As filed with the Securities and Exchange Commission on April 21, 2017July 7, 2020
Registration No. 333-
UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FormS-4
REGISTRATION STATEMENT
UNDER
THE SECURITIES ACT OF 1933
LEVI STRAUSS & CO.
(Exact Name of Registrant as Specified in Its Charter)
| Delaware | 2325 | 94-0905160 | ||
(State or Other Jurisdiction of Incorporation or Organization) | (Primary Standard Industrial Classification Code Number) | (I.R.S. Employer Identification No.) |
1155 Battery Street, San Francisco, California 94111(415) 501-6000
(Address, Including Zip Code, and Telephone Number, Including Area Code, of Registrant’s Principal Executive Offices)
David Jedrzejek
Associate GeneralChief Counsel, Finance, Governance & GovernanceCompliance
Levi Strauss & Co.
1155 Battery Street
San Francisco, California 94111
(415)501-6000
(Name, Address, Including Zip Code, and Telephone Number, Including Area Code, of Agent for Service)
Copies to:
Brett Cooper
Lynne T. Hirata
Orrick, Herrington & Sutcliffe LLP
405 Howard Street
San Francisco, California 94105
(415)773-5700
Approximate date of commencement of proposed sale of the securities to the public:public: As soon as practicable after this registration statement becomes effective.
If the securities being registered on this form are being offered in connection with the formation of a holding company and there is compliance with General Instruction G, check the following box. ☐
If this form is filed to register additional securities for an offering pursuant to Rule 462(b) under the Securities Act, check the following box and list the Securities Act registration statement number of the earlier effective registration statement for the same offering. ☐
If this form is a post-effective amendment filed pursuant to Rule 462(d) under the Securities Act, check the following box and list the Securities Act registration statement number of the earlier effective registration statement for the same offering. ☐
Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, anon-accelerated filer, a smaller reporting company, or an emerging growth company. See the definitions of “large accelerated filer,” “accelerated filer,” “smaller reporting company,” and “emerging growth company” in Rule12b-2 of the Exchange Act. (Check one):
| Large accelerated filer | ☐ | Accelerated filer | ☐ | |||||||
| Non-accelerated filer | ☒ | Smaller reporting company | ☐ | |||||||
| Emerging growth company | ☐ | |||||||||
If an emerging growth company, indicate by check mark if the registrant has elected not to use the extended transition period for complying with any new or revised financial accounting standards provided pursuant to Section 7(a)(2)(B) of the Securities Act. ☐
If applicable, place an X in the box to designate the appropriate rule provision relied upon in conducting this transaction:
Exchange Act Rule13e-4(i) (Cross-Border Issuer Tender Offer) ☐
Exchange Act Rule14d-1(d) (Cross-Border Third-Party
Exchange Act Rule 13e-4(i) (Cross-Border Issuer Tender Offer) | ☐ | |||
Exchange Act Rule 14d-1(d) (Cross-Border Third-Party Tender Offer) | ☐ |
CALCULATION OF REGISTRATION FEE
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| Title of Each Class of Securities to be Registered | Amount to be Registered | Proposed Maximum Offering Price per Share | Proposed Offering Price(1) | Amount of Registration Fee(3) | ||||
3 3⁄8% Senior Notes due 2027 | €475,000,000 | 100% | $504,687,500.00(2) | $58,493.28 | ||||
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Title of Each Class of Securities to be Registered | Amount to be Registered | Proposed Maximum | Proposed Maximum Offering Price(1) | Amount of Registration Fee(2) | ||||
5.00% Senior Notes due 2025 | $500,000,000 | 100% | $500,000,000 | $64,900 | ||||
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| (1) | Estimated solely for the purpose of calculating the registration fee in accordance with Rule 457(f) under the Securities Act. |
| (2) |
| Calculated pursuant to Rule 457 under the Securities Act. |
The Registrant hereby amends this Registration Statement on such date or dates as may be necessary to delay its effective date until the Registrant shall file a further amendment which specifically states that this Registration Statement shall thereafter become effective in accordance with Section 8(a) of the Securities Act or until this Registration Statement shall become effective on such date as the Securities and Exchange Commission, acting pursuant to said Section 8(a), may determine.
The information in this prospectus is not complete and may be changed. We may not sell these securities or accept any offer to buy these securities until the registration statement filed with the Securities and Exchange Commission is effective. This prospectus is not an offer to sell these securities and is not soliciting an offer to buy these securities in any state where the offer or sale is not permitted.
SUBJECT TO COMPLETION, DATED APRIL 21, 2017JULY 7, 2020
Prospectus
LEVI STRAUSS & CO.
Offer to Exchange
all outstanding unregistered 3 3⁄8%5.00% Senior Notes due 20272025
(€475,000,000$500,000,000 aggregate principal amount outstanding)
for
3 3⁄8%5.00% Senior Notes due 20272025
(€475,000,000$500,000,000 aggregate principal amount)
which have been registered under the Securities Act of 1933
The Exchange Offer
Expires 11:5:00 a.m.p.m., New York City time on , 2017,2020, unless extended.
Not conditional upon any minimum principal amount of outstanding unregistered 5.00% Senior Notes due 2025 (the “old notes”) being tendered for exchange.
All old notes that are validly tendered and not validly withdrawn will be exchanged.
Tenders of old notes may be withdrawn any time prior to 11:5:00 a.m.p.m., New York City time on the date of the expiration of the exchange offer.
The exchange of old notes will generally not be a taxable exchange for U.S. federal income tax purposes.
We will not receive any proceeds from the exchange offer.
The Exchange Notes
The terms of the exchange notes (the “exchange notes”) to be issued in the exchange offer for old notes are substantially similar to the old notes, except, in each case, for transfer restrictions and registration rights relating to the old notes.
Resale of Exchange Notes
We do not intend to apply for a listing of the exchange notes on any securities exchange or an automated dealer quotation system.
The exchange notes will be madepart of a series of notes for which certain dealers currently make a market. However, there can be no assurance as to list the Exchange Notes on the Official Listcontinuance or liquidity of the Luxembourg Stock Exchange and for trading on the Euro ETF Market.
Broker dealers who receive exchange notes pursuant to the exchange offer acknowledge that they will deliver a prospectus in connection with any resale of such exchange notes. Broker dealers who acquired the old notes as a result of market-making or other trading activities may use this prospectus for the exchange offer, as supplemented or amended, in connection with resales of the exchange notes.
See “Risk Factors” beginning on page 1011 for a discussion of factors that you should consider before tendering your old notes.
Neither the Securities and Exchange Commission nor any state securities commission has approved or disapproved of these securities or passed upon the adequacy or accuracy of this prospectus. Any representation to the contrary is a criminal offense.
Each broker-dealer that receives exchange notes for its own account pursuant to the exchange offer must acknowledge by way of letter of transmittal that it will deliver a prospectus in connection with any resale of exchange notes. The letter of transmittal states that by so acknowledging and by delivering a prospectus, such broker-dealer will not be deemed to admit that it is an “underwriter” within the meaning of the Securities Act. This prospectus, as it may be amended or supplemented from time to time, may be used by a broker-dealer in connection with resales of exchange notes received in exchange for old notes where such old notes were acquired by such broker-dealer as a result of market-making activities or other trading activities. We have agreed that, for a period of 180 days after the consummation of the exchange offer, we will make this prospectus available to any broker-dealer for use in connection with any such resale. Please Read “Plan of Distribution.”
The date of this prospectus is , 2017.2020.
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WHERE YOU CAN FIND MORE INFORMATION
We have filed with the Securities and Exchange Commission (the “SEC” or the “Commission”) a registration statement on FormS-4 under the Securities Act of 1933 (the “Securities Act”) relating to the exchange offer that includes important business and financial information about us that is not included in or delivered with this prospectus. This prospectus does not contain all of the information included in the registration statement. This information is available from us without charge to holders of old notes as specified below. If we have made references in this prospectus to any contracts, agreements or other documents and also filed any of those contracts, agreements or documents as exhibits to the registration statement, you should read the relevant exhibit for a more complete understanding of the document or matter involved.
We file periodic reports and other information with the SEC under the Securities Exchange Act of 1934 (the “Exchange Act”).
You may read and copy the registration statement, including the attached exhibits, and any report, statements or other information that we file at the SEC’s public reference facilities at 100 F Street, N.E., Washington D.C. 20549. Please call the SEC at1-800-SEC-0330 for further information on the operation of the public reference room. Our SEC filings will also be available to the public from commercial document retrieval services and at the SEC’s Internet site at www.sec.gov.
You may request a copy of any of our filings with the SEC, or any of the agreements or other documents that constitute exhibits to those filings, at no cost, by writing or telephoning us at the following address or phone number:
Levi Strauss & Co.
1155 Battery Street
San Francisco, California 94111
Attention: Investor Relations
Telephone:(800) 438-0349 or(415) 501-6000
To obtain timely delivery of any of our filings, agreements or other documents, you must make your request to us no later than five business days before the expiration date of the exchange offer. The exchange offer will expire at 11:5:00 a.m.p.m., New York City time on, 20172020 (the “expiration date”). The exchange offer can be extended by us in our sole discretion. See the caption “The Exchange Offer” for more detailed information.information.
You should rely only on the information provided in this prospectus. No person has been authorized to provide you with different information. The information in this prospectus is accurate as of the date on the front cover. You should not assume that the information contained in this prospectus is accurate as of any other date.
Any old notes not tendered and accepted in the exchange offer will remain outstanding. To the extent old notes are tendered and accepted in the exchange offer, a holder’s ability to sell untendered old notes could be adversely affected. Following consummation of the exchange offer, the holders of old notes will continue to be subject to the existing restrictions upon transfer thereof and we will have fulfilled one of our obligations under the registration rights agreement. Holders of old notes who do not tender their notes generally will not have any further registration rights under the registration rights agreement or otherwise.
Each broker-dealer that receives exchange notes for its own account pursuant to the exchange offer must acknowledge that it will deliver a prospectus in connection with any resale of such exchange notes. By so acknowledging and by delivering a prospectus, a broker-dealer will not be deemed to admit that it is an “underwriter” within the meaning of the Securities Act. This prospectus, as it may be amended or supplemented
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from time to time, may be used by a broker-dealer in connection with resales of exchange notes received in exchange for old notes where such old notes were acquired by such broker-dealer as a result of market-making activities or other trading activities. We have agreed that, starting on the expiration date and ending on the close of business 180 days after the expiration date, we will make this prospectus available to any broker-dealer for use in connection with any such resale. See “Plan of Distribution.”
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Except for the historical information contained or incorporated by reference in this prospectus, certain matters discussed in this prospectus, including (without limitation) statements under “Summary,“Summary” and “Risk Factors” and in our Annual Report on Form 10-K for the year ended November 24, 2019 and our Quarterly Reports on Form 10-Q for the three months ended February 23, 2020 and May 24, 2020, all of which are incorporated by reference in this prospectus, under “Business,” “Risk Factors,” “Business”Factors” and “Management’s Discussion and Analysis of Financial Condition and Results of Operations,” contain forward-looking statements within the meaning of Section 27A of the Securities Act of 1933 (the “Securities Act”), and Section 21E of the Securities Exchange Act of 1934, as amended (the “Exchange Act”). 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.
