

 

713,120

 

Short-term investments in marketable securities

 

79,736

 

 

 

Trade receivables, net of allowance for doubtful accounts of $9,876 and $10,037

 

574,389

 

 

 

534,164

 

Inventories:

 

 

 

Raw materials

 

5,275

 

 

 

3,681

 

Work-in-process

 

2,933

 

 

 

2,977

 

Finished goods

 

887,111

 

 

 

877,115

 

Total inventories

 

895,319

 

 

 

883,773

 

Other current assets

 

196,769

 

 

 

157,002

 

Total current assets

 

2,607,146

 

 

 

2,288,059

 

Property, plant and equipment, net of accumulated depreciation of $1,014,365 and $974,206

 

480,515

 

 

 

460,613

 

Goodwill

 

235,688

 

 

 

236,246

 

Other intangible assets, net

 

42,808

 

 

 

42,835

 

Deferred tax assets, net

 

414,620

 

 

 

397,791

 

Other non-current assets

 

128,616

 

 

 

117,116

 

Total assets

$

 

3,909,393

 

 

$

 

3,542,660

 

 

 

 

 

LIABILITIES, TEMPORARY EQUITY AND STOCKHOLDERS' EQUITY

Current Liabilities:

 

 

 

Short-term debt

$

 

11,481

 

 

$

 

31,935

 

Accounts payable

 

339,497

 

 

 

351,329

 

Accrued salaries, wages and employee benefits

 

164,788

 

 

 

298,990

 

Accrued interest payable

 

5,787

 

 

 

6,089

 

Accrued income taxes

 

34,579

 

 

 

15,466

 

Accrued sales allowances

 

116,282

 

 

 

Other accrued liabilities

 

435,300

 

 

 

348,390

 

Total current liabilities

 

1,107,714

 

 

 

1,052,199

 

Long-term debt

 

1,011,119

 

 

 

1,020,219

 

Postretirement medical benefits

 

70,147

 

 

 

74,181

 

Pension liability

 

190,588

 

 

 

195,639

 

Long-term employee related benefits

 

79,517

 

 

 

107,556

 

Long-term income tax liabilities

 

11,339

 

 

 

9,805

 

Other long-term liabilities

 

117,716

 

 

 

116,462

 

Total liabilities

 

2,588,140

 

 

 

2,576,061

 

Commitments and contingencies

 

 

 

Temporary equity

 

 

 

299,140

 

 

 

 

 

Stockholders' Equity:

 

 

 

Levi Strauss & Co. stockholders' equity

 

 

 

Common stock — $.001 par value; 1,200,000,000 Class A shares authorized, 42,166,667 shares and no shares issued and outstanding as of May 26, 2019 and November 25, 2018, respectively; and 422,000,000 Class B shares authorized, 350,332,920 shares and 376,028,430 shares issued and outstanding, as of May 26, 2019 and November 25, 2018, respectively

 

392

 

 

 

376

 

Additional paid-in capital

 

629,703

 

 

 

Accumulated other comprehensive loss

 

(411,256

)

 

 

(424,584

)

Retained earnings

 

1,094,666

 

 

 

1,084,321

 

Total Levi Strauss & Co. stockholders' equity

 

1,313,505

 

 

 

660,113

 

Noncontrolling interest

 

7,748

 

 

 

7,346

 

Total stockholders' equity

 

1,321,253

 

 

 

667,459

 

Total liabilities, temporary equity and stockholders' equity

$

 

3,909,393

 

 

$

 

3,542,660

 

The notes accompanying our consolidated financial statements in our Form 10-Q are an integral part of these consolidated financial statements.

