LEVI STRAUSS & CO. You should read the following discussion and analysis of our financial condition and results of operations together with our consolidated financial statements and related notes thereto included in Part II, Item 8 of this Annual Report on Form 10-K, or Annual Report. Some of the information contained in this discussion and analysis or set forth elsewhere in this Annual Report, including information with respect to our plans and strategy for our business, includes forward-looking statements that involve risks and uncertainties. See "Special Note Regarding Forward-Looking Statements" and "Risk Factors" for a discussion of forward-looking statements and important factors that could cause actual results to differ materially from the results described in or implied by the forward-looking statements. We use a 52- or 53-week fiscal year, with each fiscal year ending on the Sunday that is closest toNovember 30 of that year. See "-Financial Information Presentation-Fiscal Year." Non-GAAP Financial Measures To supplement our consolidated financial statements prepared and presented in accordance with generally accepted accounting principles in the Unites States ("GAAP"), we use certain non-GAAP financial measures throughout this Annual Report, as described further below, to provide investors with additional useful information about our financial performance, to enhance the overall understanding of our past performance and future prospects and to allow for greater transparency with respect to important metrics used by our management for financial and operational decision-making. We are presenting these non-GAAP financial measures to assist investors in seeing our financial performance from management's view and because we believe they provide an additional tool for investors to use in comparing our core financial performance over multiple periods with other companies in our industry. However, 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. 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, our consolidated financial statements prepared and presented in accordance with GAAP. Overview We are an iconic American company with a rich history of profitable growth, quality, innovation and corporate citizenship. Our story began inSan Francisco, California , in 1853 as a wholesale dry goods business. We invented the blue jean 20 years later. Today we design, market and sell 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 byLevi Strauss & Co. and Denizen brands. Our business is operated through three geographic regions:Americas ,Europe andAsia (which includes theMiddle East andAfrica ). We service our consumers through our global infrastructure, developing, sourcing and marketing our products around the world. Our iconic, enduring brands are brought to life every day around the world by our talented and creative employees and partners. The Levi's brand epitomizes classic, authentic American style and effortless cool. We have cultivated Levi's as a lifestyle brand that is inclusive and democratic in the eyes of consumers while offering products that feel exclusive, personalized and original. This approach has enabled the Levi's brand to evolve with the times and continually reach a new, younger audience, while our rich heritage continues to drive relevance and appeal across demographics. The Dockers brand helped drive "Casual Friday" in the 1990s and has been a cornerstone of casual menswear for more than 30 years. The Signature byLevi Strauss & Co. and Denizen brands, which we developed for value-conscious consumers, offer quality craftsmanship and great fit and style at affordable prices. We recognize wholesale revenue from sales of our products through third-party retailers such as department stores, specialty retailers, leading third-party e-commerce sites and franchise locations dedicated to our brands. We also sell our products directly to consumers (direct-to-consumer "DTC") through a variety of formats, including our own company-operated mainline and outlet stores, company-operated e-commerce sites and select shop-in-shops that we operate within department stores and other third-party retail locations. As ofNovember 24, 2019 , our products were sold in over 50,000 retail locations in more than 110 countries, including approximately 3,000 brand-dedicated stores and shop-in-shops. As ofNovember 24, 2019 , we had 905 company-operated stores located in 32 countries and approximately 500 company-operated shop-in-shops. The remainder of our brand-dedicated stores and shop-in-shops were operated by franchisees and other partners. OurEurope andAsia businesses, collectively, contributed 47% of our net revenues and 45% of our regional operating income in 2019, as compared to 45% of our net revenues and 41% of our regional operating income in 2018. Sales of Levi's® brand 33
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products represented approximately 87% of our total net sales in 2019, as compared to 86% in 2018. Pants represented 65% of our total units sold in 2019, as compared to 68% of our total units sold in 2018, and men's products generated 67% of our total net sales in 2019 as compared to 69% in 2018. Our wholesale channel generated 64% and 65% of our net revenues in fiscal years 2019 and 2018, respectively. Our DTC channel generated 36% and 35% of our net revenues in fiscal years 2019 and 2018, respectively, with our company operated e-commerce representing 14% and 13% of DTC channel net revenues and 5% and 4% of total net revenues in fiscal years 2019 and 2018, respectively. Our Objectives Our key long-term objectives are to strengthen our brands globally in order to deliver sustainable profitable growth and generate industry leading shareholder returns. Critical strategies to achieve these objectives include; driving our profitable core business, expanding the reach of our brands globally and into new categories, leading in omni-channel, and achieving operational excellence. Factors Affecting Our Business We believe the key business and marketplace factors that are impacting our business include the following: • Factors that impact consumer discretionary spending, which remains
volatile globally, continue to create a complex and challenging retail
environment for us and our customers, characterized by unpredictable
traffic patterns and a general promotional environment. In developed
economies, mixed real wage growth and shifting in consumer spending also
continue to pressure global discretionary spending. Consumers continue to
focus on value pricing and convenience with the off-price retail channel
remaining strong and increased expectations for real-time delivery.
• The diversification of our business model across regions, channels,
brands and categories affects our gross margin. For example, if our sales
in higher gross margin business regions, channels, brands and categories
grow at a faster rate than in our lower gross margin business regions,
channels, brands and categories, we would expect a favorable impact to
aggregate gross margin over time. Gross margin in
higher than in our other two regional operating segments. Sales directly
to consumers generally have higher gross margins than sales through third
parties, although these sales typically have higher selling expenses.
Value brands, which are focused on the value-conscious consumer,
generally generate lower gross margin. Enhancements to our existing
product offerings, or our expansion into new products categories, may
also impact our future gross margin.
• More competitors are seeking growth globally, thereby increasing
competition across regions. Some of these competitors are entering
markets where we already have a mature business such as the United
States , Mexico , Western Europe and Japan , and may provide consumersdiscretionary purchase alternatives or lower-priced apparel offerings.
• Wholesaler/retailer dynamics and wholesale channels remain challenged by
mixed growth prospects due to increased competition from e-commerce
shopping, pricing transparency enabled by the proliferation of online
technologies and vertically-integrated specialty stores. Retailers,
including our top customers, have in the past and may in the future
decide to consolidate, undergo restructurings or rationalize their storeswhich could result in a reduction in the number of stores that carry our
products.
• Many apparel companies that have traditionally relied on wholesale
distribution channels have invested in expanding their own retail store
and e-commerce distribution and consumer-facing technologies, which has
increased competition in the retail market.
• Competition for, and price volatility of, resources throughout the supply
chain have increased, causing us and other apparel manufacturers to
continue to seek alternative sourcing channels and create new
efficiencies in our global supply chain. Trends affecting the supplychain include the proliferation of lower-cost sourcing alternatives,
resulting in reduced barriers to entry for new competitors, and the
impact of fluctuating prices of labor and raw materials as well as the
consolidation of suppliers. Trends such as these can bring additional
pressure on us and other wholesalers and retailers to shorten lead-times,
reduce costs and raise product prices.
• Foreign currencies continue to be volatile. Significant fluctuations of
the
British Pound and Mexican Peso will impact our financial results,
affecting translation, and revenue, operating margins and net income.
• The current environment has introduced greater uncertainty with respect
to potential tax and trade regulations. The current domestic and
international political environment, including changes to other U.S.
policies related to global trade and tariffs, have resulted in
uncertainty surrounding the future state of the global economy. Such
changes may require us to modify our current sourcing practices, which
may impact our product costs and, if not mitigated, could
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have a material adverse effect on our business and results of operations. In addition,the United States enacted tax legislation in fiscal year 2018, which is intended to stimulate economic growth and capital investments inthe United States by, among other provisions, lowering tax rates for both corporations and individuals. For more information, see Note 18 of our audited consolidated financial statements included in this report. These factors contribute to a global market environment of intense competition, constant product innovation and continuing cost pressure, and combine with the continuing global economic conditions to create a challenging commercial and economic environment. We evaluate these factors as we develop and execute our strategies. For more information on the risk factors affecting our business, see "Item 1A - Risk Factors". Seasonality of Sales We typically achieve our largest quarterly revenues in the fourth quarter. In fiscal year 2019, our net revenues in the first, second, third and fourth quarters represented 25%, 23%, 25% and 27%, respectively, of our total net revenues for the year. In fiscal year 2018, our net revenues in the first, second, third and fourth quarters represented 24%, 22%, 25% and 29%, respectively, of our total net revenues for the year. We typically achieve a significant amount of revenues from our DTC channel on the Friday followingThanksgiving Day , which is commonly referred to as Black Friday. Due to the timing of our fiscal year-end, a particular fiscal year might include one, two or no Black Fridays, which could impact our net revenues for the fiscal year. Each of fiscal years 2018 and 2017 included one Black Friday, fiscal year 2019 did not have a Black Friday, while fiscal year 2020 will have two Black Fridays. The level of our working capital reflects the seasonality of our business. We expect inventory, accounts payable and accrued expenses to be higher in the second and third quarters in preparation for the fourth quarter selling season. Order backlog is not material to our business. Effects of Inflation We believe inflation in the regions where most of our sales occur has not had a significant effect on our net revenues or profitability. Our 2019 Results
• Net revenues. Compared to 2018, consolidated net revenues increased 3.4%
on a reported basis and 5.8% on a constant-currency basis driven by
growth across all three regions.
• Operating income. Compared to 2018, consolidated operating income
increased 4.8% and operating margin increased to 9.8% from 9.7%,
primarily reflecting higher net revenues and lower selling, general andadministrative ("SG&A") expenses as a percent of net revenues as higher
selling expenses incurred to support DTC growth were more than offset by
lower administration expenses.
• Net income. Compared to 2018, consolidated net income increased to
million from
year and a
impact from the 2017 Tax Act, partially offset with a $24.9 million
underwriter commission paid by us on behalf of selling stockholders in
connection with our IPO.
• Adjusted EBIT. Compared to 2018, adjusted EBIT of $610.6 million increased 4% on a reported basis and 8% on a constant-currency basis as a
result of higher net revenues. Adjusted EBIT margin was 10.6%, flat
compared to prior year on a reported basis, and 20 basis points higher
than the prior year on a constant-currency basis. The lack of Black
Friday sales in 2019 adversely impacted the adjusted EBIT margin
comparison by approximately 25 basis points.
• Adjusted net income. Compared to 2018, adjusted net income increased 9%
due to higher operating income in the current year, and a
charge in the prior year from a one-time
undistributed foreign earnings and foreign and state tax costs associated
with future remittances of undistributed earnings from foreign
subsidiaries, both resulting from the 2017 Tax Act.