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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 benefits and timing of our global productivity initiative, 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”“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 this prospectus and in our other filings with the SEC, 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;
the potential impact of COVID-19 on both our projected customer demand and supply chain, as well as our consolidated financial position, consolidated results of operations, and consolidated cash flows in fiscal 2020;
the risk of future non-cash asset impairment charges, including to goodwill, operating right-of-use assets and/or other store assets;
expected impact from benefits related to the Coronavirus Aid, Relief, and Economic Security Act enacted in March 2020;
the impact of the United Kingdom’s withdrawal from the European Union;
our ability to effectively implement and manage ourany global productivity and outsourcing actions as planned, which are intended to increase productivity and efficiency in our global operations, take advantage of lower-cost service-delivery models in our distribution network and streamline our procurement practices to maximize efficiency in our global operations, without business disruption or mitigation to such disruptions;
consequences of impacts to the businesses of our wholesale customers, including significant store closures or a significant decline in a wholesale customer’s financial condition leading to restructuring actions, bankruptcies, liquidations or other unfavorable events for our wholesale customers, caused by factors such as inability to secure financing, decreased discretionary consumer spending, inconsistent foot and online traffic patterns and an increase in promotional activity as a result of decreased foot and online traffic, pricing fluctuations, general economic and financial conditions and changing consumer preferences;
our and our wholesale customers’ decisions to modify strategies and adjust product mix and pricing, and our ability to manage any resulting product transition costs, including liquidating inventory or increasing promotional activity;
our ability to purchase products through our independent contract manufacturers that are made with quality raw materials and our ability to mitigate the variability of costs related to manufacturing, sourcing, and raw materials supply and to manage consumer response to such mitigating actions;
our ability to gauge and adapt to changing U.S. and international retail environments and fashion trends and changing consumer preferences in product, price-points, as well asin-store and digital shopping experiences;
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our ability to increase the number of dedicated stores for our products, including through opening and profitably operating company-operated stores;
consequences of foreign currency exchange and interest rate fluctuations;
our ability to successfully prevent or mitigate the impacts of data security breaches;
our ability to attract and retain key executives and other key employees;
our ability to protect our trademarks and other intellectual property;
the impact of the variables that affect the net periodic benefit cost and future funding requirements of our postretirement benefits and pension plans;
our dependence on key distribution channels, customers and suppliers;
our ability to utilize our tax credits and net operating loss carryforwards;
ongoing or future litigation matters and disputes and regulatory developments;
the impact of the Tax Cut and Jobs Act in the United States, including 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;
changes in or application of trade and tax laws, including potential increases in import tariffs or taxes;taxes and the potential withdrawal from or renegotiation or replacement of the North America Free Trade Agreement; and
political, social and economic instability, or natural disasters, in countries where we or our customers do business.
For more information on these and other factors, see “Risk Factors” in this prospectus.our Annual Report on Form 10-K for the year ended November 24, 2019 and our Quarterly Reports on Form 10-Q for the three months ended February 23, 2020 and May 24, 2020. We caution prospective investors not to place undue reliance on these forward-looking statements. All subsequent written and oral forward-looking statements attributable to us are expressly qualified in their entirety by the cautionary statements and the risk factors contained throughout this prospectus.
We have based the forward-looking statements contained in this prospectus 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 prospectus and in the documents incorporated herein by reference. These risks are not exhaustive. Other sections of this prospectus 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 prospectus and in the documents incorporated herein by reference. 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 prospectus, 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 prospectus 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 prospectus or to conform such statements to actual results or revised expectations, except as required by law.
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This summary contains basic information about our company and the offering.exchange offer. This summary highlights selected information contained elsewhere in this prospectus. This summary is not complete and does not contain all of the information that you should consider before deciding to exchange your old notes for exchange notes. For a more complete understanding of our company and this offering, you should read this entire prospectus, including “Risk Factors” and the financial information and the notes thereto included herein. Unless otherwise indicated or required by the context, the terms “we,” “our,” “us” and the “Company” refer to Levi Strauss & Co. and all of its subsidiaries that are consolidated under U.S. GAAP and all references to financial results or data for a particular year are to our fiscal years.
Our CompanyThe Exchange Notes
From our California Gold Rush beginnings, we have grown into one
The terms of the world’s largest brand-name apparel companies. A historyexchange notes (the “exchange notes”) to be issued in the exchange offer for old notes are substantially similar to the old notes, except, in each case, for transfer restrictions and registration rights relating to the old notes.
Resale of responsible business practices, rooted in our core values, has helped us build our brands and engender consumer trust around the world. Under our Levi’s®, Dockers®, Signature by Levi Strauss & Co.™ and Denizen® brands, we design, market and sell—directly or through third parties and licensees—products that include jeans, casual and dress pants, tops, shorts, skirts, jackets, footwear, and related accessoriesExchange Notes
We do not intend to apply for men, women and children around the world.
An Authentic American Icon
Our Levi’s® brand has become onea listing of the most widely recognized brandsexchange notes on any securities exchange or an automated dealer quotation system.
The exchange notes will be part of a series of notes for which certain dealers currently make a market. However, there can be no assurance as to the continuance or liquidity of any market for the exchange notes.
See “Risk Factors” beginning on page 11 for a discussion of factors that you should consider before tendering your old notes.
Neither the Securities and Exchange Commission nor any state securities commission has approved or disapproved of these securities or passed upon the adequacy or accuracy of this prospectus. Any representation to the contrary is a criminal offense.
Each broker-dealer that receives exchange notes for its own account pursuant to the exchange offer must acknowledge by way of letter of transmittal that it will deliver a prospectus in connection with any resale of exchange notes. The letter of transmittal states that by so acknowledging and by delivering a prospectus, such broker-dealer will not be deemed to admit that it is an “underwriter” within the historymeaning of the apparel industry. Its broad distribution reflects the brand’s appeal across consumersSecurities Act. This prospectus, as it may be amended or supplemented from time to time, may be used by a broker-dealer in connection with resales of all ages and lifestyles. Its merchandising and marketing reflect the brand’s core attributes: authentic, courageous, confident, effortless, connected and purposeful.
Our Dockers® brand offers an alternative to suit dressingexchange notes received in the form of the American staple—the khaki pant. The Dockers® brand has evolved around the worldexchange for old notes where such old notes were acquired by such broker-dealer as a market leader in the casual pant category, while also providing tops and accessories to complete ahead-to-toe offering.
Our Global Reach
Our products are sold in more than 110 countries, grouped into three geographic regions: Americas, Europe and Asia. We support our brands throughout these regions through a global infrastructure, developing, sourcing and marketing our products around the world. Although our brands are recognized as authentically “American,” we derive approximately halfresult of our net revenues from outside the United States.
Our products are sold in approximately 50,000 retail locations worldwide, including approximately 2,900 retail stores, both franchised and company-operated, andshop-in-shops dedicated to our brands. We distribute our Levi’s® and Dockers® products primarily through chain retailers and department stores in the United States and primarily through department stores, specialty retailers, franchisedmarket-making activities or other brand-dedicated stores andshop-in-shops outsidetrading activities. We have agreed that, for a period of the United States. Levi’s® and Dockers® products are also sold through our brand-dedicated company-operated retail stores and through the ecommerce sites we operate, as well as the ecommerce sites operated by certain of our key wholesale customers and other third parties. We distribute Signature by Levi Strauss & Co.™ and Denizen® brand products primarily through mass channel retailers in the Americas.
Our Business Strategies
Our goal is to generate and sustain profitable growth over the long term in order to significantly improve the value of the enterprise. The management team is focused on four key strategies to achieve this goal:
Recent Developments
On February 28, 2017, we issued €475 million in aggregate principal amount of 3.375% senior notes due 2027. On March 3, 2017, we completed a tender offer for $370.3 million of the 6 7⁄8% senior notes due 2022 (our “2022 Notes”). On March 16, 2017, following the consummation of the tender offer, we elected to redeem all 2022 Notes that remained outstanding180 days after the consummation of the tender offer. All remaining 2022 Notesexchange offer, we will be redeemed on May 1, 2017.
Failure to Exchange Your Old Notes
Inmake this prospectus we referavailable to the €475.0 million principal amountany broker-dealer for use in connection with any such resale. Please Read “Plan of unregistered 3 3⁄8% Senior Notes due 2027 that we issued in February 2017 as the old notes. The old notes which you do not tender or we do not acceptDistribution.”
The date of this prospectus is , 2020.
WHERE YOU CAN FIND MORE INFORMATION
We have filed with the Securities and Exchange Commission (the “SEC” or the “Commission”) a registration statement on Form S-4 under the Securities Act of 1933 (the “Securities Act”) relating to the exchange offer continuethat includes important business and financial information about us that is not included in or delivered with this prospectus. This prospectus does not contain all of the information included in the registration statement. This information is available from us without charge to be restricted securities underholders of old notes as specified below. If we have made references in this prospectus to any contracts, agreements or other documents and also filed any of those contracts, agreements or documents as exhibits to the Securities Act. Therefore,registration statement, you should read the relevant exhibit for a more complete understanding of the document or matter involved.
You may only transferread and copy the registration statement, including the attached exhibits, and any report, statements or resell them inother information that we file at the SEC at www.sec.gov.
You may request a transaction registered undercopy of any of our filings with the SEC, or exempt fromany of the Securities Act and applicable state securities laws. We will issueagreements or other documents that constitute exhibits to those filings, at no cost, by writing or telephoning us at the following address or phone number:
Levi Strauss & Co.
1155 Battery Street
San Francisco, California 94111
Attention: Investor Relations
Telephone: (800) 438-0349 or (415) 501-6000
To obtain timely delivery of any of our filings, agreements or other documents, you must make your request to us no later than five business days before the expiration date of the exchange notes in exchange for the old notes under theoffer. The exchange offer only following the satisfaction of the procedures and conditions described underwill expire at 5:00 p.m., New York City time on, 2020 (the “expiration date”). The exchange offer can be extended by us in our sole discretion. See the caption “The Exchange Offer.”Offer” for more detailed information.
Because we anticipate that most holdersYou should rely only on the information provided in this prospectus. No person has been authorized to provide you with different information. The information in this prospectus is accurate as of the old notes will elect to exchange their old notes, we expectdate on the front cover. You should not assume that the liquidityinformation contained in this prospectus is accurate as of the markets, if any for any old notes remaining after the completion of the exchange offer will be substantially limited. other date.
Any old notes not tendered and exchangedaccepted in the exchange offer will reduceremain outstanding. To the aggregate principal amount outstandingextent old notes are tendered and accepted in the exchange offer, a holder’s ability to sell untendered old notes could be adversely affected. Following consummation of the exchange offer, the holders of old notes.notes will continue to be subject to the existing restrictions upon transfer thereof and we will have fulfilled one of our obligations under the registration rights agreement. Holders of old notes who do not tender their notes generally will not have any further registration rights under the registration rights agreement or otherwise.
Corporate InformationFORWARD-LOOKING STATEMENTS
Except for the historical information contained or incorporated by reference in this prospectus, certain matters discussed in this prospectus, including (without limitation) statements under “Summary” and “Risk Factors” and in our Annual Report on Form 10-K for the year ended November 24, 2019 and our Quarterly Reports on Form 10-Q for the three months ended February 23, 2020 and May 24, 2020, all of which are incorporated by reference in this prospectus, under “Business,” “Risk Factors” and “Management’s Discussion and Analysis of Financial Condition and Results of Operations,” contain forward-looking statements within the meaning of Section 27A of the Securities Act of 1933 (the “Securities Act”), and Section 21E of the Securities Exchange Act of 1934, as amended (the “Exchange Act”). 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.