LEVI STRAUSS & CO. AND SUBSIDIARIES

CONSOLIDATED STATEMENTS OF INCOME

 

 

Three Months Ended

 

Six Months Ended

 

May 26,

2019

 

May 27,

2018

 

May 26,

2019

 

May 27,

2018

 

(Dollars in thousands, except per share amounts)

(Unaudited)

Net revenues

$

 

1,312,940

 

 

$

 

1,245,742

 

 

$

 

2,747,398

 

 

$

 

2,589,427

 

Cost of goods sold

 

612,517

 

 

 

574,865

 

 

 

1,264,167

 

 

 

1,180,426

 

Gross profit

 

700,423

 

 

 

670,877

 

 

 

1,483,231

 

 

 

1,409,001

 

Selling, general and administrative expenses

 

637,525

 

 

 

593,595

 

 

 

1,219,421

 

 

 

1,156,797

 

Operating income

 

62,898

 

 

 

77,282

 

 

 

263,810

 

 

 

252,204

 

Interest expense

 

(15,126

)

 

 

(14,465

)

 

 

(32,670

)

 

 

(29,962

)

Underwriter commission paid on behalf of selling stockholders

 

(24,860

)

 

 

 

 

(24,860

)

 

 

Other income, net

 

3,166

 

 

 

12,895

 

 

 

1,520

 

 

 

2,495

 

Income before income taxes

 

26,078

 

 

 

75,712

 

 

 

207,800

 

 

 

224,737

 

Income tax (benefit) expense

 

(2,429

)

 

 

(1,320

)

 

 

32,842

 

 

 

166,334

 

Net income

 

28,507

 

 

 

77,032

 

 

 

174,958

 

 

 

58,403

 

Net income attributable to noncontrolling interest

 

(277

)

 

 

(2,100

)

 

 

(151

)

 

 

(2,483

)

Net income attributable to Levi Strauss & Co.

$

 

28,230

 

 

$

 

74,932

 

 

$

 

174,807

 

 

$

 

55,920

 

Earnings per common share attributable to common stockholders:

 

 

 

 

 

 

 

Basic

$

 

0.07

 

 

$

 

0.20

 

 

$

 

0.46

 

 

$

 

0.15

 

Diluted

$

 

0.07

 

 

$

 

0.19

 

 

$

 

0.44

 

 

$

 

0.14

 

Weighted-average common shares outstanding:

 

 

 

 

 

 

 

Basic

 

389,518,461

 

 

 

377,132,162

 

 

 

383,278,398

 

 

 

376,384,657

 

Diluted

 

409,332,997

 

 

 

387,764,580

 

 

 

401,405,411

 

 

 

387,130,124

 

The notes accompanying our consolidated financial statements in our Form 10-Q are an integral part of these consolidated financial statements.

LEVI STRAUSS & CO. AND SUBSIDIARIES

CONSOLIDATED STATEMENTS OF COMPREHENSIVE INCOME (LOSS)

 

 

Three Months Ended

 

Six Months Ended

 

May 26,

2019

 

May 27,

2018

 

May 26,

2019

 

May 27,

2018

 

(Dollars in thousands)

(Unaudited)

Net income

$

 

28,507

 

 

$

 

77,032

 

 

$

 

174,958

 

 

$

 

58,403

 

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

 

 

 

 

 

 

 

Pension and postretirement benefits

 

3,464

 

 

 

3,157

 

 

 

6,886

 

 

 

6,517

 

Derivative instruments

 

12,667

 

 

 

28,975

 

 

 

14,404

 

 

 

6,127

 

Foreign currency translation losses

 

(8,843

)

 

 

(34,353

)

 

 

(4,757

)

 

 

(14,572

)

Unrealized gains (losses) on marketable securities

 

329

 

 

 

(116

)

 

 

1,219

 

 

 

174

 

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

 

7,617

 

 

 

(2,337

)

 

 

17,752

 

 

 

(1,754

)

Income taxes expense related to items of other comprehensive income

 

(2,432

)

 

 

(7,229

)

 

 

(4,173

)

 

 

(2,383

)

Comprehensive income, net of income taxes

 

33,692

 

 

 

67,466

 

 

 

188,537

 

 

 

54,266

 

Comprehensive income attributable to noncontrolling interest

 

(348

)

 

 

(1,939

)

 

 

(402

)

 

 

(2,583

)

Comprehensive income attributable to Levi Strauss & Co.