• Earnings per share. Compared to 2018, diluted earnings per share
increased from
by an increase in shares outstanding as a result of our IPO.
• Adjusted diluted earnings per share. Compared to 2018, adjusted diluted
earnings per share increased from
increased from
higher adjusted net income, partially offset by increased shares
outstanding as a result of our IPO.
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Financial Information Presentation Fiscal year. We use a 52- or 53-week fiscal year, with each fiscal year ending on the Sunday that is closest toNovember 30 of that year. Certain of our foreign subsidiaries have fiscal years endingNovember 30 . Each fiscal year generally consists of four 13-week quarters, with each quarter ending on the Sunday that is closest to the last day of the last month of that quarter. Fiscal years 2019, 2018 and 2017 were 52-week years ending onNovember 24, 2019 ,November 25, 2018 andNovember 26, 2017 , respectively. Fiscal 2020 will be a 53-week year. Each quarter of fiscal years 2019, 2018 and 2017 consisted of 13 weeks. The fourth quarter of 2020 will consist of 14 weeks. Segments. We manage our business according to three operating segments:Americas ,Europe andAsia . Classification. Our classification of certain significant revenues and expenses reflects the following: • Net revenues comprise net sales and licensing revenues. Net sales include
sales of products to wholesale customers, including franchised stores,
and direct sales to consumers at our company-operated stores and
shop-in-shops located within department stores and other third party
locations, as well as company-operated e-commerce sites. Net revenues
include discounts, allowances for estimated returns and incentives.
Licensing revenues, which include revenues from the use of our trademarks
in connection with the manufacturing, advertising and distribution of
trademarked products by third-party licensees, are earned and recognized
as products are sold by licensees based on royalty rates as set forth in
the applicable licensing agreements.
• Cost of goods sold primarily comprises product costs, labor and related
overhead, sourcing costs, inbound freight, internal transfers and the
cost of operating our remaining manufacturing facilities, including therelated depreciation expense. On both a reported and constant-currency
basis, cost of goods sold reflects the transactional currency impact
resulting from the purchase of products in a currency other than the
functional currency.
• Selling expenses include, among other things, all occupancy costs anddepreciation associated with our company-operated stores and commissions
associated with our company-operated shop-in-shops, as well as costs
associated with our e-commerce operations.
• We reflect substantially all distribution costs in selling, general and
administrative expenses, including costs related to receiving and
inspection at distribution centers, warehousing, shipping to our
customers, handling, and certain other activities associated with our
distribution network.
• SG&A and Other Income (Expense), net in the period ended November 25 ,
2018 and
ASU 2017-07, "Compensation-Retirement Benefits (Topic 715) Improving the
Presentation of Net Periodic Cost and Net Periodic Postretirement Benefit
Cost". Refer to Note 1 for more information.
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Results of Operations
2019 compared to 2018
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:
Year Ended
November 24, November 25,
% 2019 2018
November 24, November 25, Increase % of Net % of Net
2019 2018 (Decrease) Revenues Revenues
(Dollars in millions, except per share amounts)
Net revenues $ 5,763.1 $ 5,575.4 3.4 % 100.0 % 100.0 %
Cost of goods sold 2,661.7 2,577.4 3.3 % 46.2 % 46.2 %
Gross profit 3,101.4 2,998.0 3.4 % 53.8 % 53.8 %
Selling, general and
administrative expenses 2,534.7 2,457.5 3.1 % 44.0 % 44.1 %
Operating income 566.7 540.5 4.8 % 9.8 % 9.7 %
Interest expense (66.2 ) (55.3 ) 19.7 % (1.1 )% (1.0 )%
Underwriter commission paid
on behalf of selling
stockholders (24.9 ) - * (0.4 )% - %
Other income, net 2.0 14.9 (86.6 )% - % 0.3 %
Income before income taxes 477.6 500.1 (4.5 )% 8.3 % 9.0 %
Income tax expense 82.6 214.8 (61.5 )% 1.4 % 3.9 %
Net income 395.0 285.3 38.5 % 6.9 % 5.1 %Net income attributable to noncontrolling interest (0.4 ) (2.1 ) (81.0 )% - % - % Net income attributable to Levi Strauss & Co.$ 394.6 $ 283.2 39.3 % 6.8 % 5.1 % Earnings per common share attributable to common stockholders: Basic$ 1.01 $ 0.75 34.7 % * * Diluted$ 0.97 $ 0.73 32.9 % * * Weighted-average common shares outstanding: Basic 389.1 377.1 3.2 % * * Diluted 408.4 388.6 5.1 % * * _____________ * Not meaningful 37
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Net revenues
The following table presents net revenues by regional operating segment for the
periods indicated and the changes in net revenues by operating segment on both
reported and constant-currency bases from period to period:
Year Ended
% Increase
November 24, November 25, As Constant
2019 2018 Reported Currency
(Dollars in millions)
Net revenues:
Americas $ 3,057.0 $ 3,042.7 0.5 % 0.8 %
Europe 1,768.1 1,646.2 7.4 % 13.3 %
Asia 938.0 886.5 5.8 % 9.5 %
Total net revenues $ 5,763.1 $ 5,575.4 3.4 % 5.8 %
As compared to the same period in the prior year, total net revenues were
affected unfavorably by approximately $126 million in foreign currency exchange
rates.
Americas . On both a reported basis and constant-currency basis, net revenues in
our Americas region increased slightly for 2019. Currency translation had an
unfavorable impact on net revenues of approximately $10 million for the year.
Constant-currency net revenues increased as a result of higher DTC revenues, in
the U.S. and international markets, specifically Mexico , despite lacking Black
Friday sales due to the timing of our 2019 fiscal year-end. The increase in
sales was due to the expansion of our company-operated retail network, as we had
14 more stores in operation as of November 24, 2019 as compared to November 25,
2018 and increased traffic to our e-commerce business. Total wholesale revenues
were down, driven from a decline in U.S. wholesale revenues, as a result of the
softening in the overall wholesale environment, including the impact of
financially troubled retailers and increased door closures since a year ago. The
decline was also due to the 2018 relaunch of our Docker's Signature Khaki, as we
stocked our customers' floors with the new product, driving increased sales in
the prior year.
Europe . Net revenues in Europe increased on both reported and constant-currency
bases, with currency translation affecting net revenues unfavorably by
approximately $86 million .
Constant-currency net revenues increased for 2019 as a result of strong
performance across both DTC and wholesale channels. The growth in DTC is mainly
driven from strong performance within our company-operated retail network,
particularly outlets, as well as expansion, as we had 24 more stores in
operation as of November 24, 2019 as compared to November 25, 2018 , despite
lacking Black Friday sales due to the timing of our 2019 fiscal year-end. The
growth in our wholesale channel is broad based, across all markets and product
categories.
Asia . Net revenues in Asia increased on both reported and constant-currency
bases, with currency translation affecting net revenues unfavorably by
approximately $30 million .
On a constant-currency basis, the increase in net revenues was due to growth
across both wholesale and DTC channels. The growth in wholesale, which includes
franchised stores was across multiple markets, in particular India . The growth
in DTC was primarily due to store expansion, as there were 43 more stores as of
November 24, 2019 as compared to November 25, 2018 as well as growth within our
e-commerce business.
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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:
Year Ended
November 24, November 25, %
2019 2018 Increase
(Dollars in millions)
Net revenues $ 5,763.1 $ 5,575.4 3.4 %
Cost of goods sold 2,661.7 2,577.4 3.3 %
Gross profit $ 3,101.4 $ 2,998.0 3.4 %
Gross margin 53.8 % 53.8 %
Currency translation unfavorably impacted gross profit by approximately $72
million . Excluding the impact of currency translation, gross margin increased
slightly due to sales in higher gross margin businesses offset primarily by
transactional currency impact.
Selling, general and administrative expenses
The following table shows SG&A expenses for the periods indicated, the changes
in these items from period to period and these items expressed as a percentage
of net revenues:
Year Ended
November 24, November 25,
% 2019 2018
November 24, November 25, Increase % of Net % of Net
2019 2018 (Decrease) Revenues Revenues
(Dollars in millions)
Selling $ 1,116.8 $ 1,043.0 7.1 % 19.4 % 18.7 %
Advertising and promotion 399.3 400.3 (0.2 )% 6.9 % 7.2 %
Administration 426.0 484.5 (12.1 )% 7.4 % 8.7 %
Other 592.6 529.7 11.9 % 10.3 % 9.5 %
Total SG&A expenses $ 2,534.7 $ 2,457.5 3.1 % 44.0 % 44.1 %
Currency translation affected SG&A expenses favorably by approximately $50
million as compared to the prior year.
Selling. Currency translation impacted selling expenses favorably by
approximately $29 million for the year ended November 24, 2019 . Higher selling
expenses primarily reflected costs associated with the expansion and performance
of our DTC business, including increased investment in new and existing
company-operated stores. We had 81 more company-operated stores as of
November 24, 2019 than as of November 25, 2018 .
Advertising and promotion. Currency translation impacted advertising and
promotion expense favorably by approximately $8 million for the year ended
November 24, 2019 . Advertising and promotion expenses as a percent of net
revenues decreased due to planned reductions in advertising spend.
Administration. Administration expenses include functional administrative and
organization costs. Currency translation impacted administration expenses
favorably by approximately $6 million for the fiscal year 2019. Administration
expenses decreased due to lower annual incentive compensation costs as well as
lower stock-based compensation costs, which reflect the cancel of cash-settled
awards and concurrent replacement with similar equity-settled awards in relation
to the IPO, as well as lower overall stock price volatility for 2019.
Other. Other SG&A expenses include distribution, information resources, and
marketing organization costs. Currency translation impacted other SG&A expenses
favorably by approximately $7 million for the fiscal year 2019. The increase in
other SG&A costs was primarily due to an increase in information technology
expenses, which reflect critical investments towards expanding our omni-channel
capabilities as well as initial investments towards a new enterprise resource
planning system. Distribution costs also increased to support increased volume,
mainly within Europe and Asia .
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Operating income
The following table shows operating income by regional operating 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 corresponding
region net revenues:
Year Ended
November 24, November 25,
2019 2018
November 24, November 25, % (Decrease) % of Net % of Net
2019 2018 Increase Revenues Revenues
(Dollars in millions)
Operating income:
Americas $ 545.1 $ 551.4 (1.1 )% 17.8 % 18.1 %
Europe 353.1 292.9 20.6 % 20.0 % 17.8 %
Asia 85.8 86.6 (0.9 )% 9.1 % 9.8 %
Total regional operating income 984.0 930.9 5.7 % 17.1 % * 16.7 % *
Corporate expenses 417.3 390.4 6.9 % 7.2 % * 7.0 % *
Total operating income $ 566.7 $ 540.5 4.8 % 9.8 % * 9.7 % *
Operating margin 9.8 % 9.7 %
______________
* Percentage of consolidated net revenues
Currency translation affected total operating income unfavorably by
approximately $22 million as compared to the prior year.