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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 this prospectus and in our other filings with the SEC, 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;
the potential impact of COVID-19 on both our projected customer demand and supply chain, as well as our consolidated financial position, consolidated results of operations, and consolidated cash flows in fiscal 2020;
the risk of future non-cash asset impairment charges, including to goodwill, operating right-of-use assets and/or other store assets;
expected impact from benefits related to the Coronavirus Aid, Relief, and Economic Security Act enacted in March 2020;
the impact of the United Kingdom’s withdrawal from the European Union;
our ability to effectively manage any global productivity and outsourcing actions as planned, which are intended to increase productivity and efficiency in our global operations, take advantage of lower-cost service-delivery models in our distribution network and streamline our procurement practices to maximize efficiency in our global operations, without business disruption or mitigation to such disruptions;
consequences of impacts to the businesses of our wholesale customers, including significant store closures or a significant decline in a wholesale customer’s financial condition leading to restructuring actions, bankruptcies, liquidations or other unfavorable events for our wholesale customers, caused by factors such as inability to secure financing, decreased discretionary consumer spending, inconsistent foot and online traffic patterns and an increase in promotional activity as a result of decreased foot and online traffic, pricing fluctuations, general economic and financial conditions and changing consumer preferences;
our and our wholesale customers’ decisions to modify strategies and adjust product mix and pricing, and our ability to manage any resulting product transition costs, including liquidating inventory or increasing promotional activity;
our ability to purchase products through our independent contract manufacturers that are made with quality raw materials and our ability to mitigate the variability of costs related to manufacturing, sourcing, and raw materials supply and to manage consumer response to such mitigating actions;
our ability to gauge and adapt to changing U.S. and international retail environments and fashion trends and changing consumer preferences in product, price-points, as well as in-store and digital shopping experiences;
our ability to respond to price, innovation and other competitive pressures in the global apparel industry, on and from our key customers and in our key markets;
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our ability to increase the number of dedicated stores for our products, including through opening and profitably operating company-operated stores;
consequences of foreign currency exchange and interest rate fluctuations;
our ability to successfully prevent or mitigate the impacts of data security breaches;
our ability to attract and retain key executives and other key employees;
our ability to protect our trademarks and other intellectual property;
the impact of the variables that affect the net periodic benefit cost and future funding requirements of our postretirement benefits and pension plans;
our dependence on key distribution channels, customers and suppliers;
our ability to utilize our tax credits and net operating loss carryforwards;
ongoing or future litigation matters and disputes and regulatory developments;
the impact of the Tax Cut and Jobs Act in the United States, including 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;
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 North America Free Trade Agreement; and
political, social and economic instability, or natural disasters, in countries where we or our customers do business.
For more information on these and other factors, see “Risk Factors” in our Annual Report on Form 10-K for the year ended November 24, 2019 and our Quarterly Reports on Form 10-Q for the three months ended February 23, 2020 and May 24, 2020. We caution prospective investors not to place undue reliance on these forward-looking statements. All subsequent written and oral forward-looking statements attributable to us are expressly qualified in their entirety by the cautionary statements and the risk factors contained throughout this prospectus.
We have based the forward-looking statements contained in this prospectus 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 prospectus and in the documents incorporated herein by reference. These risks are not exhaustive. Other sections of this prospectus 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 prospectus and in the documents incorporated herein by reference. 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 prospectus, 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 prospectus 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 prospectus or to conform such statements to actual results or revised expectations, except as required by law.
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This summary contains basic information about our company and the exchange offer. This summary highlights selected information contained elsewhere in this prospectus. This summary is not complete and does not contain all of the information that you should consider before deciding to exchange your old notes for exchange notes. For a more complete understanding of our company and this offering, you should read this entire prospectus, including “Risk Factors” and the financial information and the notes thereto included herein. Unless otherwise indicated or required by the context, the terms “we,” “our,” “us” and the “Company” refer to Levi Strauss & Co. was founded in San Francisco, California, in 1853 and incorporated in Delaware in 1971. Our common stock is owned primarily by descendantsall of the family of Levi Straussits subsidiaries that are consolidated under U.S. GAAP and their relatives. We conductall references to financial results or data for a particular year are to our operations outside the United States through foreign subsidiaries owned directly or indirectly by Levi Strauss & Co. We have headquarter offices in San Francisco, Brussels and Singapore. Our corporate offices are located at Levi’s Plaza, 1155 Battery Street, San Francisco, California 94111, and our main telephone number is(415) 501-6000. Our website address is www.levistrauss.com. The information on our website is not a part of this prospectus.fiscal years.
The Exchange Notes
The terms of the exchange notes (the “exchange notes”) to be issued in the exchange offer for old notes are substantially similar to the old notes, except, in each case, for transfer restrictions and registration rights relating to the old notes.
Resale of Exchange Notes
We do not intend to apply for a listing of the exchange notes on any securities exchange or an automated dealer quotation system.
The exchange notes will be part of a series of notes for which certain dealers currently make a market. However, there can be no assurance as to the continuance or liquidity of any market for the exchange notes.
See “Risk Factors” beginning on page 11 for a discussion of factors that you should consider before tendering your old notes.
Neither the Securities and Exchange Commission nor any state securities commission has approved or disapproved of these securities or passed upon the adequacy or accuracy of this prospectus. Any representation to the contrary is a criminal offense.
Each broker-dealer that receives exchange notes for its own account pursuant to the exchange offer must acknowledge by way of letter of transmittal that it will deliver a prospectus in connection with any resale of exchange notes. The letter of transmittal states that by so acknowledging and by delivering a prospectus, such broker-dealer will not be deemed to admit that it is an “underwriter” within the meaning of the Securities Act. This prospectus, as it may be amended or supplemented from time to time, may be used by a broker-dealer in connection with resales of exchange notes received in exchange for old notes where such old notes were acquired by such broker-dealer as a result of market-making activities or other trading activities. We have agreed that, for a period of 180 days after the consummation of the exchange offer, we will make this prospectus available to any broker-dealer for use in connection with any such resale. Please Read “Plan of Distribution.”
The date of this prospectus is , 2020.
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WHERE YOU CAN FIND MORE INFORMATION
We have filed with the Securities and Exchange Commission (the “SEC” or the “Commission”) a registration statement on Form S-4 under the Securities Act of 1933 (the “Securities Act”) relating to the exchange offer that includes important business and financial information about us that is not included in or delivered with this prospectus. This prospectus does not contain all of the information included in the registration statement. This information is available from us without charge to holders of old notes as specified below. If we have made references in this prospectus to any contracts, agreements or other documents and also filed any of those contracts, agreements or documents as exhibits to the registration statement, you should read the relevant exhibit for a more complete understanding of the document or matter involved.
You may read and copy the registration statement, including the attached exhibits, and any report, statements or other information that we file at the SEC at www.sec.gov.
You may request a copy of any of our filings with the SEC, or any of the agreements or other documents that constitute exhibits to those filings, at no cost, by writing or telephoning us at the following address or phone number:
Levi Strauss & Co.
1155 Battery Street
San Francisco, California 94111
Attention: Investor Relations
Telephone: (800) 438-0349 or (415) 501-6000
To obtain timely delivery of any of our filings, agreements or other documents, you must make your request to us no later than five business days before the expiration date of the exchange offer. The exchange offer will expire at 5:00 p.m., New York City time on, 2020 (the “expiration date”). The exchange offer can be extended by us in our sole discretion. See the caption “The Exchange Offer” for more detailed information.
You should rely only on the information provided in this prospectus. No person has been authorized to provide you with different information. The information in this prospectus is accurate as of the date on the front cover. You should not assume that the information contained in this prospectus is accurate as of any other date.
Any old notes not tendered and accepted in the exchange offer will remain outstanding. To the extent old notes are tendered and accepted in the exchange offer, a holder’s ability to sell untendered old notes could be adversely affected. Following consummation of the exchange offer, the holders of old notes will continue to be subject to the existing restrictions upon transfer thereof and we will have fulfilled one of our obligations under the registration rights agreement. Holders of old notes who do not tender their notes generally will not have any further registration rights under the registration rights agreement or otherwise.
Except for the historical information contained or incorporated by reference in this prospectus, certain matters discussed in this prospectus, including (without limitation) statements under “Summary” and “Risk Factors” and in our Annual Report on Form 10-K for the year ended November 24, 2019 and our Quarterly Reports on Form 10-Q for the three months ended February 23, 2020 and May 24, 2020, all of which are incorporated by reference in this prospectus, under “Business,” “Risk Factors” and “Management’s Discussion and Analysis of Financial Condition and Results of Operations,” contain forward-looking statements within the meaning of Section 27A of the Securities Act of 1933 (the “Securities Act”), and Section 21E of the Securities Exchange Act of 1934, as amended (the “Exchange Act”). 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.
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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 this prospectus and in our other filings with the SEC, 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;
the potential impact of COVID-19 on both our projected customer demand and supply chain, as well as our consolidated financial position, consolidated results of operations, and consolidated cash flows in fiscal 2020;
the risk of future non-cash asset impairment charges, including to goodwill, operating right-of-use assets and/or other store assets;
expected impact from benefits related to the Coronavirus Aid, Relief, and Economic Security Act enacted in March 2020;
the impact of the United Kingdom’s withdrawal from the European Union;
our ability to effectively manage any global productivity and outsourcing actions as planned, which are intended to increase productivity and efficiency in our global operations, take advantage of lower-cost service-delivery models in our distribution network and streamline our procurement practices to maximize efficiency in our global operations, without business disruption or mitigation to such disruptions;
consequences of impacts to the businesses of our wholesale customers, including significant store closures or a significant decline in a wholesale customer’s financial condition leading to restructuring actions, bankruptcies, liquidations or other unfavorable events for our wholesale customers, caused by factors such as inability to secure financing, decreased discretionary consumer spending, inconsistent foot and online traffic patterns and an increase in promotional activity as a result of decreased foot and online traffic, pricing fluctuations, general economic and financial conditions and changing consumer preferences;
our and our wholesale customers’ decisions to modify strategies and adjust product mix and pricing, and our ability to manage any resulting product transition costs, including liquidating inventory or increasing promotional activity;
our ability to purchase products through our independent contract manufacturers that are made with quality raw materials and our ability to mitigate the variability of costs related to manufacturing, sourcing, and raw materials supply and to manage consumer response to such mitigating actions;
our ability to gauge and adapt to changing U.S. and international retail environments and fashion trends and changing consumer preferences in product, price-points, as well as in-store and digital shopping experiences;
our ability to respond to price, innovation and other competitive pressures in the global apparel industry, on and from our key customers and in our key markets;
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our ability to increase the number of dedicated stores for our products, including through opening and profitably operating company-operated stores;
consequences of foreign currency exchange and interest rate fluctuations;
our ability to successfully prevent or mitigate the impacts of data security breaches;
our ability to attract and retain key executives and other key employees;
our ability to protect our trademarks and other intellectual property;
the impact of the variables that affect the net periodic benefit cost and future funding requirements of our postretirement benefits and pension plans;
our dependence on key distribution channels, customers and suppliers;
our ability to utilize our tax credits and net operating loss carryforwards;
ongoing or future litigation matters and disputes and regulatory developments;
the impact of the Tax Cut and Jobs Act in the United States, including 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;
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 North America Free Trade Agreement; and
political, social and economic instability, or natural disasters, in countries where we or our customers do business.