$

 

33,344

 

 

$

 

65,527

 

 

$

 

188,135

 

 

$

 

51,683

 

The notes accompanying our consolidated financial statements in our Form 10-Q are an integral part of these consolidated financial statements.

LEVI STRAUSS & CO. AND SUBSIDIARIES

CONSOLIDATED STATEMENTS OF STOCKHOLDERS' EQUITY

 

 

Levi Strauss & Co. Stockholders

 

 

 

 

 

Class A &

Class B

Common

Stock

 

Additional

Paid-In

Capital

 

Retained

Earnings

 

Accumulated

Other Comprehensive

(Loss)/Income

 

Noncontrolling

Interest

 

Total

Stockholders'

Equity

 

(Dollars in thousands)

Balance at November 26, 2017

$

 

375

 

 

$

 

 

 

$

 

1,100,916

 

 

$

 

(404,381

)

 

$

 

5,478

 

 

$

 

702,388

 

Net (loss) income

 

 

 

 

 

(19,012

)

 

 

 

 

383

 

 

 

(18,629

)

Other comprehensive income, net of tax

 

 

 

 

 

 

 

5,167

 

 

 

261

 

 

 

5,428

 

Stock-based compensation and dividends, net

 

2

 

 

 

5,254

 

 

 

 

 

 

 

 

 

5,256

 

Reclassification to temporary equity

 

 

 

9,590

 

 

 

(42,589

)

 

 

 

 

 

 

(32,999

)

Repurchase of common stock

 

 

 

(14,844

)

 

 

 

 

 

 

 

 

(14,844

)

Cash dividends declared ($0.24 per share)

 

 

 

 

 

(90,000

)

 

 

 

 

 

 

(90,000

)

Balance at February 25, 2018

 

377

 

 

 

 

 

949,315

 

 

 

(399,214

)

 

 

6,122

 

 

 

556,600

 

Net income

 

 

 

 

 

74,932

 

 

 

 

 

2,100

 

 

 

77,032

 

Other comprehensive loss, net of tax

 

 

 

 

 

 

 

(9,405

)

 

 

(161

)

 

 

(9,566

)

Stock-based compensation and dividends, net

 

 

 

5,566

 

 

 

 

 

 

 

 

 

5,566

 

Reclassification to temporary equity

 

 

 

(2,438

)

 

 

(27,796

)

 

 

 

 

 

 

(30,234

)

Repurchase of common stock

 

 

 

(3,128

)

 

 

(4,055

)

 

 

 

 

 

 

(7,183

)

Balance at May 27, 2018

$

 

377

 

 

$

 

 

 

$

 

992,396

 

 

$

 

(408,619

)

 

$

 

8,061

 

 

$

 

592,215

 

 

 

 

 

 

 

 

 

 

 

 

 

Balance at November 25, 2018

$

 

376

 

 

$

 

 

 

$

 

1,084,321

 

 

$

 

(424,584

)

 

$

 

7,346

 

 

$

 

667,459

 

Net income (loss)

 

 

 

 

 

146,577

 

 

 

 

 

(126

)

 

 

146,451

 

Other comprehensive income, net of tax

 

 

 

 

 

 

 

8,214

 

 

 

180

 

 

 

8,394

 

Stock-based compensation and dividends, net

 

 

 

1,497

 

 

 

 

 

 

 

 

 

1,497

 

Reclassification to temporary equity

 

 

 

(506

)

 

 

(23,339

)

 

 

 

 

 

 

(23,845

)

Repurchase of common stock

 

 

 

(991

)

 

 

(2,923

)

 

 

 

 

 

 

(3,914

)

Cash dividends declared ($0.29 per share)

 

 

 

 

 

(110,000

)

 

 

 

 

 

 

(110,000

)

Balance at February 24, 2019

 

376

 

 

 

 

 

1,094,636

 

 

 

(416,370

)

 

 

7,400

 

 

 

686,042

 

Net income

 

 

 

 

 

28,230

 

 

 

 

 

277

 

 

 

28,507

 

Other comprehensive income, net of tax

 

 

 

 

 

 

 

5,114

 

 

 

71

 

 

 

5,185

 