Regional operating income.
• Americas . Currency translation did not have a significant impact on
operating income in the region for fiscal year 2019. The decrease in
operating income was primarily due to an increase in net revenues andgross margin offset by higher SG&A selling expense, mainly to support
growth across our DTC channel.
•
region by approximately $17 million as compared to the prior year.
Excluding the effects of currency, the increase in operating income was
due to higher net revenues across all channels and increased gross
margin, partially offset by higher SG&A selling, distribution, and
advertising and promotion costs to support revenue growth.
•
region by approximately
Excluding the effects of currency, the increase in operating income for
2019 was due to higher net revenues across all channels, offset by higher
SG&A selling expense to support growth across our retail channel.
Corporate. Corporate expenses represent costs that management does not attribute to any of our regional operating segments. Included in corporate expenses are other corporate staff costs and costs associated with our global inventory sourcing organization, which are reported as a component of consolidated gross margin. The increase in corporate expenses for 2019 was primarily due to an increase in foreign currency transaction losses related to our global sourcing organizations procurement of inventory on behalf of our foreign subsidiaries. Interest expense Interest expense was$66.2 million for the year endedNovember 24, 2019 , as compared to$55.3 million in the prior year. The increase in interest expense was primarily related to higher interest on deferred compensation as a result of changes in market conditions, and higher interest incurred on lease financing obligations for build to suit locations. Our weighted-average interest rate on average borrowings outstanding for 2019 was 5.31%, as compared to 5.01% for 2018. 40
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Other income (expense), net Other income (expense), net, primarily consists of foreign exchange management activities and transactions. For the year endedNovember 24, 2019 andNovember 25, 2018 , we recorded net other income of$2.0 million and$14.9 million , respectively. The income in 2019 primarily reflected investment interest generated from money market funds and short-term investments, partially offset by net periodic pension cost and net losses on our foreign currency denominated balances. The income in 2018 primarily reflected net gains on our foreign exchange derivatives and investment interest generated from money market funds, partially offset by net losses on our foreign currency denominated balances. Underwriter commission paid on behalf of selling stockholders For the year endedNovember 24, 2019 , we recorded an expense of$24.9 million for underwriting discounts and commissions paid by us on behalf of the selling stockholders in connection with our IPO. Income tax expense OnDecember 22, 2017 , theU.S. enacted the Tax Act, which significantly changedU.S. tax law. The Tax Act lowered ourU.S. statutory federal income tax rate from 35% to 21% effective onNovember 26, 2018 . Beginning the first quarter of 2019, our effective tax rate reflected a provision to tax Global Intangible Low-Taxed Income ("GILTI") of foreign subsidiaries and a tax benefit for Foreign Derived Intangible Income ("FDII"). In accordance withU.S. GAAP, we made an accounting policy election to account for GILTI in the period in which it is incurred. Income tax expense was$82.6 million for the year endedNovember 24, 2019 , compared to$214.8 million for the prior year. Our effective income tax rate was 17.3% for the year endedNovember 24, 2019 , compared to 43.0% for the prior year. The decrease in the effective tax rate in 2019 as compared to 2018 was primarily driven by a$143.4 million one-time tax charge in 2018 related to the enactment of the Tax Act. This charge was comprised of$95.6 million re-measurement of deferred tax assets and liabilities and$37.5 million one-timeU.S. transition tax on undistributed foreign earnings and$10.3 million charge related to foreign and state tax costs associated with the future remittance of undistributed earnings of foreign subsidiaries. We historically provided forU.S. income taxes on the undistributed earnings of foreign subsidiaries unless they were considered indefinitely reinvested outsidethe United States . We have reevaluated this historic indefinite reinvestment assertion as a result of the enactment of the Tax Act and determined that any historical undistributed earnings throughNovember 25, 2018 of foreign subsidiaries are no longer considered to be indefinitely reinvested as well as most of the additional undistributed earnings generated throughNovember 2019 . The deferred tax liability related to foreign and state tax costs associated with the future remittance of these undistributed earnings of foreign subsidiaries was$9.7 million . For the year endedNovember 24, 2019 , management asserted indefinite reinvestment on a small portion of foreign earnings generated in fiscal year 2019. If such earnings were to repatriate back to theU.S. , the related foreign withholding and state tax costs could be approximately$1 million . 41
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2018 compared to 2017
The following table summarizes, for the periods indicated, our consolidated
statements of income, the changes in these items from period to period and these
items expressed as a percentage of net revenues:
Year Ended
November 25, November 26,
% 2018 2017
November 25, November 26, Increase % of Net % of Net
2018 2017 (Decrease) Revenues Revenues
(Dollars in millions, except per share amounts)
Net revenues $ 5,575.4 $ 4,904.0 13.7 % 100.0 % 100.0 %
Cost of goods sold 2,577.4 2,341.3 10.1 % 46.2 % 47.7 %
Gross profit 2,998.0 2,562.7 17.0 % 53.8 % 52.3 %
Selling, general and
administrative expenses(1) 2,457.5 2,082.6 18.0 % 44.1 % 42.5 %
Operating income 540.5 480.1 12.6 % 9.7 % 9.8 %
Interest expense (55.3 ) (68.6 ) (19.4 )% (1.0 )% (1.4 )%
Loss on early extinguishment of
debt - (22.8 ) * - % (0.5 )%
Other income (expense), net(1) 14.9 (39.9 ) (137.3 )% 0.3 % (0.8 )%
Income before income taxes 500.1 348.8 43.4 % 9.0 % 7.1 %
Income tax expense 214.8 64.2 * 3.9 % 1.3 %
Net income 285.3 284.6 0.2 % 5.1 % 5.8 %
Net income attributable to
noncontrolling interest (2.1 ) (3.2 ) (34.4 )% - % (0.1 )%
Net income attributable to Levi
Strauss & Co. $ 283.2 $ 281.4 0.6 % 5.1 % 5.7 %
Earnings per common share
attributable to common
stockholders:
Basic $ 0.75 $ 0.75 - % * *
Diluted $ 0.73 $ 0.73 - % * *
Weighted-average common shares
outstanding:
Basic 377.1 376.2 0.2 % * *
Diluted 388.6 384.3 1.1 % * *
_____________* Not meaningful (1) The amounts in SG&A and Other income (expense), net have been conformed to
reflect the adoption of ASU 2017-07, "Compensation-Retirement Benefits (Topic
715) Improving the Presentation of Net Periodic Cost and Net Periodic
Postretirement Benefit Cost" and include non-service cost component of net
periodic benefit costs. Refer to Note 1 for more information.
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Net revenues
The following table presents net revenues by regional operating segment for the
periods indicated and the changes in net revenues by operating segment on both
reported and constant-currency bases from period to period:
Year Ended
% Increase
November 25, November 26, As Constant
2018 2017 Reported Currency
(Dollars in millions)
Net revenues:
Americas $ 3,042.7 $ 2,774.0 9.7 % 10.0 %
Europe 1,646.2 1,312.3 25.4 % 20.8 %
Asia 886.5 817.7 8.4 % 8.2 %
Total net revenues $ 5,575.4 $ 4,904.0 13.7 % 12.7 %
As compared to the same period in the prior year, total net revenues were
affected favorably by changes in foreign currency exchange rates.
Americas . On both a reported basis and constant-currency basis, net revenues in
our Americas region increased for 2018. Currency translation had an unfavorable
impact on net revenues of approximately $7 million for the year.
Constant-currency net revenues increased as a result of broad-based growth in
the region. Wholesale revenues grew in the region, largely due to the continued
growth in performance and expansion of Signature® products and Levi's® women's
products as well as growth in Mexico . DTC revenues grew due to strong
performance of our company-operated retail outlet and e-commerce businesses
driven by increased traffic and conversion, as well as 21 more company-operated
retail stores in operation as of November 25, 2018 as compared to November 26,
2017 .
Europe . Net revenues in Europe increased on both reported and constant-currency
bases, with currency translation affecting net revenues favorably by
approximately $50 million .
Constant-currency net revenues increased for 2018 as a result of strong
performance in all channels mostly due to traditional wholesale and
company-operated retail. The widespread growth in all channels reflects the
strength of the brand and expanded product assortment across the customer base,
mainly in Levi's® men's and women's products. Additionally, there were 17 more
company-operated retail stores in operation as of November 25, 2018 as compared
to November 26, 2017 .
Asia . Net revenues in Asia increased on both reported and constant-currency
bases, with currency translation having a minimal impact on net revenues.
On a constant-currency basis, the increase in net revenues was primarily due to
the expansion and strong performance of our company-operated retail network,
which included 36 more stores as of November 25, 2018 as compared to
November 26, 2017 . Wholesale revenues in 2018 increased, particularly in India ,
Japan , Australia and New Zealand .
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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:
Year Ended
November 25, November 26, %
2018 2017 Increase
(Dollars in millions)
Net revenues $ 5,575.4 $ 4,904.0 13.7 %
Cost of goods sold 2,577.4 2,341.3 10.1 %
Gross profit $ 2,998.0 $ 2,562.7 17.0 %
Gross margin 53.8 % 52.3 %
Currency translation favorably impacted gross profit by approximately
Year Ended
November 25, November 26,
2018 2017
November 25, November 26, % % of Net % of Net
2018 2017 Increase Revenues Revenues
(Dollars in millions)
Selling $ 1,043.0 $ 888.2 17.4 % 18.7 % 18.1 %
Advertising and promotion 400.3 323.3 23.8 % 7.2 % 6.6 %
Administration 484.5 398.1 21.7 % 8.7 % 8.1 %
Other 529.7 473.0 12.0 % 9.5 % 9.7 %
Total SG&A expenses $ 2,457.5 $ 2,082.6 18.0 % 44.1 % 42.5 %
Currency translation affected SG&A expenses unfavorably by approximately $19
million as compared to the prior year.
Selling. Currency translation impacted selling expenses unfavorably by
approximately $11.0 million for the year ended November 25, 2018 . Higher selling
expenses primarily reflected costs associated with the expansion and performance
of our DTC business, including increased investment in new and existing
company-operated stores. We had 74 more company-operated stores as of
November 25, 2018 than as of November 26, 2017 .
Advertising and promotion. Currency translation impacted advertising and
promotion expense unfavorably by approximately $2.0 million for the year ended
November 25, 2018 . Advertising and promotion expenses increased due to planned
incremental investments in advertising.