For more information on these and other factors, see “Risk Factors” in our Annual Report on Form 10-K for the year ended November 24, 2019 and our Quarterly Reports on Form 10-Q for the three months ended February 23, 2020 and May 24, 2020. We caution prospective investors not to place undue reliance on these forward-looking statements. All subsequent written and oral forward-looking statements attributable to us are expressly qualified in their entirety by the cautionary statements and the risk factors contained throughout this prospectus.
We have based the forward-looking statements contained in this prospectus 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 prospectus and in the documents incorporated herein by reference. These risks are not exhaustive. Other sections of this prospectus 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 prospectus and in the documents incorporated herein by reference. 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 prospectus, 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 prospectus 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 prospectus or to conform such statements to actual results or revised expectations, except as required by law.
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This summary contains basic information about our company and the exchange offer. This summary highlights selected information contained elsewhere in this prospectus. This summary is not complete and does not contain all of the information that you should consider before deciding to exchange your old notes for exchange notes. For a more complete understanding of our company and this offering, you should read this entire prospectus, including “Risk Factors” and the financial information and the notes thereto included herein. Unless otherwise indicated or required by the context, the terms “we,” “our,” “us” and the “Company” refer to Levi Strauss & Co. and all of its subsidiaries that are consolidated under U.S. GAAP and all references to financial results or data for a particular year are to our fiscal years.
Our Company
From our California Gold Rush beginnings, we have grown into one of the world’s largest brand-name apparel companies. A history of responsible business practices, rooted in our core values, has helped us build our brands and engender consumer trust around the world. Under our Levi’s®, Dockers®, Signature by Levi Strauss & Co.™ and Denizen® brands, we design, market and sell—directly or through third parties and licensees—products that include jeans, casual and dress pants, tops, shorts, skirts, jackets, footwear, and related accessories for men, women and children around the world.
Our Global Reach
Our products are sold in more than 110 countries, grouped into three geographic regions that comprise our three operating segments: the Americas, Europe and Asia (which includes the Middle East and Africa). We service our customers through our global infrastructure, developing, sourcing and marketing our products around the world. Although our brands are recognized as authentically “American,” we derive approximately half of our net revenues from outside the United States.
Our products are sold in over 50,000 retail locations worldwide, including approximately 3,200 brand-dedicated retail stores and shop-in-shops. In the United States, chain retailers and department stores are the primary distribution channels for our Levi’s® and Dockers® products. Outside the United States, department stores, specialty retailers, franchised or other brand-dedicated stores and shop-in-shops have traditionally been our primary distribution channels. Levi’s® and Dockers® products are also sold through our brand-dedicated company-operated retail stores and through the e-commerce sites we operate, as well as the e-commerce sites operated by certain of our key wholesale customers and other third parties. We distribute Signature by Levi Strauss & Co.™ and Denizen® brand products primarily through mass channel retailers in the Americas.
Failure to Exchange Your Old Notes
In this prospectus, we refer to the $500.0 million principal amount of unregistered 5.00% Senior Notes due 2025 that we issued in April 2020 as the old notes. The old notes which you do not tender or we do not accept will, following the exchange offer, continue to be restricted securities under the Securities Act. Therefore, you may only transfer or resell them in a transaction registered under or exempt from the Securities Act and applicable state securities laws. We will issue the exchange notes in exchange for the old notes under the exchange offer only following the satisfaction of the procedures and conditions described under the caption “The Exchange Offer.”
Because we anticipate that most holders of the old notes will elect to exchange their old notes, we expect that the liquidity of the markets, if any, for any old notes remaining after the completion of the exchange offer will be substantially limited. Any old notes tendered and exchanged in the exchange offer will reduce the aggregate principal amount outstanding of the old notes.
Corporate Information
Levi Strauss & Co. was founded in San Francisco, California in 1853 and incorporated in Delaware in 1970. We conduct our operations outside the United States through foreign subsidiaries. We have headquarters in San Francisco, Brussels and Singapore. Our primary corporate office is located at Levi’s Plaza, 1155 Battery Street, San Francisco, California 94111, and our main telephone number is (415) 501-6000. Our website address is www.levistrauss.com. The information on our website is not a part of this prospectus.
The Exchange Notes
The summary below describes the principal terms of the exchange notes. Certain of the terms and conditions described below are subject to important limitations and exceptions. The “Description of Exchange Notes” section of this prospectus contains a more detailed description of the terms and conditions of the exchange notes. In this summary, “notes” refers to both our old notes and the exchange notes.
Issuer | Levi Strauss & Co. |
Notes Offered |
Maturity Date |
Interest | Interest on the exchange notes will accrue at a rate of |
Denominations | The exchange notes will be issued on the issue date in global form in minimum denominations of |
Ranking | The exchange notes will be general senior obligations of Levi Strauss & Co. and will: |
rank equally in right of payment to all our existing and future senior unsecured debt (including the 2025 Notes and the 2027 Notes (as defined herein));
rank senior in right of payment to our future debt that is expressly subordinated in right of payment to the notes;
be effectively subordinated to our secured indebtedness, including indebtedness under our existingrevolving credit facility, to the extent of the value of the collateral securing such indebtedness; and
be structurally subordinated to all of the existing and future liabilities, including trade payables, of our subsidiaries.
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Optional Redemption | On or after |
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Change of Control | If we experience certain kinds of changes of control, we must offer to purchase the exchange notes at 101% of their principal amount, plus accrued and unpaid |
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Certain Covenants | The indenture contains covenants that limit, among other things, our ability and the ability of some of our subsidiaries to: |
incur additional debt;
pay dividends or make other restricted payments;
consummate specified asset sales;
incur liens;
impose restrictions on the ability of a subsidiary to pay dividends or make payments to us and our restricted subsidiaries;
merge or consolidate with any other person; and
sell, assign, transfer, lease convey or otherwise dispose of all or substantially all of our assets or the assets of our restricted subsidiaries.
| If the exchange notes receive and maintain an investment grade rating by both Standard & Poor’s Ratings Service and Moody’s Investors Service, Inc. and we and our restricted subsidiaries are and remain in compliance with the indenture governing the |
| We do not intend to apply for a listing of the |
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Risk FactorsRISK FACTORS
See “Risk Factors,” which begins on page 10,11, for a discussion of certain factors that should be considered by prospective investors in evaluating an investment in the exchange notes.
Ratio of Earnings to Fixed Charges
The ratio of earnings to fixed charges for each of the periods indicated is as follows:
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The Exchange OfferTHE EXCHANGE OFFER
The €475.0$500.0 million unregistered old notes were issued in a private placement. In this exchange offer, we are offering to exchange, for your old notes, exchange notes which are substantially similar in all material respects to the old notes except that the exchange notes have been registered under the Securities Act and certain transfer restrictions and registration rights relating to the old notes do not apply to the exchange notes.
Registration rights agreement | In connection with the issuance of the |
| You may exchange your old notes for exchange notes, which have substantially similar terms to your old notes. The exchange offer satisfies your rights and our obligations under the registration rights agreement. After the exchange offer is over, you will not be entitled to any exchange or registration rights with respect to your old notes. |
The exchange offer | We are offering to exchange up to |
| You may exchange old notes only in a minimum denomination of |
Purpose and effect | The purpose of the exchange offer is to give you the opportunity to exchange your old notes for exchange notes that have been registered under the Securities Act. |
Resale | Except as indicated in this prospectus, we believe that the exchange notes may be offered for resale, resold and otherwise transferred without compliance with the registration and prospectus delivery requirements of the Securities Act provided that: |
you are acquiring the exchange notes in the ordinary course of your business;
you are not participating, do not intend to participate and have no arrangement or understanding with any person to participate in the distribution of the exchange notes;
you are not a broker-dealer who purchased the old notes directly from us for resale pursuant to Rule 144A or any other available exemption under the Securities Act; and
you are not our “affiliate,” as defined in Rule 405 under the Securities Act.
Our belief is based on existing interpretations of the Securities Act by the staff of the SEC set forth in severalno-action letters to third parties. We do not intend to seek ano-action letter, and there is no assurance that the staff of the SEC would make a similar |
determination with respect to the exchange notes. If this interpretation |
is inapplicable, and you transfer any exchange notes without delivering a prospectus meeting the requirements of the Securities Act or without an exemption from such requirements, you may incur liability under the Securities Act. We do not assume, or indemnify holders against, such liability. See “The Exchange Offer—Resales of Exchange Notes.” |
| Each broker-dealer that is issued exchange notes for its own account in exchange for old notes that were acquired by the broker-dealer as a result of market-making activities or other trading activities must acknowledge that it will deliver a prospectus meeting the requirements of the Securities Act in connection with any resale of the exchange notes. To the extent described in “Plan of Distribution,” a broker-dealer may use this prospectus for an offer to resell, resale or other retransfer of the exchange notes. |
Expiration of the exchange offer; withdrawal of tender | The exchange offer will expire at |
Conditions to the exchange offer | We will not be required to accept old notes for exchange: |
if the exchange offer would be unlawful or would violate any interpretation of the SEC staff; or
if any legal action has been instituted or threatened that would impair our ability to proceed with the exchange offer.
| The exchange offer is not conditioned on any minimum aggregate principal amount of old notes being tendered. Please read “The Exchange Offer—Conditions” for more information about the conditions to the exchange offer. |
Procedures for tendering old notes | We have forwarded to you, along with this prospectus, a letter of transmittal relating to this exchange offer. Because all of the old notes are held in book-entry accounts maintained by the exchange agent at |
| If you beneficially own old notes and those notes are held through a broker, dealer, commercial bank, trust company or other nominee or custodian and you wish to tender your old notes in the exchange offer, you should contact the |
| By agreeing to be bound by the letter of transmittal, you will represent to us that, among other things: |
any exchange notes that you receive will be acquired in the ordinary course of your business;
you have no arrangement or understanding with any person to participate in the distribution of the old notes or the exchange notes;
you are not our affiliate;
if you are not a broker-dealer, you are not engaged in and do not intend to engage in the distribution of the exchange notes; and
if you are a broker-dealer that will receive exchange notes for your own account in exchange for old notes that you acquired as result of market-making activities or other trading activities, you will deliver a prospectus in connection with any resale of such exchange notes.
Effect on holders of old notes | If you are a holder of old notes and you do not tender your old notes in the exchange offer, you will continue to hold your old notes and will be entitled to all the rights and subject to all the limitations applicable to the old notes in the indenture. |
| The trading market for old notes could be adversely affected if some but not all of the old notes are tendered and accepted in the exchange offer. |
Consequences of failure to exchange | All untendered old notes will remain subject to the restrictions on transfer provided for in the old notes and in the indenture. Generally, the old notes that are not exchanged for exchange notes pursuant to the exchange offer will remain restricted securities and may not be offered or sold unless registered under the Securities Act, except pursuant to an exemption from, or in a transaction not subject to, the Securities Act and applicable state securities laws. Other than in connection with the exchange offer, we do not currently anticipate that we will register the old notes under the Securities Act. |
Certain federal income tax considerations | The exchange of old notes for exchange notes in the exchange offer will generally not be a taxable exchange for U.S. federal income tax |
purposes. See the caption “Certain U.S. Federal Income Tax Considerations” for a more detailed description of the tax consequences of the exchange. |
Use of proceeds | We will not receive any cash proceeds from the issuance of exchange notes pursuant to the exchange offer. |
Exchange agent |
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Your investment in the exchange notes will involve risks. You should carefully consider the following factors described below and all other information in, or incorporated by reference in, this prospectus, including the sections titled “Risk Factors” in our Annual Report on Form 10-K for the year ended November 24, 2019 and our Quarterly Reports on Form 10-Q for the three months ended February 23, 2020 and May 24, 2020, before deciding to exchange your old notes for exchange notes. In this section, “notes” refers to both our old notes and the exchange notes.