Stock-based compensation and dividends, net

 

2

 

 

 

12,515

 

 

 

 

 

 

 

 

 

12,517

 

Repurchase of common stock

 

 

 

(24,696

)

 

 

 

 

 

 

 

 

(24,696

)

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

 

 

 

351,185

 

 

 

(28,200

)

 

 

 

 

 

 

322,985

 

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

 

14

 

 

 

234,569

 

 

 

 

 

 

 

 

 

234,583

 

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

$

 

 

 

$

 

56,130

 

 

$

 

 

 

$

 

 

 

$

 

 

 

$

 

56,130

 

Balance at May 26, 2019

$

 

392

 

 

$

 

629,703

 

 

$

 

1,094,666

 

 

$

 

(411,256

)

 

$

 

7,748

 

 

$

 

1,321,253

 

The notes accompanying our consolidated financial statements in our Form 10-Q are an integral part of these consolidated financial statements.

LEVI STRAUSS & CO. AND SUBSIDIARIES

CONSOLIDATED STATEMENTS OF CASH FLOWS

 

 

Six Months Ended

 

May 26,

2019

 

May 27,

2018

 

(Dollars in thousands)

(Unaudited)

Cash Flows from Operating Activities:

 

 

 

Net income

$

 

174,958

 

 

$

 

58,403

 

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

 

 

 

Depreciation and amortization

 

58,745

 

 

 

64,695

 

Unrealized foreign exchange losses (gains)

 

14,899

 

 

 

(10,678

)

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

 

(7,134

)

 

 

18,148

 

Employee benefit plans' amortization from accumulated other comprehensive loss and settlement loss

 

6,886

 

 

 

6,517

 

Stock-based compensation

 

14,014

 

 

 

10,822

 

Other, net

 

1,813

 

 

 

3,767

 

(Benefit from) provision for deferred income taxes

 

(19,937

)

 

 

135,168

 

Change in operating assets and liabilities:

 

 

 

Trade receivables

 

119,916

 

 

 

135,739

 

Inventories

 

(32,628

)

 

 

(95,690

)

Other current assets

 

(22,546

)

 

 

(1,580

)

Other non-current assets

 

(5,198

)

 

 

(7,435

)

Accounts payable and other accrued liabilities

 

(47,137

)

 

 

38,284

 

Restructuring liabilities

 

(126

)

 

 

(254

)

Income tax liabilities

 

20,675

 

 

 

(980

)

Accrued salaries, wages and employee benefits and long-term employee related benefits

 

(115,443

)

 

 

(127,321

)

Other long-term liabilities

 

56

 

 

 

(47

)

Net cash provided by operating activities

 

161,813

 

 

 

227,558

 

Cash Flows from Investing Activities:

 

 

 

Purchases of property, plant and equipment

 

(76,961

)

 

 

(61,153

)

Proceeds (Payments) on settlement of forward foreign exchange contracts not designated for hedge accounting

 

13,125

 

 

 

(18,148

)

Payments to acquire short-term investments

 

(84,829

)

 

 

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

 

5,481

 

 

 

Net cash used for investing activities

 

(143,184

)

 

 

(79,301

)

Cash Flows from Financing Activities:

 

 

 

Proceeds from short-term credit facilities

 

17,929

 

 

 

22,689

 

Repayments of short-term credit facilities

 

(27,866

)

 

 

(20,673

)

Other short-term borrowings, net

 

(9,422

)

 

 

(14,537

)

Proceeds from issuance of Class A common stock

 

254,329

 

 

 

Payments for underwriter commission and other offering costs

 

(19,746

)

 

 

Repurchase of common stock, including shares surrendered for tax withholdings on equity award exercises

 

(28,610

)

 

 

(22,027

)

Dividend to stockholders

 

(55,000

)

 

 

(45,000

)

Other financing, net

 

(565

)

 

 

(644

)

Net cash provided by (used for) financing activities

 

131,049

 

 

 

(80,192

)

Effect of exchange rate changes on cash and cash equivalents and restricted cash

 

(1,913

)

 

 