Administration. Administration expenses include functional administrative and
organization costs. Currency translation impacted administration expenses
unfavorably by approximately $3.0 million for the fiscal year 2018. As compared
to the same prior-year period, administration expenses in 2018 reflect higher
stock-based and incentive compensation which increased $57.9 million , reflecting
outperformance against our internally-set objectives. Our stock-based
compensation expense related to cash-settled awards increased to $71.4 million
for fiscal year 2018 from $31.3 million for the same prior-year period, mostly
as a result of an increase in fair value of our common stock during the period.
This increase was partially offset by an $8.3 million adjustment in 2017, which
was for the correction of the periods used for the recognition of expense
associated with employees eligible to vest in awards after retirement in the
prior years.
Other. Other SG&A expense include distribution, information resources, and
marketing organization costs. Currency translation impacted other SG&A expenses
unfavorably by approximately $3.0 million for the fiscal year 2018. The increase
in SG&A other costs was primarily due to an increase in distribution costs as a
result of higher volume.
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Operating income
The following table shows operating income by regional operating 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 corresponding
region net revenues:
Year Ended
November 25, November 26,
2018 2017
November 25, November 26, % % of Net % of Net
2018 2017 Increase Revenues Revenues
(Dollars in millions)
Operating income:
Americas $ 551.4 $ 529.3 4.2 % 18.1 % 19.1 %
Europe 292.9 198.7 47.4 % 17.8 % 15.1 %
Asia 86.6 78.3 10.6 % 9.8 % 9.6 %
Total regional operating income 930.9 806.3 15.5 % 16.7 % * 16.4 % *
Corporate expenses 390.4 326.2 19.7 % 7.0 % * 6.7 % *
Total operating income $ 540.5 $ 480.1 12.6 % 9.7 % * 9.8 % *
Operating margin 9.7 % 9.8 %
______________
* Percentage of consolidated net revenues
Currency translation affected total operating income favorably by approximately
$13 million as compared to the prior year.
Regional operating income.
• Americas . Currency translation did not have a significant impact on
operating income in the region for fiscal year 2018. The increase in
operating income was primarily due to higher net revenues and gross
margin partially offset by higher SG&A selling expense due to store
growth and an increased investment in advertising.
• Europe . Currency translation favorably affected operating income by
approximately
operating income was due to higher net revenues across all channels,
partially offset by higher SG&A selling expense to support growth and
higher advertising and promotion expense.
•
income in the region for fiscal year 2018. The increase in operating
income for 2018 was due to higher net revenues and gross margins,
partially offset by higher SG&A selling expense related to retail
expansion.
Corporate. Corporate expenses represent costs that management does not attribute
to any of our regional operating segments. Included in corporate expenses are
restructuring and restructuring-related charges, other corporate staff costs,
and costs associated with our global inventory sourcing organization. Currency
translation did not have a significant impact on corporate expenses. The
increase in corporate expenses for 2018 was primarily due to an increase in
administration expenses of $57.9 million relating to stock-based and incentive
compensation reflecting outperformance against our internally-set objectives.
This increase was partially offset by an $8.3 million adjustment in 2017, which
was for the correction of the periods used for the recognition of expense
associated with employees eligible to vest in awards after retirement in the
prior years.
Interest expense
Interest expense was $55.3 million for the year ended November 25, 2018 , as
compared to $68.6 million in the prior year. The decrease in interest expense
was primarily due to lower average borrowing rates in 2018 resulting from our
debt refinancing activities during the second quarter of 2017, and the reduction
in deferred compensation interest due to changes to market conditions.
Our weighted-average interest rate on average borrowings outstanding for 2018
was 5.01%, as compared to 5.60% for 2017.
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Loss on early extinguishment of debt For the year endedNovember 26, 2017 , we recorded a$22.8 million loss on early extinguishment of debt as a result of our debt refinancing activities during the year. The loss included$21.9 million of tender and call premiums on the retirement of the debt. Other income (expense), net Other income (expense), net, primarily consists of foreign exchange management activities and transactions. For the year endedNovember 25, 2018 , we recorded net other income of$14.9 million as compared to net other expense of$39.9 million for the prior year. The income in 2018 primarily reflected net gains on our foreign exchange derivatives and investment interest generated from money market funds, partially offset by net losses on our foreign currency denominated balances. The expense in 2017 primarily reflected net losses on foreign exchange derivatives, partially offset by net gains on our foreign currency denominated balances. Income tax expense Income tax expense was$214.8 million for the year endedNovember 25, 2018 , compared to$64.2 million for the prior year. Our effective income tax rate was 43.0% for the year endedNovember 25, 2018 , compared to 18.4% for the prior year. The increase in the effective tax rate in 2018 as compared to 2017 was primarily driven by one-time tax charge related to the impact of the Tax Cuts and Jobs Act (the "Tax Act") described below and proportionately less tax benefit from the lower tax cost of foreign operations, partially offset by the lowerU.S. federal statutory tax rate. For the year endedNovember 25, 2018 , management reevaluated its historic assertion of indefinite reinvestment of$264 million of undistributed foreign earnings. These earnings, as well as other foreign earnings, were subject to theU.S. one-time mandatory transition tax and are eligible to be repatriated tothe United States without additionalU.S. federal tax under the Tax Act. As a result of this reevaluation, we have determined that any historical undistributed earnings throughNovember 25, 2018 are no longer considered to be indefinitely reinvested and accordingly recognized a$10.3 million deferred tax expense associated with the future remittance of these undistributed earnings of foreign subsidiaries. The Tax Act was enacted inthe United States onDecember 22, 2017 and includes, among other items, a reduction in the federal corporate income tax rate from 35% to 21% and a deemed repatriation of foreign earnings. The enactment of the Tax Act resulted in a charge of$143.4 million to tax expense for the year endedNovember 25, 2018 . This charge was comprised of a$95.6 million re-measurement of our deferred tax assets and liabilities based on the lower rates at which they are expected to reverse in the future, a$37.5 million one-timeU.S. transition tax on undistributed foreign earnings and a$10.3 million charge related to foreign and state tax costs associated with the future remittance of undistributed earnings of foreign subsidiaries. The Tax Act also includes provisions not yet effective for our company, including a provision to tax global intangible low-taxed income (GILTI) of foreign subsidiaries, which were effective for our company beginning onNovember 26, 2018 . In accordance withU.S. GAAP, we have made an accounting policy election to treat taxes due under the GILTI provision as a current period expense. 46
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Liquidity and Capital Resources Liquidity outlook We believe we will have adequate liquidity over the next 12 months to operate our business and to meet our cash requirements. Our capital allocation priorities are (1) to invest in opportunities and initiatives to grow our business organically, (2) to return capital to our stockholders in the form of cash dividends, which we expect to be in the range of$130 million in 2020, as well as stock repurchases to offset dilution that would otherwise be introduced from stock-based incentive compensation grants, and (3) to pursue acquisitions that support our current strategies. Future determinations regarding the declaration and payment of dividends, if any, will be at the discretion of our board of directors and will depend on then-existing conditions, including our results of operations, payout ratio, capital requirements, financial condition, prospects, contractual arrangements, any limitations on payment of dividends present in our current and future debt agreements and other factors that our board of directors may deem relevant. Cash sources 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 party to a second amended and restated credit agreement that provides for 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 ourU.S. Levi's® trademarks and the levels of accounts receivable and inventory inthe United States andCanada . The maximum availability under the facility is$850 million , of which$800 million is available to us for revolving loans inU.S. Dollars and$50 million is available to us for revolving loans either inU.S. Dollars or Canadian Dollars. InMarch 2019 , we completed our IPO, in which we issued and sold 14,960,557 shares of Class A common stock at a public offering price of$17.00 per share. We received net proceeds of$234.6 million after deducting underwriting discounts and commissions of$13.6 million and other direct and incremental offering expenses of$6.1 million . We agreed to pay all underwriting discounts and commissions applicable to the sales of shares of Class A common stock by the selling stockholders. This amount,$24.9 million , was paid at completion of the IPO inMarch 2019 and was recorded as non-operating expense in the second quarter of 2019. Additionally, we incurred$3.5 million of other costs associated with the IPO that were recorded in SG&A. As ofNovember 24, 2019 , we did not have any borrowings under the credit facility, unused availability under the facility was$819.5 million , and our total availability of$850.0 million , based on collateral levels as defined by the agreement, was reduced by$30.5 million of other credit-related instruments. As ofNovember 24, 2019 , we had cash and cash equivalents totaling approximately$934.2 million and short-term investments of$80.7 million resulting in a total liquidity position (unused availability and cash and cash equivalents and short-term investments) of approximately$1.8 billion . Cash uses Our principal cash requirements include working capital, capital expenditures, payments of principal and interest on our debt, payments of taxes, contributions to our pension plans and payments for postretirement health benefit plans, settlement of shares issued under our 2016 Equity Incentive Plan, as amended to date ("EIP") and, if market conditions warrant, occasional investments in, or acquisitions of, business ventures in our line of business. In addition, we regularly evaluate our ability to pay dividends or repurchase stock, all consistent with the terms of our debt agreements. Upon completion of our IPO inMarch 2019 , our 2016 Plan was replaced with our 2019 Equity Incentive Plan ("2019 Plan"). Under the 2016 Plan, holders of shares could require us to repurchase such shares at the then-current market value pursuant to a contractual put right. Under the 2019 Plan and as a result of the IPO, this contractual put right was terminated. However, upon vesting or exercise of an award, we will continue to net settle shares in order to pay withholding taxes on behalf of our employees. InDecember 2019 , the Company completed an acquisition for all operating assets related to Levi's® and Dockers® brands fromThe Jeans Company ("TJC"), LS&Co's distributor inChile ,Peru andBolivia , for$52 million , plus transaction costs. This includes 78 Levi's® and Dockers® retail stores, distribution with the region's leading multi-brand retailers, and the logistical operations in these markets. InJanuary 2020 , the Board declared a cash dividend of$0.08 per share to holders of record of its Class A and Class B common stock at the close of business onFebruary 12, 2020 . Total dividends are expected to be in the range of$130 million for fiscal year 2020 and to be paid out quarterly. 47
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The following table provides information about our significant cash contractual
obligations and commitments as of
Payments due or projected by fiscal period
Total 2020 2021 2022 2023 2024 Thereafter
(Dollars in millions)
Contractual and Long-term Liabilities: Short-term and long-term debt obligations$ 1,025 $ 8 $ - $ - $ - $ -$ 1,017 Interest(1) 273 46 45 45 43 43 51 Future minimum payments(2) 1,147 234 203 175 140 111 284 Purchase obligations(3) 863 636 41 27 18 16 125 Postretirement obligations(4) 67 9 9 8 8 7 26 Pension obligations(5) 194 44 25 15 15 15 80 Long-term employee related benefits(6) 96 11 4 3 4 3 71 Total$ 3,665 $ 988 $ 327 $ 273 $ 228 $ 195 $ 1,654 ______________
(1) Interest obligations are computed using constant interest rates until
maturity.