Risks Relating to the Notes
If you do not exchange your old notes, they may be difficult to resell.
If you do not sell your notes through the Luxembourg Stock Exchange, itIt may be difficult for you to sell old notes that are not exchanged in the exchange offer, since any old notes not exchanged will remain subject to the restrictions on transfer provided for in Rule 144 under the Securities Act.
These restrictions on transfer of your old notes exist because we issued the old notes pursuant to an exemption from the registration requirements of the Securities Act and applicable state securities laws. Generally, the old notes that are not exchanged for exchange notes pursuant to the exchange offer will remain restricted securities and may not be offered or sold, unless registered under the Securities Act, except pursuant to an exemption from, or in a transaction not subject to, the Securities Act and applicable state securities laws. Other than in connection with this exchange offer, we do not intend to register the old notes under the Securities Act.
To the extent any old notes are tendered and accepted in the exchange offer, the trading market, if any, for the old notes that remain outstanding after the exchange offer would be adversely affected due to a reduction in market liquidity.
Because the notes are effectively subordinated to all of our secured debt and the liabilities of our subsidiaries, we may not have sufficient assets to pay amounts owed on the notes if a default occurs.
The notes are general senior obligations that rank equal in right of payment with all of our existing and future unsecured and unsubordinated debt, including our 5.00%2025 Notes and our 3.375% Senior Notes due 20252027 (the “2025“2027 Notes”). The notes are effectively subordinated to all of our secured debt to the extent of the value of the assets securing that debt. As of February 26, 2017, on an as adjusted basis to give effect to the issuance of our old notes and the application of the proceeds of such notes to purchase or redeem all of our 2022 Notes,May 24, 2020, we had approximately $1.02$1.8 billion of debt alloutstanding, $300 million of which was unsecured,secured, and unused availability under theour senior secured revolving credit facility would have been $746.1(the “revolving credit facility”) was $448 million, all of which, if borrowed, would be secured debt.
Because our amended and restated senior securedthe revolving credit facility is a secured obligation, failure to comply with its terms or our inability to pay our lenders at maturity would entitle those lenders immediately to foreclose on certain of our assets, including our U.S. trademarks and the capital stock of all of our U.S. and 65% of the capital stock of our foreign subsidiaries, and the assets of our material U.S. subsidiaries, which serve as collateral. In the event of any foreclosure on our assets, our secured lenders would be entitled to be repaid in full from the proceeds of the liquidation of those assets before those assets would be available for distribution to other creditors, including the holders of notes.
The notes are also structurally subordinated to all obligations of our subsidiaries since holders of notes will only be creditors of Levi Strauss & Co. and not of our subsidiaries. As of February 26, 2017,May 24, 2020, the liabilities, including trade payables but excluding intercompany indebtedness, of our subsidiaries were approximately $496.6 million.$1.8 billion. The ability of our creditors, including you, to participate in any distribution of assets of any of our subsidiaries upon liquidation or bankruptcy will be subject to the prior claims of that subsidiary’s creditors, including trade
creditors, and any prior or equal claim of any equity holder of that subsidiary. In addition, the ability of our creditors, including you, to participate in distributions of assets of our subsidiaries will be limited to the extent that the outstanding shares of capital stock of any of our subsidiaries are either pledged to secure other
creditors, such as under our amended and restated senior securedthe revolving credit facility, or are not owned by us, such as our Japanese subsidiary.facility. As a result, you may receive less, proportionately, than our secured creditors and the creditors of our subsidiaries.
There is no establishedAn active trading market for the notes, and any market for theexchange notes may not be illiquid.sustained.
Although application will be made forWe have not listed and do not intend to list the exchange notes toon any U.S. national securities exchange or quotation system. Although we expect that the exchange notes will be listed onfungible with the Official List of2025 Notes and certain dealers currently make a market in the Luxembourg Stock Exchange and for trading on the Euro MTF Market,2025 Notes, we cannot assure you that the market for the 2025 Notes and the exchange notes will become or remain listed. Although no assurancebe sustained. If an active market is made as to the liquidity of the exchange notes as a result of the admission to trading on the Euro MTF Market, failure to be approved for listing on or the delisting of the exchange notes from, as applicable, the Official List of the Luxembourg Stock Exchange may have a material effect on a holder’s ability to resell the exchange notes in the secondary market. In addition, we do not intend to apply for listing of the exchange notes on any U.S. securities exchange or for quotation through an automated dealer quotation system. The liquidity of the trading market in the exchange notes andsustained, the market price quoted forand liquidity of the exchange notes may be adversely affected by changes in the overall market for high yield securities generally or the interest of securities dealers in making a market in the exchange notes and by changes in our financial performance or prospects or in the prospects for companies in the apparel industry generally. As a result, you cannot be sure that an active trading market will develop for the exchange notes.affected.
The trading prices of our debt securities have been volatile, and may be volatile in the future.
Other than the old notes,2027 Notes, which are listed on the Official List of the Luxembourg Stock Exchange and for trading on the Euro MTF Market, and the exchange notes, which are expected to be listed on the Official List of the Luxembourg Stock Exchange and for trading on the Euro MTF Market, none of our debt securities are currently listed on any securities exchange or registered for quotation through any automated dealer quotation system. Accordingly, information regarding the trading prices of our debt securities is limited. Based on the information available to us, however, the trading prices of our debt securities have been volatile. We expect that the trading price of our debt securities, including the notes, will be affected by developments related to the COVID-19 pandemic, developments in our business and our financial results, liquidity position and capital structure as well as developments in the apparel industry, domestic and foreign economies and in the market for high yield debt securities. The trading price for the notes may be volatile, and we cannot assure you that the trading price of notes will not be lower than the issue price.
We may be unable to purchase the notes upon a change of control.
Upon a change of control event as defined in the indenture governing the notes, we would be required to offer to purchase the notes in cash at a price equal to 101% of their principal amount, plus accrued and unpaid interest, if any. We also would be required to offer to repurchase ourthe 2025 Notes and the 2027 Notes on similar terms. A change of control under the terms of the notes, the 2025 Notes and the 2027 Notes is likely to constitute an event of default under our amended and restated senior securedthe revolving credit facility. If this occurs, then the lenders under these financingsour revolving credit facility may declare their debt immediately due and payable. Since our amended and restated senior securedthe revolving credit facility is secured, the lenders under these financingsthis facility could foreclose on most of our assets and be entitled to be repaid in full from the proceeds of any liquidation of those assets before any holder of the notes. We cannot assure you that we will have the financial resources necessary to repurchase the notes and satisfy our other payment obligations that could be triggered upon a change of control. If we do not have sufficient financial resources to effect a change of control offer for the notes, as well as for the 2025 Notes and the 2027 Notes, we would be required to seek additional financing from outside sources to repurchase the notes.notes, the 2025 Notes and the 2027 Notes. We cannot assure you that financing would be available to us at that time on satisfactory terms, or at all. In addition, the terms of the notes may not protect you if we undergo a highly leveraged transaction, reorganization, restructuring, merger or similar transaction that may adversely affect you unless the transaction is included in the definition of a change of control in the indenture.
You may face foreign exchange risks or adverse tax consequences by investing in the notes.
The notes will be denominated and payable in euros. If you measure your investment returns by reference to a currency other than euro, an investment in the notes will entail foreign exchange related risks due to, among
other factors, possible significant changes in the valueEach of the euro relativerisks in this section is applicable to both the currency by reference to which you measure the return on your investments, because of economic, political and other factors over which we have no control. Depreciation of the euro against the currency by reference to which you measure the return on your investments could cause a decrease in the effective yield of the notes below their stated coupon rates and could result in a loss to you when the return on the notes is translated into the currency by reference to which you measure the return on your investments. Investment in the notes may also have important tax consequences as a result of any foreign currency exchange gains or losses. See “Certain United States Federal Income Tax Considerations.”
Risks Relating to Our Debt
We have debt and interest payment requirements at a level that may restrict our future operations.
As of February 26, 2017, on an as adjusted basis to give effect to the issuance of our old notes and the application of the proceeds of such notes to purchase or redeem all of our 2022 Notes, we had approximately $1.02 billion of debt, all of which was unsecured, and we had $746.1 million of borrowing capacity under our amended and restated senior secured revolving credit facility. Our debt requires us to dedicate a substantial portion of any cash flow from operations to the payment of interest and principal due under our debt, which will reduce funds available for other business purposes, and result in us having lower net income than we would otherwise have had. This dedicated use of cash could impact our ability to successfully compete by, for example:old notes.
In addition, borrowings under our amended and restated senior secured revolving credit facility bear interest at variable rates. As a result, increases in market interest rates could require a greater portion of our cash flow to be used to pay interest, which could further hinder our operations. Increases in market interest rates may also affect the trading price of our debt securities that bear interest at a fixed rate. Our ability to satisfy our obligations and to reduce our total debt depends on our future operating performance and on economic, financial, competitive and other factors, many of which are beyond our control.
Volatility in the capital markets could affect our ability to access capital or could increase our costs of capital.
A downturn or disruption in the credit markets may reduce sources of liquidity available to us or increase our costs of capital, which could impact our ability to maintain or grow our business, which in turn may adversely affect our business and results of operations.
Restrictions in our notes, indentures and senior secured revolving credit facility may limit our activities, including dividend payments, share repurchases and acquisitions.
Our amended and restated senior secured revolving credit facility and the indentures relating to our senior unsecured notes contain restrictions, including covenants limiting our ability to incur additional debt, grant liens, make acquisitions and other investments, prepay specified debt, consolidate, merge or acquire other businesses, sell assets, pay dividends and other distributions, repurchase stock, and enter into transactions with affiliates. These restrictions, in combination with our leveraged condition, may make it more difficult for us to successfully execute our business strategy, grow our business or compete with companies not similarly restricted.
If our foreign subsidiaries are unable to distribute cash to us when needed, we may be unable to satisfy our obligations under our debt securities, which could force us to sell assets or use cash that we were planning to use elsewhere in our business.
We conduct our international operations through foreign subsidiaries and we only receive the cash that remains after our foreign subsidiaries satisfy their obligations. We may depend upon funds from our foreign subsidiaries for a portion of the funds necessary to meet our debt service obligations. Any agreements our foreign subsidiaries enter into with other parties, as well as applicable laws and regulations limiting the right and ability ofnon-U.S. subsidiaries and affiliates to pay dividends and remit cash to affiliated companies, may restrict the ability of our foreign subsidiaries to pay dividends or make other distributions to us. If those subsidiaries are unable to pass on the amount of cash that we need, we may be unable to make payments on our debt obligations, which could force us to sell assets or use cash that we were planning on using elsewhere in our business, which could hinder our operations and affect the trading price of our debt securities.
Risks Relating to the Industry in Which We Compete
Our revenues are influenced by economic conditions that impact consumer spending.