(3,424

)

Net increase in cash and cash equivalents and restricted cash

 

147,765

 

 

 

64,641

 

Beginning cash and cash equivalents, and restricted cash

 

713,698

 

 

 

634,691

 

Ending cash and cash equivalents, and restricted cash

 

861,463

 

 

 

699,332

 

Less: Ending restricted cash

 

(530

)

 

 

(608

)

Ending cash and cash equivalents

$

 

860,933

 

 

$

 

698,724

 

 

 

 

 

Noncash Investing Activity:

 

 

 

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

$

 

14,775

 

 

$

 

14,454

 

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

 

10,861

 

 

 

1,822

 

Realized loss on foreign currency contracts not yet paid at end of period

 

5,990

 

 

 

Supplemental disclosure of cash flow information:

 

 

 

Cash paid for interest during the period

$

 

26,849

 

 

$

 

25,824

 

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

 

52,800

 

 

 

35,066

 

The notes accompanying our consolidated financial statements in our Form 10-Q are an integral part of these consolidated financial statements.

RECONCILIATION OF GAAP TO NON-GAAP FINANCIAL MEASURES

FOR THE SECOND QUARTER OF 2019

The following information relates to non-GAAP financial measures, and should be read in conjunction with the investor call held on July 9, 2019, discussing the company's financial condition and results of operations as of and for the quarter ended May 26, 2019. Adjusted EBIT, adjusted net income, net debt, adjusted free cash flow, constant-currency net revenues and constant-currency Adjusted EBIT are not financial measures prepared in accordance with GAAP. As used in this press release: (1) Adjusted EBIT represents net income plus income tax (benefit) expense, interest expense, other income, net, underwriter commission paid on behalf of selling stockholders, other costs associated with the initial public offering, impact of changes in fair value on cash-settled stock based compensation, and restructuring and related charges, severance and other, net; (2) adjusted net income represents net income excluding impact of underwriter commission paid on behalf of selling stockholders, other costs associated with the initial public offering impact of changes in fair value on cash-settled stock-based compensation, restructuring and related charges, severance and other, net, remeasurement of deferred tax assets and liabilities, and tax impact of adjustments; (3) net debt represents total debt, excluding capital leases, less cash and cash equivalents and short-term investments in marketable securities; (4) Adjusted free cash flow represents cash from operating activities plus underwriter commission paid on behalf of selling stockholders, less purchases of property, plant and equipment, plus proceeds (less payments) on settlement of forward foreign exchange contracts not designated for hedge accounting, less repurchase of common stock including shares surrendered for tax withholdings on equity award exercises, and cash dividends to stockholders; (5) constant-currency net revenues represents net revenues without the impact of foreign currency exchange rate fluctuations; and (6) constant-currency Adjusted EBIT represents Adjusted EBIT without the impact of foreign currency exchange rate fluctuations.

Adjusted EBIT:

 

Three Months Ended

 

Six Months Ended

 

May 26, 2019

 

May 27, 2018

 

May 26, 2019

 

May 27, 2018

 

(Dollars in millions)

 

(Unaudited)

Most comparable GAAP measure:

 

 

 

 

 

 

 

Net income

$

 

28.5

 

 

$

 

77.0

 

 

$

 

175.0

 

 

$

 

58.4

 

 

 

 

 

 

 

 

 

Non-GAAP measure:

 

 

 

 

 

 

 

Net income

 

28.5

 

 

 

77.0

 

 

 

175.0

 

 

 

58.4

 

Income tax (benefit) expense

 

(2.5

)

 

 

(1.3

)

 

 

32.8

 

 

 

166.3

 

Interest expense

 

15.2

 

 

 

14.5

 

 

 

32.7

 

 

 

30.0

 

Other income, net

 

(3.2

)

 

 

(12.9

)

 

 

(1.6

)

 

 

(2.5

)

Underwriter commission paid on behalf of selling stockholders

 

24.9

 

 

 

 

 

24.9

 

 

 

Other costs associated with the initial public offering

 

3.5

 

 

 

 

 

3.5

 

 

 