(2) Amounts reflect contractual obligations relating to our existing leased
facilities as of
future openings of company-operated retail stores. For more information, see
"Item 2 - Properties."
(3) Amounts reflect estimated commitments of
purchases,
with respect to the Levi's® Stadium, and
advertising, information technology and other professional services.
(4) The amounts presented in the table represent an estimate for the next ten
years of our projected payments, based on information provided by our plans'
actuaries, and have not been reduced by estimated Medicare subsidy receipts,
the amounts of which are not material. Our policy is to fund postretirement
benefits as claims and premiums are paid. For more information, see Note 8 to
our audited consolidated financial statements included in this report.
(5) The amounts presented in the table represent an estimate of our projected
contributions to the plans for the next ten years based on information
provided by our plans' actuaries. For
can exceed the projected annual minimum required contributions in an effort
to level out potential future funding requirements and provide annual funding
flexibility. The 2020 contribution amounts will be recalculated at the end of
the plans' fiscal years, which for our
of our third fiscal quarter. Accordingly, actual contributions may differ
materially from those presented here, based on factors such as changes in
discount rates and the valuation of pension assets. For more information, see
Note 8 to our audited consolidated financial statements included in this
report.
(6) Long-term employee-related benefits primarily relate to the current and
non-current portion of deferred compensation arrangements and workers'
compensation. We estimated these payments based on prior experience and
forecasted activity for these items. For more information, see Note 12 to our
audited consolidated financial statements included in this report.
The above table does not include amounts related to our uncertain tax positions of$36.6 million . We do not anticipate a material effect on our liquidity as a result of payments in future periods of liabilities for uncertain tax positions. The table also does not include amounts related to potential cash settlement of stock appreciation rights ("SARs") put to the Company under the terms of our EIP. Based on the fair value of the Company's stock and the number of shares outstanding as ofNovember 24, 2019 , future payments under the terms of the EIP could range up to approximately$120 million , which could become payable in 2020. These payments are contingent on the Company's liquidity and the Board's discretion. Information in the above table reflects our estimates of future cash payments. These estimates and projections are based upon assumptions that are inherently subject to significant economic, competitive, legislative and other uncertainties and contingencies, many of which are beyond our control. Accordingly, our actual expenditures and liabilities may be materially higher or lower than the estimates and projections reflected in the above table. The inclusion of these projections and estimates should not be regarded as a representation by us that the estimates will prove to be correct. 48
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Cash flows
The following table summarizes, for the periods indicated, selected items in our
consolidated statements of cash flows:
Year Ended
November 24, November 25, November 26,
2019 2018 2017
(Dollars in millions)
Cash provided by operating activities $ 412.2 $ 420.4 $ 525.9
Cash used for investing activities (243.3 ) (179.4 ) (124.4 )
Cash provided by (used for) financing activities 55.0 (148.6 ) (151.8 )
Cash and cash equivalents as of fiscal year end 934.2 713.1 633.6
2019 as compared to 2018
Cash flows from operating activities
Cash provided by operating activities was $412.2 million for 2019, as compared
to $420.4 million for 2018. The decrease primarily reflects higher payments for
SG&A expenses and inventory to support our growth, higher payments for employee
stock-based incentive compensation, and a payment made for underwriting
commissions on behalf of selling stockholders in connection with our IPO in
March 2019 , partially offset by an increase in cash received from customers as
well as less contributions to our pension plans.
Cash flows from investing activities
Cash used for investing activities was $243.3 million for 2019, as compared to
$179.4 million for 2018. The increase in cash used for investing activities is
due to an increase in payments for capital expenditures and higher net payments
to acquire short-term investments, partially offset by proceeds from settlement
of forward foreign exchange contracts during 2019.
Cash flows from financing activities
Cash provided by financing activities was $55.0 million for 2019, as compared to
cash used of $148.6 million for 2018. Cash provided in 2019 primarily reflects
proceeds from our IPO of $254.3 million , partially offset by the payments of
$113.9 million for cash dividends, $44.0 million for equity award exercises,
$23.3 million for net repayments of short-term credit facility and borrowings,
and payments of $19.7 million for underwriting commissions and other direct and
incremental offering costs. Cash used in 2018 primarily reflects the payment of
$90.0 million for cash dividends and $56.0 million for equity award exercises.
2018 as compared to 2017
Cash flows from operating activities
Cash provided by operating activities was $420.4 million for 2018, as compared
to $525.9 million for 2017. The decrease primarily reflects additional
contributions to our pension plans, higher payments for inventory and SG&A
expenses to support our growth, as well as higher payments for income taxes,
partially offset by an increase in cash received from customers.
Cash flows from investing activities
Cash used for investing activities was $179.4 million for 2018, as compared to
$124.4 million for 2017. The increase in cash used for investing activities
primarily reflects increased payments for capital expenditures.
Cash flows from financing activities
Cash used for financing activities was $148.6 million for 2018, as compared to
$151.8 million for 2017. Cash used in 2018 primarily reflects the payments of
$90.0 million for cash dividends and $56.0 million for equity award exercises.
Cash used in 2017 primarily reflects the payment of a $70.0 million cash
dividend as well as our refinancing activities and debt reduction, including
debt extinguishment costs and debt issuance costs. Cash used in 2017 also
reflects payments made for equity award exercises.
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 $1.0 billion as of November 24,
2019 , 100% was fixed-rate debt, net of capitalized debt issuance costs, and no
variable-rate debt. As of November 24, 2019 , our required aggregate debt
principal payments on our unsecured long-term debt were $1.0 billion
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in years after 2024. Short-term borrowings of$7.6 million at various foreign subsidiaries were expected to be either paid over the next 12 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 ofNovember 24, 2019 . Non-GAAP Financial Measures Adjusted SG&A, Adjusted EBIT, Adjusted EBIT Margin, Adjusted EBITDA, Adjusted Net Income, Adjusted Net Income Margin, Adjusted Diluted Earnings per Share We define adjusted SG&A, a non-GAAP financial measure, as SG&A excluding costs associated with the IPO, changes in fair value on cash-settled stock-based compensation, and restructuring and related charges, severance and other, net. We define Adjusted EBIT, a non-GAAP financial measure, as net income excluding income tax expense, interest expense, other (income) expense, net, underwriter commission paid on behalf of selling stockholders, loss on early extinguishment of debt, costs associated with the IPO, impact of changes in fair value on cash-settled stock-based compensation, and restructuring and related charges, severance and other, net. We define Adjusted EBIT margin as Adjusted EBIT as a percentage of net revenues. We define Adjusted EBITDA as Adjusted EBIT excluding depreciation and amortization expense. We define adjusted net income, a non-GAAP financial measure, as net income excluding impact of underwriter commission paid on behalf of selling stockholders, loss on early extinguishment of debt, costs associated with the IPO, impact of changes in fair value on cash-settled stock-based compensation, restructuring and related charges, severance and other, net, and re-measurement of our deferred tax assets and liabilities based on the lower rates as a result of the Tax Act, adjusted to give effect to the income tax impact of such adjustments. To calculate the income tax impact of such adjustments on a year-to-date basis, we utilize an effective tax rate equal to our income tax expense divided by our income before income taxes, each as reflected in our statement of operations for the relevant period, except that during the year ended 2018 we excluded from income tax expense the effect of the$95.6 million re-measurement described above. We define adjusted net income margin as adjusted net income as a percentage of net revenues. We define adjusted diluted earnings per share as adjusted net income per weighted-average number of diluted common shares outstanding. We believe Adjusted SG&A, Adjusted EBIT, Adjusted EBIT margin, Adjusted EBITDA, adjusted net income, adjusted net income margin and adjusted diluted earnings per share are useful to investors because they help identify underlying trends in our business that could otherwise be masked by certain expenses that we include in calculating net income but that can vary from company to company depending on its financing, capital structure and the method by which its assets were acquired, and can also vary significantly from period to period. Our management also uses Adjusted EBIT in conjunction with other GAAP financial measures for planning purposes, including as a measure of our core operating results and the effectiveness of our business strategy, and in evaluating our financial performance. Adjusted SG&A, Adjusted EBIT, Adjusted EBIT margin, Adjusted EBITDA, adjusted net income, adjusted net income margin and adjusted diluted earnings per share have limitations as analytical tools and should not be considered in isolation or as a substitute for an analysis of our results prepared and presented in accordance with GAAP. Some of these limitations include: • Adjusted EBIT, Adjusted EBIT margin and Adjusted EBITDA do not reflect
income tax payments that reduce cash available to us;
• Adjusted EBIT, Adjusted EBIT margin and Adjusted EBITDA do not reflect
interest expense, or the cash requirements necessary to service interest
or principal payments on our indebtedness, which reduces cash available
to us;
• Adjusted EBIT, Adjusted EBIT margin and Adjusted EBITDA exclude other
(income) expense net, which has primarily consisted of realized andunrealized gains and losses on our forward foreign exchange contracts and
transaction gains and losses on our foreign exchange balances, although
these items affect the amount and timing of cash available to us when
these gains and losses are realized;
• all of these non-GAAP financial measures exclude underwriter commission
paid on behalf of selling stockholders in connection with our IPO that
reduces cash available to us;
• all of these non-GAAP financial measures exclude other costs associated
with our IPO;
• all of these non-GAAP financial measures exclude the expense resulting
from the impact of changes in fair value on our cash-settled stock-based
compensation awards, even though, prior to March 2019 , such awards were
required to be settled in cash;
• all of these non-GAAP financial measures exclude certain other SG&A
items, which include severance, transaction and deal related costs,including acquisition and integration costs which can affect our current
and future cash requirements;
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• the expenses and other items that we exclude in our calculations of all
of these non-GAAP financial measures may differ from the expenses and
other items, if any, that other companies may exclude from all of these
non-GAAP financial measures or similarly titled measures;
• Adjusted EBITDA excludes the recurring, non-cash expenses of depreciation
of property and equipment and, although these are non-cash expenses, the
assets being depreciated may need to be replaced in the future; and
• Adjusted net income, adjusted net income margin and adjusted diluted
earnings per share do not include all of the effects of income taxes and
changes in income taxes reflected in net income.