Apparel is a cyclical industry that is dependent upon the overall level of consumer spending. Consumer purchases of discretionary items, including our products, generally decline during periods when disposable income is adversely affected or there is economic uncertainty. Our wholesale customers anticipate and respond to adverse changes in economic conditions and uncertainty by reducing inventories, canceling orders or increasing promotional activity. Our brand-dedicated stores are also affected by these conditions which may lead to a decline in consumer traffic and spending in these stores. As a result, factors that diminish consumer spending and confidence in any of the markets in which we compete, particularly deterioration in general economic conditions, the impact of foreign exchange fluctuations on tourism and tourist spending, volatility in investment returns, fear of unemployment, increases in energy costs or interest rates, housing market downturns, fear about and impact of pandemic illness, and other factors such as acts of war, natural disasters or terrorist or political events that impact consumer confidence, could reduce our sales and adversely affect our business and financial condition through their impact on our wholesale customers as well as their direct impact on us. These outcomes and behaviors have in the past, and may continue to, adversely affect our business and financial condition.
Intense competition in the global apparel industry could lead to reduced sales and prices.
We face a variety of competitive challenges in the global apparel industry from a variety of jeanswear and casual apparel companies, and competition has increased over the years due to factors such as the international expansion and increased presence of vertically integrated specialty stores; expansion into ecommerce by existing and new competitors; the proliferation of private labels and exclusive brands offered by department stores, chain stores and mass channel retailers; the introduction of jeans and casual apparel by well-known and successful athletic wear companies; and the movement of apparel companies who traditionally relied on wholesale distribution channels into their own retail distribution network. Some of these competitors have greater financial and marketing resources than we do and may be able to adapt to changes in consumer preferences or retail requirements more quickly, devote greater resources to the building and sustaining of their brand equity and the marketing and sale of their products both in stores and online. In addition, some of these competitors may be able to achieve lower product costs or adopt more aggressive pricing and discounting policies than we can. As a result, we may not be able to compete as effectively with them and may not be able to maintain or grow the demand for our products. These evolving competitive factors could reduce our sales and adversely affect our business and financial condition.
The success of our business depends upon our ability to offeron-trend and updated products at attractive price points.
The global apparel industry is characterized by ever-changing fashion trends and consumer preferences and by the rapid replication of new products by competitors. As a result, our success depends in large part on our
ability to develop, market and deliver innovative and stylish products at a pace, intensity, and price competitive with other brands in the markets in which we sell our products. In addition, we must create products at a range of price points that appeal to the consumers of both our wholesale customers and our dedicated retail stores situated in each of our diverse geographic regions. Our development and production cycles take place prior to full visibility into all of these factors for the coming seasons. Failure on our part to forecast consumer demand and market conditions and to regularly and rapidly develop innovative and stylish products and update core products could limit sales growth, adversely affect retail and consumer acceptance of our products, and negatively impact the consumer traffic in our dedicated retail stores. In addition, if we fail to accurately forecast consumer demand, we may experience excess inventory levels. Inventory levels in excess of consumer demand may result in inventory write-downs and the sale of excess inventory at discounted prices, which could have an adverse effect on the image and reputation of our brands and could adversely affect our gross margins. Moreover, our newer products may not produce as high a gross margin as our traditional products and thus may have an adverse effect on our overall margins and profitability.
The global apparel industry is subject to ongoing pricing pressure.
The apparel market is characterized by low barriers to entry for both suppliers and marketers, global sourcing through suppliers located throughout the world, trade liberalization, continuing movement of product sourcing to lower cost countries, regular promotional activity, and the ongoing emergence of new competitors with widely varying strategies and resources. These factors have contributed, and may continue to contribute, to intense pricing pressure and uncertainty throughout the supply chain. Pricing pressure has been exacerbated by the variability of raw materials in recent years. This pressure could have the following effects:
Any of these factors could adversely affect our business and financial condition.
Increases in the price of raw materials could increase our cost of goods and negatively impact our financial results.
The principal fabrics used in our products include cotton, blends, synthetics and wools. The prices we pay our suppliers for our products are dependent in part on the market price for raw materials used to produce them, primarily cotton. The price and availability of cotton may fluctuate substantially, depending on a variety of factors, including demand, acreage devoted to cotton crops and crop yields, weather, supply conditions, transportation costs, energy prices, work stoppages, government regulation and government policy, economic climates, market speculation and other unpredictable factors. Any and all of these factors may be exacerbated by global climate change. Cotton prices suffered from unprecedented variability and uncertainty in prior years and may fluctuate significantly again in the future. Increases in raw material costs, unless sufficiently offset by our pricing actions, may cause a decrease in our profitability and negatively impact our sales volume. These factors may also have an adverse impact on our cash and working capital needs as well as those of our suppliers.
Our business is subject to risks associated with sourcing and manufacturing overseas.
We import both raw materials and finished garments into all of our operating regions. Our ability to import products in a timely and cost-effective manner may be affected by conditions at ports or issues that otherwise affect transportation and warehousing providers, such as port and shipping capacity, labor disputes and work stoppages, political unrest, severe weather, or security requirements in the United States and other countries. These issues could delay importation of products or require us to locate alternative ports or warehousing providers to avoid disruption to our customers. These alternatives may not be available on short notice or could result in higher transportation costs, which could have an adverse impact on our business and financial condition, specifically our gross margin and overall profitability.
Substantially all of our import operations are subject to customs and tax requirements as well as trade regulations, such as tariffs and quotas set by governments through mutual agreements or bilateral actions. In addition, the countries in which our products are manufactured or imported may from time to time impose additional quotas, duties, tariffs or other restrictions on our imports or adversely modify existing restrictions. Adverse changes in these import costs and restrictions, or our suppliers’ failure to comply with customs regulations or similar laws, could harm our business. In this regard, the results of the November 2016 U.S. election and the Brexit vote have introduced greater uncertainty with respect to future tax and trade regulations. Changes in tax policy or trade regulations, such as the disallowance of tax deductions on imported merchandise or the imposition of new tariffs on imported products, could have a material adverse effect on our business and results of operations.
Our operations are also subject to the effects of international trade agreements and regulations that impose requirements that could adversely affect our business, such as setting quotas on products that may be imported from a particular country into our key markets such as the United States or the European Union.
Risks Relating to Our Business
We depend on a group of key wholesale customers for a significant portion of our revenues. A significant adverse change in a customer relationship or in a customer’s performance or financial position could harm our business and financial condition.
Sales to our top ten wholesale customers accounted for approximately 30% of our total net revenues in fiscal year 2016 and 31% of net revenues in both fiscal years 2015 and 2014. No customer represented 10% or more of net revenues in any of these years. While we have long-standing relationships with our wholesale customers, we do not have long-term contracts with them. As a result, purchases generally occur on anorder-by-order basis, and the relationship, as well as particular orders, can generally be terminated by either party at any time. If any major wholesale customer decreases or ceases its purchases from us, cancels its orders, reduces the floor space, assortments, fixtures or advertising for our products or changes its manner of doing business with us for any reason, such actions could adversely affect our business and financial condition. In addition, a decline in the performance or financial condition of a major wholesale customer—including bankruptcy or liquidation—could result in a material loss of revenues to us and cause us to limit or discontinue business with that customer, require us to assume more credit risk relating to our receivables from that customer or limit our ability to collect amounts related to previous purchases by that customer, all of which could adversely affect our own business and financial condition.
The retail industry in the United States has experienced substantial consolidation over the last decade, and further consolidation may occur. Consolidation in the retail industry typically results in store closures, centralized purchasing decisions, and increased emphasis by retailers on inventory management and productivity. In addition, we and other suppliers may experience increased customer leverage over us and greater exposure to credit risk as a result of industry consolidation. Any of the foregoing results can impact, and have adversely impacted in the past, our net revenues, margins and ability to operate efficiently.
We face risks arising from the restructuring of our operations and uncertainty with respect to our ability to achieve the estimated cost savings.
We continuously assess opportunities to streamline operations and fuel long-term profitable growth. Future charges related to such actions may harm our profitability in the periods incurred.
Implementation of global productivity actions presents a number of significant risks, including:
Because of these and other factors, such as the implementation delays we have experienced with our outsourcing of certain global business service activities, we cannot predict whether we will fully realize the purpose and anticipated operational benefits or cost savings of our global productivity actions and, if we do not, our business and results of operations may be adversely affected. Furthermore, if we experience adverse changes to our business, additional restructuring or reorganization activities may be required in the future.
We may be unable to maintain or increase our sales through our primary distribution channels.
In the United States, chain stores and department stores are the primary distribution channels for our Levi’s® and Dockers® products. Outside the United States, department stores, franchised stores, and independent jeanswear retailers have traditionally been our primary distribution channels.
We may be unable to maintain or increase sales of our products through these distribution channels for several reasons, including the following:
Further success by retailer private-labels and vertically integrated specialty stores may continue to adversely affect the sales of our products across all channels, as well as the profitability of our brand-dedicated stores. Additionally, our ability to secure or maintain retail floor space, market share and sales in these channels depends on our ability to offer differentiated products and to increase retailer profitability on our products, which could have an adverse impact on our margins.
We are a global company with significant revenues and earnings generated internationally, which exposes us to the impact of foreign currency fluctuations, as well as political and economic risks.
A significant portion of our revenues and earnings are generated internationally. In addition, a substantial amount of our products come from sources outside of the country of distribution. As a result, we are subject to the risks of doing business outside of the United States, including:
The functional currency for most of our foreign operations is the applicable local currency. As a result, fluctuations in foreign currency exchange rates affect the results of our operations and the value of our foreign assets and liabilities, including debt, which in turn may adversely affect results of operations and cash flows and the comparability ofperiod-to-period results of operations. For example, the June 2016 decision by the United Kingdom to leave the European Union (“Brexit”) has resulted in increased uncertainty in the economic and political environment in Europe and has caused increased fluctuations and unpredictability in currency exchange rates. Changes in currency exchange rates may also affect the relative prices at which we and foreign competitors sell products in the same market. Foreign policies and actions regarding currency valuation could result in actions by the United States and other countries to offset the effects of such fluctuations. Given the unpredictability and volatility of foreign currency exchange rates, ongoing or unusual volatility may adversely impact our business and financial conditions.
Furthermore, due to our global operations, we are subject to numerous domestic and foreign laws and regulations affecting our business, such as those related to labor, employment, worker health and safety, antitrust and competition, environmental protection, consumer protection, import/export, and anti- corruption, including but not limited to the Foreign Corrupt Practices Act which prohibits giving anything of value intended to influence the awarding of government contracts. Although we have put into place policies and procedures aimed at ensuring legal and regulatory compliance, our employees, subcontractors and agents could take actions that violate these requirements. Violations of these regulations could subject us to criminal or civil enforcement actions, any of which could have a material adverse effect on our business.
As a global company, we are exposed to risks of doing business in foreign jurisdictions and risks relating to U.S. policy with respect to companies doing business in foreign jurisdictions. Legislation or other changes in the U.S. tax laws could increase our U.S. income tax liability and adversely affect ourafter-tax profitability. For example, U.S. lawmakers are considering several U.S. corporate tax reform proposals, including, among others, proposals which could reduce or eliminate U.S. income tax deferrals on unrepatriated foreign earnings and eliminate tax incentives in exchange for a lower U.S. statutory tax rate. In addition, the results of the November 2016 U.S. election have introduced greater uncertainty with respect to future tax and trade regulations. Changes in tax policy or trade regulations, such as the disallowance of tax deductions on imported merchandise or the imposition of new tariffs on imported products, could have a material adverse effect on our business and results of operations.