Impact of changes in fair value on cash-settled stock-based compensation

 

15.0

 

 

 

7.2

 

 

 

20.3

 

 

 

12.2

 

Restructuring and related charges, severance and other, net

 

0.2

 

 

 

0.8

 

 

 

0.3

 

 

 

1.1

 

Adjusted EBIT

$

 

81.6

 

 

$

 

85.3

 

 

$

 

287.9

 

 

$

 

265.5

 

Adjusted EBIT margin

6.2

%

 

 

6.8

%

 

 

10.5

%

 

 

10.3

%

 

 

 

 

 

 

 

 

Depreciation and amortization

 

30.1

 

 

 

31.9

 

 

 

58.7

 

 

 

64.7

 

Adjusted EBITDA

$

 

111.7

 

 

$

 

117.2

 

 

$

 

346.6

 

 

$

 

330.2

 

Adjusted net income:

 

Three Months Ended

 

Six Months Ended

 

May 26, 2019

 

May 27, 2018

 

May 26, 2019

 

May 27, 2018

 

(Dollars in millions)

 

(Unaudited)

Most comparable GAAP measure:

 

 

 

 

 

 

 

Net income

$

 

28.5

 

 

$

 

77.0

 

 

$

 

175.0

 

 

$

 

58.4

 

 

 

 

 

 

 

 

 

Non-GAAP measure:

 

 

 

 

 

 

 

Net income

 

28.5

 

 

 

77.0

 

 

 

175.0

 

 

 

58.4

 

Underwriter commission paid on behalf of selling stockholders

 

24.9

 

 

 

 

 

24.9

 

 

 

Other costs associated with the initial public offering

 

3.5

 

 

 

 

 

3.5

 

 

 

Impact of changes in fair value on cash-settled stock-based compensation

 

15.0

 

 

 

7.2

 

 

 

20.3

 

 

 

12.2

 

Restructuring and related charges, severance and other, net

 

0.2

 

 

 

0.8

 

 

 

0.3

 

 

 

1.1

 

Remeasurement of deferred tax assets and liabilities

 

 

 

 

 

 

 

99.1

 

Tax impact of adjustments

 

(2.8

)

 

 

(1.6

)

 

 

(3.8

)

 

 

(4.0

)

Adjusted net income

$

 

69.3

 

 

$

 

83.4

 

 

$

 

220.2

 

 

$

 

166.8

 

Adjusted net income margin

 

5.3

%

 

 

6.7

%

 

 

8.0

%

 

 

6.4

%

Net debt:

 

May 26, 2019

 

November 25,

2018

 

(Dollars in millions)

 

(Unaudited)

 

 

Most comparable GAAP measure:

 

 

 

Total debt, excluding capital leases

$

1,022.6

 

 

$

1,052.2

 

 

 

 

 

Non-GAAP measure:

 

 

 

Total debt, excluding capital leases

$

1,022.6

 

 

$

1,052.2

 

Cash and cash equivalents

(860.9

)

 

(713.1

)

Short-term investments in marketable securities

(79.7

)

 

 

Net debt

$

82.0

 

 

$

339.1

 

Adjusted free cash flow:

 

Six Months Ended

 

May 26, 2019

 

May 27, 2018

 

(Dollars in millions)

 

(Unaudited)

Most comparable GAAP measure:

 

 

 

Net cash provided by operating activities

$

 

161.8

 

 

$

 

227.6

 

 

 

 

 

Non-GAAP measure:

 

 

 

Net cash provided by operating activities

$

 

161.8

 

 

$

 

227.6

 

Underwriter commission paid on behalf of selling stockholders

 

24.9

 

 

 

Purchases of property, plant and equipment

 

(77.0

)

 

 

(61.2

)

Proceeds (Payments) on settlement of forward foreign exchange contracts not designated for hedge accounting

 

13.1

 

 

 

(18.1

)

Repurchase of common stock, including shares surrendered for tax withholdings on equity award exercises

 

(28.6

)

 

 

(22.0

)

Dividend to stockholders

 

(55.0

)

 

 