Because of these limitations, all of these non-GAAP financial measures should be
considered along with net income and other operating and financial performance
measures prepared and presented in accordance with GAAP. The following table
presents a reconciliation of SG&A, the most directly comparable financial
measure calculated in accordance with GAAP, to Adjusted SG&A for each of the
periods presented.
Adjusted SG&A:
Year Ended
November 24, 2019 November 25, 2018 November 26, 2017
(Dollars in millions)
Most comparable GAAP measure:
Selling, general and administrative expenses $ 2,534.7 $ 2,457.5 $ 2,082.6
Non-GAAP measure: Selling, general and administrative expenses 2,534.7 2,457.5 2,082.6 Other costs associated with the IPO (3.5 ) (0.1 ) - Impact of changes in fair value on cash-settled stock-based compensation(1) (34.1 ) (44.0 ) (8.2 ) Restructuring and related charges, severance and other, net(2) (6.3 ) (5.1 ) (13.4 ) Adjusted SG&A $ 2,490.8 $ 2,408.3 $ 2,061.0 _____________
(1) Includes the impact of the changes in fair value of Class B common stock
following the grant date on awards that were granted as cash-settled and
subsequently replaced with stock-settled awards concurrent with the IPO.
(2) Restructuring and related charges, severance and other, net include
transaction and deal related costs, including acquisition and integration
costs.
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The following table presents a reconciliation of net income, the most directly
comparable financial measure calculated in accordance with GAAP, to Adjusted
EBIT and Adjusted EBITDA for each of the periods presented.
Adjusted EBIT and Adjusted EBITDA:
Year Ended
November 24, 2019 November 25, 2018 November 26, 2017
(Dollars in millions)
Most comparable GAAP measure:
Net income $ 395.0 $ 285.3 $ 284.6
Non-GAAP measure:
Net income 395.0 285.3 284.6
Income tax expense 82.6 214.8 64.2
Interest expense 66.2 55.3 68.6
Other (income) expense, net(1) (2.0 ) (14.9 ) 39.9
Underwriter commission paid on behalf of selling
stockholders 24.9 - -
Loss on early extinguishment of debt - - 22.8
Other costs associated with the IPO 3.5 0.1 -
Impact of changes in fair value on cash-settled
stock-based compensation(2) 34.1 44.0 8.2
Restructuring and related charges, severance and
other, net(3) 6.3 5.1 13.4
Adjusted EBIT $ 610.6 $ 589.7 $ 501.7
Depreciation and amortization 123.9 120.2 117.4
Adjusted EBITDA $ 734.5 $ 709.9 $ 619.1
Adjusted EBIT margin 10.6 % 10.6 % 10.2 %
_____________
(1) Other (income) expense, net in the years ended
"Compensation-Retirement Benefits (Topic 715) Improving the Presentation of
Net Periodic Cost and Net Periodic Postretirement Benefit Cost". Refer to
Note 1 for more information.
(2) Includes the impact of the changes in fair value of Class B common stock
following the grant date on awards that were granted as cash-settled and
subsequently replaced with stock-settled awards concurrent with the IPO.
(3) Restructuring and related charges, severance and other, net include
transaction and deal related costs, including acquisition and integration
costs.
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The following table presents a reconciliation of net income, the most directly
comparable financial measure calculated in accordance with GAAP, to adjusted net
income for each of the periods presented and the calculation of adjusted diluted
earnings per share for each of the periods presented.
Adjusted Net Income and Adjusted Diluted Earnings per Share:
Year Ended
November 24, 2019 November 25, 2018 November 26, 2017
(Dollars in millions, except per share amounts)
Most comparable GAAP measure:
Net income $ 395.0 $ 285.3 $ 284.6
Non-GAAP measure:
Net income 395.0 285.3 284.6
Underwriter commission paid on behalf of selling
stockholders 24.9 - -
Loss on early extinguishment of debt - - 22.8
Other costs associated with the IPO 3.5 0.1 -
Impact of changes in fair value on cash-settled
stock-based compensation(1) 34.1 44.0 8.2
Restructuring and related charges, severance and
other, net(2) 6.3 5.1 13.4
Remeasurement of deferred tax assets and
liabilities - 95.6 -
Tax impact of adjustments (7.6 ) (11.7 ) (8.2 )
Adjusted net income $ 456.2 $ 418.4 $ 320.8
Adjusted net income margin 7.9 % 7.5 % 6.5 %
Adjusted diluted earnings per share $ 1.12 $ 1.08 $ 0.83
_____________
(1) Includes the impact of the changes in fair value of Class B common stock
following the grant date on awards that were granted as cash-settled and
subsequently replaced with stock-settled awards concurrent with the IPO.
(2) Restructuring and related charges, severance and other, net include
transaction and deal related costs, including acquisition and integration
costs.
Net Debt and Leverage Ratio:
We define net debt, a non-GAAP financial measure, as total debt, excluding
capital leases, less cash and cash equivalents. We define leverage ratio, a
non-GAAP financial measure, as the ratio of total debt to the last 12 months
Adjusted EBITDA. Our management believes that net debt and leverage ratio are
important measures to monitor our financial flexibility and evaluate the
strength of our balance sheet. Net debt and leverage ratio have limitations as
analytical tools and may vary from similarly titled measures used by other
companies. Net debt and leverage ratio should not be considered in isolation or
as substitutes for an analysis of our results prepared and presented in
accordance with GAAP.
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The following table presents a reconciliation of total debt, excluding capital
leases, the most directly comparable financial measure calculated in accordance
with GAAP, to net debt for each of the periods presented.
November 24 ,
2019
(Dollars in millions)
Most comparable GAAP measure:
Total debt, excluding capital leases $ 1,014.4 $ 1,052.2
Non-GAAP measure:
Total debt, excluding capital leases $ 1,014.4 $ 1,052.2
Cash and cash equivalents (934.2 ) (713.1 )
Short-term investments in marketable securities (80.7 ) -
Net debt $ (0.5 ) $ 339.1
The following table presents a reconciliation of total debt, excluding capital
leases, the most directly comparable financial measure calculated in accordance
with GAAP, to leverage ratio for each of the periods presented.
November 24, 2019 November 25, 2018
(Dollars in millions)
Total debt, excluding capital leases $ 1,014.4 $ 1,052.2
Last Twelve Months Adjusted EBITDA $ 734.5 $ 709.9
Leverage ratio 1.4 1.5
Adjusted Free Cash Flow:
We define adjusted free cash flow, a non-GAAP financial measure, as net cash
flow 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 payment of debt extinguishment costs, less
repurchases of common stock, including shares surrendered for tax withholdings
on equity award exercises, and cash dividends to stockholders. We believe
adjusted free cash flow is an important liquidity measure of the cash that is
available after capital expenditures for operational expenses and investment in
our business. We believe adjusted free cash flow is useful to investors because
it measures our ability to generate or use cash. Once our business needs and
obligations are met, cash can be used to maintain a strong balance sheet and
invest in future growth.
Our use of adjusted free cash flow has limitations as an analytical tool and
should not be considered in isolation or as a substitute for an analysis of our
results under GAAP. First, adjusted free cash flow is not a substitute for net
cash flow from operating activities. Second, other companies may calculate
adjusted free cash flow or similarly titled non-GAAP financial measures
differently or may use other measures to evaluate their performance, all of
which could reduce the usefulness of adjusted free cash flow as a tool for
comparison. Additionally, the utility of adjusted free cash flow is further
limited as it does not reflect our future contractual commitments and does not
represent the total increase or decrease in our cash balance for a given period.
Because of these and other limitations, adjusted free cash flow should be
considered along with net cash flow from operating activities and other
comparable financial measures prepared and presented in accordance with GAAP.
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The following table presents a reconciliation of net cash flow from operating
activities, the most directly comparable financial measure calculated in
accordance with GAAP, to adjusted free cash flow for each of the periods
presented.
Year Ended
November 24, 2019 November 25, 2018 November 26, 2017
(Dollars in millions)
Most comparable GAAP measure:
Net cash provided by operating activities $ 412.2 $ 420.4 $ 525.9
Non-GAAP measure:
Net cash provided by operating activities $ 412.2 $ 420.4 $ 525.9
Underwriter commission paid on behalf of selling
stockholders 24.9 - -
Purchases of property, plant and equipment (175.4 ) (159.4 ) (118.6 )
Proceeds (Payments) on settlement of forward 12.2 (20.0 ) (5.8 )
foreign exchange contracts not designated for
hedge accounting
Payment of debt extinguishment costs - - (21.9 )
Repurchase of common stock, including shares (44.0 ) (56.0 ) (25.1 )
surrendered for tax withholdings on equity award
exercises
Dividend to stockholders (113.9 ) (90.0 ) (70.0 )
Adjusted free cash flow $ 116.0 $ 95.0 $ 284.5
Constant-Currency:
We report our operating results in accordance with GAAP, as well as on a
constant-currency basis in order to facilitate period-to-period comparisons of
our results without regard to the impact of fluctuating foreign currency
exchange rates. The term foreign currency exchange rates refers to the exchange
rates we use to translate our operating results for all countries where the
functional currency is not the U.S. Dollar into U.S. Dollars. Because we are a
global company, foreign currency exchange rates used for translation may have a
significant effect on our reported results. In general, our reported 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 we conduct our business. References to our operating results on a
constant-currency basis mean our operating results without the impact of foreign
currency translation fluctuations.
We believe disclosure of constant-currency results is helpful to investors
because it facilitates period-to-period comparisons of our results by increasing
the transparency of our 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 in isolation
or as a 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 our 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.
We calculate constant-currency amounts by translating local currency amounts in
the prior-year period at actual foreign exchange rates for the current period.
Our constant-currency results do not eliminate the transaction currency impact,
which primarily include the realized and unrealized gains and losses recognized
from the measurement and remeasurement of purchases and sales of products in a
currency other than the functional currency. Additionally, gross margin is
impacted by gains and losses related to the procurement of inventory, primarily
products sourced in EUR and USD, by our global sourcing organization on behalf
of our foreign subsidiaries.
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Constant-Currency Net Revenues:
The table below sets forth the calculation of net revenues for each of our
regional operating segments on a constant-currency basis for each of the periods
presented.