If we encounter problems with distribution, our ability to deliver our products to market could be adversely affected.
We rely on company-owned and third-party distribution facilities to warehouse and ship products to our wholesale customers, retail stores and ecommerce consumers. As part of the pursuit for improved organizational agility and marketplace responsiveness, we have consolidated the number of distribution facilities we rely upon and continue to look for opportunities for further consolidation in certain regions. Such consolidation may make our operations more vulnerable to interruptions in the event of work stoppages, labor disputes, earthquakes, floods, fires or other natural disasters affecting our company-owned and third-party distribution centers. In addition, distribution capacity is dependent on the timely performance of services by third parties, including the transportation of products to and from their distribution facilities. Moreover, our distribution system includes computer-controlled and automated equipment, which may be subject to a number of risks related to security or computer viruses, the proper operation of software and hardware, power interruptions or other system failures. If we encounter problems with our distribution system whether company- owned or third-party, our ability to meet wholesale customer and ecommerce consumer expectations, manage inventory, complete sales and achieve operating efficiencies could be adversely affected.
Our efforts to expand our retail business may not be successful, which could impact our operating results.
One of our key strategic priorities is to become a world-class omni-channel retailer by expanding our consumer reach in brand-dedicated stores globally, including making selective investments in company-operated stores, dedicated ecommerce sites, franchisee and other dedicated store models. In many locations, we face major, established retail competitors who may be able to better attract customers and execute their retail strategies. In addition, a retail operating model involves substantial investments in equipment and property, information systems, inventory and personnel. Due to the high fixed-cost structure associated with these investments, a significant expansion in company-operated stores, a decline in sales or the closure of or poor performance of stores could result in significant costs and impacts to our margins. Our ability to grow our retail channel also depends on the availability of real estate that meets our criteria for traffic, square footage, demographics, and other factors. Failure to identify and secure adequate new locations, or failure to effectively manage the profitability of the fleet of stores, could have a material adverse effect on our results of operations.
If we are unable to effectively execute our ecommerce business our reputation and operating results may be harmed.
While still comprising a small portion of our net revenues, ecommerce has been our fastest growing business over the last several years. The success of our ecommerce business depends, in part, on third parties and factors over which we have limited control, including changing consumer preferences and buying trends relating to ecommerce usage, both domestically and abroad, as well as promotional or other advertising initiatives employed by our wholesale customers or other third parties on their ecommerce sites.
We are also vulnerable to certain additional risks and uncertainties associated with our ecommerce sites, including: changes in required technology interfaces; website downtime and other technical failures; costs and technical issues from website software upgrades; computer viruses; and changes in applicable federal and state regulations. In addition, we must keep up to date with competitive technology trends, including the use of new or improved technology, creative user interfaces and other ecommerce marketing tools such as paid search and mobile applications, among others, which may increase our costs and which may not succeed in increasing sales or attracting consumers. Our failure to successfully respond to these risks and uncertainties might adversely affect the sales in our ecommerce business, as well as damage our reputation and brands.
Additionally, the success of our ecommerce business and the satisfaction of our consumers depends on their timely receipt of our products. The efficient flow of our products requires that our company-operated and third-party operated distribution facilities have adequate capacity to support the current level of ecommerce operations, and any anticipated increased levels that may follow from the growth of our ecommerce business. If we encounter difficulties with our distribution facilities or in our relationships with the third parties who operate the facilities, or if any facilities were to shut down for any reason, including as a result of fire or other natural disaster, we could face shortages of inventory, resulting in “out of stock” conditions in the ecommerce sites we operate and those operated by our wholesale customers or other third parties, and we could incur significantly higher costs and longer lead times associated with distributing our products to our consumers and experience dissatisfaction from our consumers. Any of these issues could have a material adverse effect on our business and harm our reputation.
Any major disruption or failure of our information technology systems could adversely affect our business and operations.
We rely on various information technology systems, owned by us and third parties, to manage our operations. Over the last several years, we have been and continue to implement modifications and upgrades to our systems, including making changes to legacy systems, replacing legacy systems with successor systems with new functionality and acquiring new systems with new functionality. These types of activities subject us to inherent costs and risks associated with replacing and changing these systems, including impairment of our ability to fulfill customer orders, potential disruption of our internal control structure, substantial capital
expenditures, additional administration and operating expenses, retention of sufficiently skilled personnel to implement and operate the new systems, demands on management time, and other risks and costs of delays or difficulties in transitioning to new systems or of integrating new systems into our current systems. Our system implementations may not result in productivity improvements at a level that outweighs the costs of implementation, or at all. In addition, the difficulties with implementing new technology systems may cause disruptions in our business operations and have an adverse effect on our business and operations, if not anticipated and appropriately mitigated.
As we outsource functions, we become more dependent on the entities performing those functions. Disruptions or delays at our third-party service providers could adversely impact our operations.
As part of our long-term profitable growth strategy, we are continually looking for opportunities to provide essential business services in a more cost-effective manner. In some cases, this requires the outsourcing of functions or parts of functions that can be performed more effectively by external service providers. In 2014, we entered into an agreement with Wipro Limited to outsource certain information technology operations, and certain finance, human resource, consumer relations and customer service functions. While we believe we conduct appropriate diligence before entering into agreements with the outsourcing entity, the failure of one or more entities to meet our performance standards and expectations, including with respect to data security, provide them on a timely basis or to provide them at the prices we expect may have a material adverse effect on our results of operations or financial condition. In addition, we could face increased costs associated with finding replacement vendors or hiring new employees in order to return these servicesin-house. We may outsource other functions in the future, which would increase our reliance on third parties.
We face cybersecurity risks and may incur increasing costs in an effort to minimize those risks.
We utilize systems and websites that allow for the secure storage and transmission of proprietary or confidential information regarding our customers, employees, and others, including credit card information and personal identification information. As evidenced by companies who have recently suffered serious security breaches, we may be vulnerable to, and unable to anticipate or detect data security breaches and data loss, including rapidly evolving and increasingly sophisticated cybersecurity attacks. In addition, data and security breaches can also occur as a result of a breach by us or our employees or by persons with whom we have commercial relationships that result in the unauthorized release of personal or confidential information. In addition to our own databases, we use third-party service providers to store, process and transmit confidential or sensitive information on our behalf. Although we contractually require these service providers to implement and use reasonable security measures, we cannot control third parties and cannot guarantee that a security breach will not occur in the future either at their location or within their systems.
A security breach may expose us to a risk of loss or misuse of this information, and could result in significant costs to us, which may include, among others, potential liabilities to payment card networks for reimbursement of credit card fraud and card reissuance costs, including fines and penalties, potential liabilities from governmental or third-party investigations, proceedings or litigation and diversion of management attention. We could also experience delays or interruptions in our ability to function in the normal course of business, including delays in the fulfillment or cancellation of customer orders or disruptions in the manufacture and shipment of products. In addition, actual or anticipated attacks may cause us to incur costs, including costs to deploy additional personnel and protection technologies, train employees, and engage third-party experts and consultants. Any compromise or breach of our security could result in a violation of applicable privacy and other laws, significant legal and financial exposure, and a loss of confidence in our security measures, which could have an adverse effect on our results of operations and our reputation.
In addition, the regulatory environment surrounding information security and privacy is increasingly demanding, with frequent imposition of new and changing requirements. Compliance with changes in privacy and information security laws and standards may result in significant expense due to increased investment in technology and the development of new operational processes.
We currently rely on contract manufacturing of our products. Our inability to secure production sources meeting our quality, cost, working conditions and other requirements, or failures by our contractors to perform, could harm our sales, service levels and reputation.
We source approximately 95% of our products from independent contract manufacturers who purchase fabric and make our products and may also provide us with design and development services. As a result, we must locate and secure production capacity. We depend on independent manufacturers to maintain adequate financial resources, including access to sufficient credit, secure a sufficient supply of raw materials, and maintain sufficient development and manufacturing capacity in an environment characterized by continuing cost pressure and demands for product innovation andspeed-to-market. In addition, we currently do not have any material long-term contracts with any of our independent manufacturers. Under our current arrangements with our independent manufacturers, these manufacturers generally may unilaterally terminate their relationship with us at any time. Finally, while we have historically worked with numerous manufacturers, in the past several years we have begun consolidating the number of independent manufacturers from which we source our products. Reliance on a fewer number of independent manufacturers involves risk and any difficulties or failures to perform by our independent contract manufacturers could cause delays in product shipments or otherwise negatively affect our results of operations.
Our dependence on contract manufacturing could subject us to difficulty in obtaining timely delivery of products of acceptable quality. For example, a contractor’s failure to ship products to us in a timely manner or to meet our quality standards, or interference with our ability to receive shipments due to factors such as port or transportation conditions, could cause us to miss the delivery date requirements of our customers. Failing to make timely deliveries may cause our customers to cancel orders, refuse to accept deliveries, imposenon- compliance charges, demand reduced prices, or reduce future orders, any of which could harm our sales and margins.
We require contract manufacturers to meet our standards in terms of working conditions, environmental protection, raw materials, facility safety, security and other matters before we are willing to place business with them. As such, we may not be able to obtain the lowest-cost production. In addition, the labor and business practices of apparel manufacturers have received increased attention from the media,non-governmental organizations, consumers and governmental agencies in recent years. Any failure by our independent manufacturers to adhere to labor or other laws or appropriate labor or business practices, and the potential litigation, negative publicity and political pressure relating to any of these events, could harm our business and reputation.
Our suppliers may be impacted by economic conditions and cycles and changing laws and regulatory requirements which could impact their ability to do business with us or cause us to terminate our relationship with them and require us to find replacements, which we may have difficulty doing.
Our suppliers are subject to the fluctuations in general economic cycles, and global economic conditions may impact their ability to operate their businesses. They may also be impacted by the increasing costs of raw materials, labor and distribution, resulting in demands for less attractive contract terms or an inability for them to meet our requirements or conduct their own businesses. The performance and financial condition of a supplier may cause us to alter our business terms or to cease doing business with a particular supplier, or change our sourcing practices generally, which could in turn adversely affect our business and financial condition.
Regulatory developments such as the use of “conflict” minerals mined from the Democratic Republic of Congo and adjoining countries could affect the sourcing and availability of raw materials used by our suppliers in the manufacturing of certain of our products. We have been and may continue to be subject to costs associated with regulations, including for the diligence pertaining to the presence of any conflict minerals used in our products and the cost of remediation and other changes to products, processes, or sources of supply as a consequence of such verification activities. The impact of the regulations may result in a limited pool of suppliers
who provide conflict free metals, and we cannot assure you that we will be able to obtain products in sufficient quantities or at competitive prices. Also, because our supply chain is complex, we may face reputational challenges with our consumers and other stakeholders if we are unable to sufficiently verify the origins for all metals used in the products we sell.
If one or more of our counterparty financial institutions default on their obligations to us, we may incur significant losses.