(45.0

)

Adjusted free cash flow

$

 

39.2

 

 

$

 

81.3

 

Constant-currency net revenues:

 

Three Months Ended

 

Six Months Ended

 

May 26,

2019

 

May 27,

2018

 

%

Increase

 

May 26,

2019

 

May 27,

2018

 

%

Increase

 

(Dollars in millions)

 

(Unaudited)

Total revenues

 

 

 

 

 

 

 

 

 

 

 

As reported

$

 

1,312.9

 

 

$

 

1,245.7

 

 

5.4

%

 

$

 

2,747.4

 

 

$

 

2,589.4

 

 

6.1

%

Impact of foreign currency exchange rates

 

 

 

(43.7

)

 

*

 

 

 

 

 

(91.5

)

 

*

 

Constant-currency net revenues

$

 

1,312.9

 

 

$

 

1,202.0

 

 

9.2

%

 

$

 

2,747.4

 

 

$

 

2,497.9

 

 

10.0

%

 

 

 

 

 

 

 

 

 

 

 

 

Americas

 

 

 

 

 

 

 

 

 

 

 

As reported

$

 

692.7

 

 

$

 

669.7

 

 

3.4

%

 

$

 

1,410.0

 

 

$

 

1,326.9

 

 

6.3

%

Impact of foreign currency exchange rates

 

 

 

(3.7

)

 

*

 

 

 

 

 

(9.2

)

 

*

 

Constant-currency net revenues - Americas

$

 

692.7

 

 

$

 

666.0

 

 

4.0

%

 

$

 

1,410.0

 

 

$

 

1,317.7

 

 

7.0

%

 

 

 

 

 

 

 

 

 

 

 

 

Europe

 

 

 

 

 

 

 

 

 

 

 

As reported

$

 

398.3

 

 

$

 

366.9

 

 

8.6

%

 

$

 

863.0

 

 

$

 

819.6

 

 

5.3

%

Impact of foreign currency exchange rates

 

 

 

(28.7

)

 

*

 

 

 

 

 

(59.0

)

 

*

 

Constant-currency net revenues - Europe

$

 

398.3

 

 

$

 

338.2

 

 

17.8

%

 

$

 

863.0

 

 

$

 

760.6

 

 

13.5

%

 

 

 

 

 

 

 

 

 

 

 

 

Asia

 

 

 

 

 

 

 

 

 

 

 

As reported

$

 

221.9

 

 

$

 

209.1

 

 

6.1

%

 

$

 

474.4

 

 

$

 

442.9

 

 

7.1

%

Impact of foreign currency exchange rates

 

 

 

(11.3

)

 

*

 

 

 

 

 

(23.3

)

 

*

 

Constant-currency net revenues - Asia

$

 

221.9

 

 

$

 

197.8

 

 

12.2

%

 

$

 

474.4

 

 

$

 

419.6

 

 

13.1

%

_____________

* Not meaningful

Constant-currency Adjusted EBIT:

 

Three Months Ended

 

Six Months Ended

 

May 26,

2019

 

May 27,

2018

 

%

Increase

(Decrease)

 

May 26,

2019

 

May 27,

2018

 

%

Increase

 

(Dollars in millions)

 

(Unaudited)

Adjusted EBIT

$

 

81.6

 

 

$

 

85.3

 

 

(4.3)%

 

$

 

287.9

 

 

$

 

265.5

 

 

8.4

%

Impact of foreign currency exchange rates

 

 

 

(6.0

)

 

*  

 

 

 

 

(17.0

)

 

*

 

Constant-currency Adjusted EBIT

$

 

81.6

 

 

$

 

79.3

 

 

2.9 %

 

$

 

287.9

 

 

$

 

248.5

 

 

15.9

%

Constant-currency Adjusted EBIT margin (1)

 

6.2

%

 

 

6.6

%

 

 

 

 

10.5

%

 

 

9.9

%

 

 

_____________

(1) We define constant-currency Adjusted EBIT margin as constant-currency Adjusted EBIT as a percentage of constant-currency net revenues.

* Not meaningful

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