Year Ended
% Increase % Increase
November 24, (Over Prior November 25, (Over Prior November 26,
2019 Year) 2018 Year) 2017
(Dollars in millions)
Total revenues
As reported $ 5,763.1 3.4 % $ 5,575.4 13.7 % $ 4,904.0
Impact of foreign currency
exchange rates - * (126.2 ) * 44.0
Constant-currency net
revenues $ 5,763.1 5.8 % $ 5,449.2 12.7 % $ 4,948.0
Americas
As reported $ 3,057.0 0.5 % $ 3,042.7 9.7 % $ 2,774.0
Impact of foreign currency
exchange rates - * (10.4 ) * (7.3 )
Constant-currency net
revenues - Americas $ 3,057.0 0.8 % $ 3,032.3 10.0 % $ 2,766.7
Europe
As reported $ 1,768.1 7.4 % $ 1,646.2 25.4 % $ 1,312.3
Impact of foreign currency
exchange rates - * (85.9 ) * 49.9
Constant-currency net
revenues - Europe $ 1,768.1 13.3 % $ 1,560.3 20.8 % $ 1,362.2
Asia
As reported $ 938.0 5.8 % $ 886.5 8.4 % $ 817.7
Impact of foreign currency
exchange rates - * (29.9 ) * 1.4
Constant-currency net
revenues - Asia $ 938.0 9.5 % $ 856.6 8.2 % $ 819.1
_____________
* Not meaningful
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Constant-Currency Adjusted EBIT: The table below sets forth the calculation of adjusted EBIT on a constant-currency basis for each of the periods presented.
Year Ended
% Increase
November 24, % Increase (Over (Over Prior November 26,
2019 Prior Year) November 25, 2018 Year) 2017
(Dollars in millions)
Adjusted EBIT(1) $ 610.6 3.5 % $ 589.7 17.5 % $ 501.7
Impact of foreign currency
exchange rates - * (21.6 ) * 12.4
Constant-currency Adjusted
EBIT $ 610.6 7.5 % $
568.1 14.7 %
Constant-currency Adjusted
EBIT margin(2) 10.6 % 10.4 % 10.4 %
_____________
(1) Adjusted EBIT is reconciled from net income which is the most comparable
GAAP measure. Refer to Adjusted EBIT and Adjusted EBITDA table for more
information.
(2) We define constant-currency Adjusted EBIT margin as constant-currency
Adjusted EBIT as a percentage of constant-currency net revenues.
* Not meaningful
Constant-Currency Adjusted Net Income and Adjusted Diluted Earnings per Share:
The table below sets forth the calculation of adjusted net income and adjusted
diluted earnings per share on a constant-currency basis for each of the periods
presented.
Year Ended
% Increase % Increase
November 24, (Over Prior (Over Prior November 26,
2019 Year) November 25, 2018 Year) 2017
(Dollars in millions, except per share amounts)
Adjusted net income(1) $ 456.2 9.0 % $ 418.4 30.4 % $ 320.8
Impact of foreign currency
exchange rates - * (18.1 ) * 11.5
Constant-currency Adjusted
net income $ 456.2 14.0 % $
400.3 25.9 %
Constant-currency Adjusted net income margin(2) 7.9 % 7.3 % 6.7 % Adjusted diluted earnings per share$ 1.12 3.7 % $ 1.08 30.1 %$ 0.83 Impact of foreign currency exchange rates - * (0.05 ) * 0.03 Constant-currency adjusted diluted earnings per share$ 1.12 8.7 % $
1.03 25.6 %
_____________
(1) Adjusted net income is reconciled from net income which is the most
comparable GAAP measure. Refer to Adjusted net income table for more
information.
(2) We define constant-currency Adjusted net income margin as constant-currency
Adjusted net income as a percentage of constant-currency net revenues.
* Not meaningful
Effects of Inflation
We believe that inflation in the regions where most of our sales occur has not
had a significant effect on our net revenues or profitability.
Off-Balance Sheet Arrangements, Guarantees and Other Contingent Obligations
Off-balance sheet arrangements and other. We have contractual commitments for
non-cancelable operating leases; for more information, see Note 13 to our
audited consolidated financial statements included in this report. We
participate in a multiemployer pension plan; however, our exposure to risks
arising from participation in the plan and the extent to which we can be liable
to the
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plan for other participating employers' obligations are not material. We have no other material non-cancelable guarantees or commitments, and no material special-purpose entities or other off-balance sheet debt obligations. Indemnification agreements. In the ordinary course of our business, we enter into agreements containing indemnification provisions under which we agree to indemnify the other party for specified claims and losses. For example, our trademark license agreements, real estate leases, consulting agreements, logistics outsourcing agreements, securities purchase agreements and credit agreements typically contain such provisions. This type of indemnification provision obligates us to pay certain amounts associated with claims brought against the other party as the result of trademark infringement, negligence or willful misconduct of our employees, breach of contract by us including inaccuracy of representations and warranties, specified lawsuits in which we and the other party are co-defendants, product claims and other matters. These amounts generally are not readily quantifiable; the maximum possible liability or amount of potential payments that could arise out of an indemnification claim depends entirely on the specific facts and circumstances associated with the claim. We have insurance coverage that minimizes the potential exposure to certain of such claims. We also believe that the likelihood of material payment obligations under these agreements to third parties is remote. Critical Accounting Policies, Estimates and Assumptions The preparation of financial statements in conformity withU.S. GAAP requires management to make estimates and assumptions that affect the amounts reported in the consolidated financial statements and the related notes. We believe that the following discussion addresses our critical accounting policies, which are those that are most important to the portrayal of our financial condition and results of operations and require management's most difficult, subjective and complex judgments, often as a result of the need to make estimates about the effect of matters that are inherently uncertain. Changes in such estimates, based on newly available information, or different assumptions or conditions, may affect amounts reported in future periods. We summarize our critical accounting policies below. Revenue recognition. Revenue transactions generally comprise of a single performance obligation which consists of the sale of products to customers either through wholesale or direct-to-consumer channels. Net revenues are recognized when the Company's performance obligations are satisfied upon transfer of control of promised goods. A customer is deemed to have control once they are able to direct the use and receive substantially all of the benefits of the product. This includes a present obligation to payment, the transfer of legal title, physical possession, the risks and rewards of ownership, and customer acceptance. Licensing revenues are included in the Company's wholesale channel and represent approximately 2% of total revenues which are recognized over time based on the contractual term with variable amounts recognized only when royalties exceed contractual minimum royalty guarantees. We recognize allowances for estimated returns in the period in which the related sale is recorded. We recognize allowances for estimated discounts, retailer promotions and other similar incentives at the later of the period in which the related sale is recorded or the period in which the sales incentive is offered to the customer. We estimate non-volume based allowances based on historical rates as well as customer and product-specific circumstances. Actual allowances may differ from estimates due to changes in sales volume based on retailer or consumer demand and changes in customer and product-specific circumstances. Sales and value-added taxes collected from customers and remitted to governmental authorities are presented on a net basis in the accompanying consolidated statements of income. Inventory valuation. We value inventories at the lower of cost or market value. Inventory cost is generally determined using the first-in first-out method. We include 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, in the cost of inventories. We estimate quantities of slow-moving and obsolete inventory by reviewing on-hand quantities, outstanding purchase obligations and forecasted sales. In determining inventory market values, substantial consideration is given to the expected product selling price. We estimate expected selling prices based on our historical recovery rates for sale of slow-moving and obsolete inventory and other factors, such as market conditions, expected channel of disposition, and current consumer preferences. Estimates may differ from actual results due to changes in resale or market value, avenues of disposition, consumer and retailer preferences and economic conditions. Impairment. We review our goodwill and other non-amortized intangible assets for impairment annually in the fourth quarter of our fiscal year, or more frequently as warranted by events or changes in circumstances which indicate that the carrying amount may not be recoverable. We qualitatively assess goodwill impairment and non-amortized intangible assets to determine whether it is more likely than not that the fair value of a reporting unit or other non-amortized intangible asset is less than its carrying amount. During fiscal year 2019, we performed this analysis examining key events and circumstances affecting fair value and determined it is more likely than not that the reporting unit's fair value is greater than its carrying amount. As such, no further analysis was required. If goodwill and other non-amortized intangible assets are not qualitatively assessed and it is determined that it is not more likely than not that the reporting unit's fair value is greater than its carrying amount, a two-step quantitative 58
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approach is utilized. In the first step, we compare the carrying value of the reporting unit or applicable asset to its fair value, which we estimate using a discounted cash flow analysis or by comparison to the market values of similar assets. If the carrying amount of the reporting unit or asset exceeds its estimated fair value, we perform the second step, and determine the impairment loss, if any, as the excess of the carrying value of the goodwill or intangible asset over its fair value. The assumptions used in such valuations are subject to volatility and may differ from actual results; however, based on the carrying value of our goodwill and other non-amortized intangible assets as ofNovember 24, 2019 , relative to their estimated fair values, we do not anticipate any material impairment charges in the near-term. We review our other long-lived assets for impairment whenever events or changes in circumstances indicate the carrying amount of an asset may not be recoverable. If the carrying amount of an other long-lived asset exceeds the expected future undiscounted cash flows, we measure and record an impairment loss for the excess of the carrying value of the asset over its fair value. To determine the fair value of impaired assets, we utilize the valuation technique or techniques deemed most appropriate based on the nature of the impaired asset and the data available, which may include the use of quoted market prices, prices for similar assets or other valuation techniques such as discounted future cash flows or earnings. Income tax. Significant judgment is required in determining our worldwide income tax provision. In the ordinary course of a global business, there are many transactions and calculations where the ultimate tax outcome is uncertain. Some of these uncertainties arise from examinations in various jurisdictions and assumptions and estimates used in evaluating the need for a valuation allowance. The Tax Act was enacted inthe United States onDecember 22, 2017 and includes, among other items, a reduction in the federal corporate income tax rate from 35% to 21% and a deemed repatriation of foreign earnings. We are required to recognize the effect of the tax law changes in the period of enactment, such as determining the transition tax, remeasuring ourU.S. deferred tax assets and liabilities and reassessing the net realizability of our deferred tax assets and liabilities. We are subject to income taxes in boththe United States and numerous foreign jurisdictions. We compute our provision for income taxes using the asset and liability method, under which deferred tax assets and liabilities are recognized for the expected future tax consequences of temporary differences between the financial reporting and tax bases of assets and liabilities and for operating loss and tax credit carryforwards. Deferred tax assets and liabilities are measured using the currently enacted tax rates that are expected to apply to taxable income for the years in which those tax assets and liabilities are expected to be realized or settled. Significant judgments are required in order to determine the realizability of these deferred tax assets. In assessing the need for a valuation allowance, we evaluate all significant available positive and negative evidence, including historical operating results, estimates of future taxable income and the existence of prudent and feasible tax planning strategies. Changes in the expectations regarding the realization of deferred tax assets could materially impact income tax expense in future periods. We continuously review issues raised in connection with all ongoing examinations and open tax years to evaluate the adequacy of our tax liabilities. We evaluate uncertain tax positions under a two-step approach. The first step is to evaluate the uncertain tax position for recognition by determining if the weight of available evidence indicates that it is more likely than not that the position will be sustained upon examination based on its technical merits. The second step is, for those positions that meet the recognition criteria, to measure the tax benefit as the largest amount that is more than fifty percent likely of being realized. We believe our recorded tax liabilities are adequate to cover all open tax years based on our assessment. This assessment relies on estimates and assumptions and involves significant judgments about future events. To the extent that our view as to the outcome of these matters changes, we will adjust income tax expense in the period in which such determination is made. We classify interest and penalties related to income taxes as income tax expense. Employee benefits and incentive compensation Pension and postretirement benefits. We have several non-contributory defined benefit retirement plans covering eligible employees. We also provide certain health care benefits forU.S. employees who meet age, participation and length of service requirements at retirement. In addition, we sponsor other retirement or post-employment plans for our foreign employees in accordance with local government programs and requirements. We retain the right to amend, curtail or discontinue any aspect of the plans, subject to local regulations. Any of these actions, either individually or in combination, could have a material impact on our consolidated financial statements and on our future financial performance. We recognize either an asset or liability for any plan's funded status in our consolidated balance sheets. We measure changes in funded status using actuarial models which utilize an attribution approach that generally spreads individual events either over the estimated service lives of the remaining employees in the plan, or, for plans where participants will not earn additional benefits by rendering future service, over the plan participants' estimated remaining lives. The attribution approach assumes that employees render service over their service lives on a relatively smooth basis and as such, presumes that the income statement effects of 59
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pension or postretirement benefit plans should follow the same pattern. Our policy is to fund our pension plans based upon actuarial recommendations and in accordance with applicable laws, income tax regulations and credit agreements. Net pension and postretirement benefit income or expense is generally determined using assumptions which include expected long-term rates of return on plan assets, discount rates, compensation rate increases and medical trend and mortality rates. We use a mix of actual historical rates, expected rates and external data to determine the assumptions used in the actuarial models. For example, we utilized a yield curve constructed from a portfolio of high-quality corporate bonds with various maturities to determine the appropriate discount rate to use for ourU.S. benefit plans. Under this model, each year's expected future benefit payments are discounted to their present value at the appropriate yield curve rate, thereby generating the overall discount rate. We utilized country-specific third-party bond indices to determine appropriate discount rates to use for benefit plans of our foreign subsidiaries. Changes in actuarial assumptions and estimates, either individually or in combination, could have a material impact on our consolidated financial statements and on our future financial performance. For example, as ofNovember 24, 2019 , a 25 basis point change in the discount rate would yield an approximately three percent change in the projected benefit obligation and no significant change in the annual service cost of our pension plans. A 25 basis point change in the discount rate would not have a significant impact on the postretirement benefit plan. Employee incentive compensation. We maintain short-term and long-term employee incentive compensation plans. For our short-term plans, the amount of the cash bonus earned depends upon business unit and corporate financial results as measured against pre-established targets, and also depends upon the performance and job level of the individual. Our long-term plans are intended to reward certain levels of management for its long-term impact on our total earnings performance. Performance is measured at the end of a three-year period based on our performance over the period measured against certain pre-established targets such as the compound annual growth rates over the periods for net revenues and average margin of net earnings adjusted for certain items such as interest and taxes. We accrue the related compensation expense over the period of the plan, and changes in our projected future financial performance could have a material impact on our accruals. Stock-Based Compensation. We have stock-based incentive plans which allow for the issuance of cash or equity-settled awards to certain employees and non-employee directors. We recognize stock-based compensation expense for share-based awards that are classified as equity based on the grant date fair value of the awards over the requisite service period, adjusted for estimated forfeitures. Cash-settled awards are classified as liabilities and stock-based compensation expense is measured using fair value at the end of each reporting period until settlement. As ofNovember 24, 2019 , the fair value of the shares of our common stock has been determined on market prices. Prior to the IPO, the fair value of our common stock was determined by the Company's board of directors (the "Board"). As there was no public market for the Company's common stock, the Board determined the fair value of the common stock on the stock option grant date by considering a number of objective and subjective factors, including third-party valuations of the common stock, comparisons of the Company's financial results against selected publicly-traded companies and application of a discount for the illiquidity of the stock to derive the fair value of the stock. For stock appreciation rights that are classified as equity, we use the Black-Scholes valuation model to estimate the grant date fair value, unless the awards are subject to a market condition, in which case we use a Monte Carlo simulation valuation model. The grant date fair value of equity-classified restricted stock units that are not subject to a market condition, is based on the fair value of our common stock on the date of grant, adjusted to reflect the absence of dividends for those awards that are not entitled to dividend equivalents. For restricted stock units that include a market condition, we use a Monte Carlo simulation valuation model to estimate the grant date fair value. For share-based awards that are classified as liabilities, the fair value of the awards is estimated using the intrinsic value method, which is based on the fair value of our common stock on each measurement date. The Black-Scholes option pricing model and the Monte Carlo simulation model require the input of highly subjective assumptions including volatility. Due to the fact that our common stock has not been publicly traded, the computation of expected volatility is based on the average of the implied volatilities and the historical volatilities over the expected life of the awards, of a representative peer group of publicly-traded entities. Other assumptions include the expected life, risk-free rate of interest and dividend yield. For equity awards with a service condition, the expected life is derived based on historical experience and expected future post-vesting termination and exercise patterns. For equity awards with a performance condition, the expected life is computed using the simplified method until historical experience is available. The risk-free interest rate is based on zero couponU.S. Treasury bond rates corresponding to the expected life of the awards. Dividend assumptions are based on historical experience. Due to the job function of the award recipients, we have included stock-based compensation in "Selling, general and administrative expenses" in our consolidated statements of income. 60
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Recently Issued Accounting Standards
See Note 1 to our audited consolidated financial statements included in this
report for recently issued accounting standards, including the expected dates of
adoption and expected impact to our consolidated financial statements upon
adoption.
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SPECIAL NOTE REGARDING FORWARD-LOOKING STATEMENTS Certain matters discussed in this Annual Report, including (without limitation) statements under "Management's Discussion and Analysis of Financial Condition and Results of Operations" contain forward-looking statements. Although we believe that, in making any such statements, our expectations are based on reasonable assumptions, any such statement may be influenced by factors that could cause actual outcomes and results to be materially different from those projected. These forward-looking statements include statements relating to our anticipated financial performance and business prospects, including debt reduction, currency values and financial impact, foreign exchange counterparty exposures, the impact of pending legal proceedings, adequate liquidity levels, dividends and/or statements preceded by, followed by or that include the words "believe", "will", "so we can", "when", "anticipate", "intend", "estimate", "expect", "project", "could", "plans", "seeks" and similar expressions. These forward-looking statements speak only as of the date stated and we do not undertake any obligation to update or revise publicly any forward-looking statements, whether as a result of new information, future events or otherwise, even if experience or future events make it clear that any expected results expressed or implied by these forward-looking statements will not be realized. Although we believe that the expectations reflected in these forward-looking statements are reasonable, these expectations may not prove to be correct or we may not achieve the financial results, savings or other benefits anticipated in the forward-looking statements. These forward-looking statements are necessarily estimates reflecting the best judgment of our senior management and involve a number of risks and uncertainties, some of which may be beyond our control. These risks and uncertainties, including those disclosed under "Risk Factors" in Part I, Item 1A on this Annual Report and in our other filings with theSecurities and Exchange Commission , could cause actual results to differ materially from those suggested by the forward-looking statements and include, without limitation: • changes in general economic and financial conditions, and the resulting impact on the level of discretionary consumer spending for apparel and pricing trend fluctuations, and our ability to plan for and respond to the impact of those changes; • our ability to gauge and adapt to changingU.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 forecast and respond timely to price, innovation and other
competitive pressures in the global apparel industry on and from our key
customers and in our key markets;
• our dependence on key distribution channels, customers and suppliers;
• consequences of impacts to the businesses of our wholesale customers,
including significant store closures or a significant decline in a
wholesale customer's financial condition leading to restructuring
actions, bankruptcies, liquidations or other unfavorable events for our
wholesale customers, caused by factors such as inability to secure
financing, decreased discretionary consumer spending, inconsistenttraffic 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 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;
• changes in or application of trade and tax laws, potential increases in
import tariffs or taxes and the potential withdrawal from or
renegotiation or replacement of the
("NAFTA"); and
• the impact of the recently passed Tax Act in
related changes to our deferred tax assets and liabilities, tax
obligations and effective tax rate in future periods, as well as the
charge recorded in fiscal 2018;
• our ability to effectively manage any global productivity and outsourcing
actions as planned, which are intended to increase productivity and
efficiency in our global operations, take advantage of lower-cost
service-delivery models in our distribution network and streamline ourprocurement practices to maximize efficiency in our global operations,
without business disruption or mitigation to such disruptions;
• our ability to successfully prevent or mitigate the impacts of data
security breaches;
• our and our wholesale customers' decisions to modify strategies andadjust 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 contractmanufacturers 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;
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• 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;
• ongoing or future litigation matters and disputes and regulatory developments;
• political, social and economic instability, or natural disasters, in
countries where we or our customers do business.
We have based the forward-looking statements contained in this Annual Report
primarily on our current expectations and projections about future events and
trends that we believe may affect our business, financial condition, results of
operations, prospects, business strategy and financial needs. The outcome of the
events described in these forward-looking statements is subject to risks,
uncertainties, assumptions and other factors described under "Risk Factors" and
elsewhere in this Annual Report. These risks are not exhaustive. Other sections
of this Annual Report include additional factors that could adversely affect our
business and financial performance. Moreover, we operate in a very competitive
and rapidly changing environment. New risks and uncertainties emerge from time
to time, and it is not possible for us to predict all risks and uncertainties
that could have an impact on the forward-looking statements contained in this
Annual Report. We cannot assure you that the results, events and circumstances
reflected in the forward-looking statements will be achieved or occur, and
actual results, events or circumstances could differ materially from those
described in the forward-looking statements.
In addition, statements that "we believe" and similar statements reflect our
beliefs and opinions on the relevant subject. These statements are based upon
information available to us as of the date of this Annual Report, and while we
believe such information forms a reasonable basis for such statements, such
information may be limited or incomplete, and our statements should not be read
to indicate that we have conducted an exhaustive inquiry into, or review of, all
potentially available relevant information. These statements are inherently
uncertain and investors are cautioned not to unduly rely upon these statements.
The forward-looking statements made in this Annual Report relate only to events
as of the date on which such statements are made. We undertake no obligation to
update any forward-looking statements after the date of this Annual Report or to
conform such statements to actual results or revised expectations, except as
required by law.
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