As part of our hedging activities, we enter into transactions involving derivative financial instruments, which may include forward contracts, commodity futures contracts, option contracts, collars and swaps, with various financial institutions. In addition, we have significant amounts of cash, cash equivalents and other investments on deposit or in accounts with banks or other financial institutions in the United States and abroad. As a result, we are exposed to the risk of default by or failure of counterparty financial institutions. The risk of counterparty default or failure may be heightened during economic downturns and periods of uncertainty in the financial markets. If one of our counterparties were to become insolvent or file for bankruptcy, our ability to recover losses incurred as a result of default or our assets that are deposited or held in accounts with such counterparty may be limited by the counterparty’s liquidity or the applicable laws governing the insolvency or bankruptcy proceedings. In the event of default or failure of one or more of our counterparties, we could incur significant losses, which could negatively impact our results of operations and financial condition.
The loss of members of the Company’s executive management and other key employees could harm our business.
Our future success depends in part on the continued service of our executive management team and other key employees, and the loss of the services of any key individual could harm our business. Our future success depends, in part, on our ability to recruit, retain and motivate our employees sufficiently, both to maintain our current business and to execute our strategic initiatives. Competition for experienced and well- qualified employees in our industry is particularly intense in many of the places where we do business, and we may not be successful in attracting and retaining such personnel.
Most of the employees in our production and distribution facilities are covered by collective bargaining agreements, and any material job actions could negatively affect our results of operations.
In North America, most of our distribution employees are covered by various collective bargaining agreements, and outside North America, most of our production and distribution employees are covered by either industry-sponsored and/or government-sponsored collective bargaining mechanisms. Any work stoppages or other job actions by these employees could harm our business and reputation.
Our licensees and franchisees may not comply with our product quality, manufacturing standards, marketing and other requirements which could negatively affect our reputation and business.
We license our trademarks to third parties for manufacturing, marketing and distribution of various products. While we enter into comprehensive agreements with our licensees covering product design, product quality, sourcing, manufacturing, marketing and other requirements, our licensees may not comply fully with those agreements.Non-compliance could include marketing products under our brand names that do not meet our quality and other requirements or engaging in manufacturing practices that do not meet our supplier code of conduct. These activities could harm our brand equity, our reputation and our business.
In addition, we enter into franchise agreements with unaffiliated franchisees to operate stores and, in limited circumstances, websites, in many countries around the world. Under these agreements, third parties operate, or will operate, stores and websites that sell apparel and related products under our brand names. While the agreements we have entered into and plan to enter into in the future provide us with certain termination rights,
the value of our brands could be impaired to the extent that these third parties do not operate their stores in a manner consistent with our requirements regarding our brand identities and customer experience standards. Failure to protect the value of our brands, or any other harmful acts or omissions by a franchisee, could have an adverse effect on our results of operations and our reputation.
Our success depends on the continued protection of our trademarks and other proprietary intellectual property rights.
Our trademarks and other intellectual property rights are important to our success and competitive position, and the loss of or inability to enforce trademark and other proprietary intellectual property rights could harm our business. We devote substantial resources to the establishment and protection of our trademark and other proprietary intellectual property rights on a global basis. Our efforts to establish and protect our trademark and other proprietary intellectual property rights may not be adequate to prevent imitation of our products by others or to prevent others from seeking to block sales of our products. Unauthorized copying of our products or unauthorized use of our trademarks or other proprietary rights may not only erode sales of our products but may also cause significant reputational harm to our brand names and our ability to effectively represent ourselves to our customers, contractors, suppliers and/or licensees. Moreover, others may seek to assert rights in, or ownership of, our trademarks and other intellectual property, including through civil and/or criminal prosecution. We may not be able to successfully resolve those claims, which may result in financial liability and criminal penalties. In addition, the laws and enforcement mechanisms of some foreign countries may not allow us to protect our proprietary rights to the same extent as we are able to in the United States and other countries.
We have substantial liabilities and cash requirements associated with postretirement benefits, pension and our deferred compensation plans.
Our postretirement benefits, pension, and our deferred compensation plans result in substantial liabilities on our balance sheet. These plans and activities have and will generate substantial cash requirements for us, and these requirements may increase beyond our expectations in future years based on changing market conditions. The difference between plan obligations and assets, or the funded status of the plans, is a significant factor in determining the net periodic benefit costs of our pension plans and the ongoing funding requirements of those plans. Many variables, such as changes in interest rates, mortality rates, health care costs, investment returns, and/or the market value of plan assets can affect the funded status of our defined benefit pension, other postretirement, and postemployment benefit plans and cause volatility in the net periodic benefit cost and future funding requirements of the plans. Plan liabilities may impair our liquidity, have an unfavorable impact on our ability to obtain financing and place us at a competitive disadvantage compared to some of our competitors who do not have such liabilities and cash requirements.
Natural disasters, public health crisis, political crisis, and other catastrophic events or other events outside of our control may damage our facilities or the facilities of third parties on which we depend and could impact consumer spending.
Our global headquarters and the headquarters of our Americas region are both located in California near major geologic faults that have experienced earthquakes in the past. An earthquake or other natural disaster or power shortages or outages could disrupt operations or impair critical systems. Any of these disruptions or other events outside of our control could affect our business negatively, harming our operating results. In addition, if any of our facilities, including our manufacturing, finishing or distribution facilities or our company- operated or franchised stores, or the facilities of our suppliers or customers, is affected by natural disasters, such as earthquakes, tsunamis, power shortages or outages, floods or monsoons; public health crisis, such as pandemics and epidemics; political crisis, such as terrorism, war, political instability or other conflict; or other events outside of our control, our business and operating results could suffer. Moreover, these types of events could negatively impact consumer spending in the impacted regions or depending upon the severity, globally, which could adversely impact our operating results. Disasters occurring at our vendors’ manufacturing facilities could impact our reputation and our customers’ perception of our brands.
General
In connection with the issuance of €475.0$500.0 million old notes on February 28, 2017,April 17, 2020, we entered into a registration rights agreement with the initial purchasers for the old notes, which provides for the exchange offer. A copy of the registration rights agreement is filed as an exhibit to the registration statement of which this prospectus is a part.
Under the registration rights agreements,agreement, we agreed to:
file and cause to become effective a registration statement with respect to an offer to exchange the old notes for the exchange notes; or
in certain circumstances file and cause to become effective a shelf registration statement with respect to the resale of the old notes.
The exchange offer being made hereby, if completed by September 26, 2017November 13, 2020 will satisfy those requirements under the registration rights agreement. If the exchange offer is not completed by September 26, 2017November 13, 2020 and a shelf registration statement has not been declared effective, then the interest rates on the old notes will increase by 0.25% per annum during the90-day period immediately following September 26, 2017November 13, 2020 and will increase by 0.25% per annum at the end of each subsequent90-day period until the exchange offer is completed or a shelf registration statement is declared effective. In no event shall the additional interest exceed 1% per annum.
Purpose and Effect of the Exchange Offer
The exchange offer will give holders of old notes the opportunity to exchange the old notes for exchange notes that have been registered under the Securities Act. The exchange notes will be substantially similar in all material respects to the old notes except that the exchange notes have been registered under the Securities Act and certain transfer restrictions and registration rights relating to the old notes do not apply to the exchange notes. Upon the effectiveness of the registration statement of which the prospectus is a part, we will beWe are subject to the informational requirements of the Exchange Act. To satisfy those requirements, we file reports and other information with the SEC that will be made available to the holders of the old notes, if any are outstanding after the exchange offer, and the exchange notes and the general public.
The exchange offer is not being made to, nor will we accept tenders for exchange from, holders of old notes in any jurisdiction in which the exchange offer or the acceptance of it would not be in compliance with the securities or blue sky laws of the jurisdiction.
If you participate in the exchange offer, you will receive an exchange note of equal principal amount and, with limited exceptions, receive securities that are freely tradable and not subject to restrictions on transfer. See “—Resales of Exchange Notes” for more information relating to your ability to transfer the exchange notes.
If you are eligible to participate in this exchange offer and you do not tender your unregistered notes as described in this prospectus, you will not have any further registration rights, except in limited circumstances. Old notes will continue to bear interest at the current rate and will continue to be subject to all of the terms and conditions specified in the indenture, including restrictions on transfer under the Securities Act.
Each broker-dealer that receives exchange notes for its own account in exchange for old notes, where such old notes were acquired by such broker-dealer as a result of market-making activities or other trading activities, must acknowledge that it will deliver a prospectus in connection with any resale of such exchange notes. See “Plan of Distribution.”
Terms of the Exchange Offer
Upon the terms and subject to the conditions set forth in this prospectus and in the letter of transmittal, we will accept for exchange any old notes properly tendered and not withdrawn before expiration of the exchange
offer. The date of acceptance for exchange of the old notes and completion of the exchange offer is the exchange date, which will be the thirdfirst business day following the expiration date (as defined below) unless we extend the date as described in this prospectus. The old notes may be tendered only in a minimum denomination of €100,000$2,000 and integral multiples of €1,000$1,000 principal amount thereafter. The exchange notes will be delivered promptly after the expiration date.
The form and terms of the exchange notes will be substantially identical to the form and terms of the old notes, except the exchange notes:
will be registered under the Securities Act; and
will not bear legends restricting their transfer.
The exchange notes will evidence the same debt as the old notes. The exchange notes will be issued under and entitled to the benefits of the same indenture that authorized the issuance of the old notes. For a description of the indenture, see the caption “Description of Exchange Notes.”
The exchange offer is not conditioned upon any minimum aggregate principal amount of old notes being tendered for exchange.
As of the date of this prospectus, €475.0$500.0 million aggregate principal amount of the old notes are outstanding. There will be no fixed record date for determining registered holders of old notes entitled to participate in the exchange offer.
We intend to conduct the exchange offer in accordance with the applicable requirements of the Securities Act, the Exchange Act, and the rules and regulations of the SEC. Old notes that are not exchanged in the exchange offer will remain outstanding and continue to accrue interest and will be entitled to the rights and benefits their holders have under the indenture.
We will be deemed to have accepted for exchange properly tendered old notes when we have given oral or written notice of the acceptance to the exchange agent. The exchange agent will act as agent for the holders of old notes who surrender them in the exchange offer for the purposes of receiving the exchange notes from us and delivering the exchange notes to their holders. The exchange agent will make the exchange promptly on or after the date of acceptance for exchange of the old notes. The exchange date will be the first business day following the expiration date unless it is extended as described in this prospectus. We expressly reserve the right to amend or terminate the exchange offer, and not to accept for exchange any old notes not previously accepted for exchange, upon the occurrence of any of the conditions specified below under the caption “—Conditions.”
Holders who tender old notes in the exchange offer will not be required to pay brokerage commissions or fees or, subject to the instructions in the letter of transmittal, transfer taxes with respect to the exchange of old notes. We will pay all charges and expenses, other than applicable taxes described below, in connection with the exchange offer. It is important that you read the caption “—Fees and Expenses” for more details regarding fees and expenses incurred in the exchange offer.
Expiration of the Exchange Offer; Extensions; Amendments
The exchange offer will expire at 11:5:00 a.m.p.m., New York City time, on , 2017.2020 (the “expiration date”). The exchange offer can be extended by us in our sole discretion, in which case the term “expiration date” shall mean the latest date and time to which the exchange offer is extended.
In order to extend the exchange offer, we will notify the exchange agent orally, confirmed in writing, or in writing, of any extension. We will notify the registered holders of old notes by public announcement of the extension no later than 9:00 a.m., New York City time, on the business day after the previously scheduled expiration of the exchange offer.
Without limiting the manner in which we may choose to make public announcements of any delay in acceptance, extension, termination or amendment of the exchange offer, we will have no obligation to publish, advertise, or otherwise communicate any public announcement, other than by making a timely release to a financial news service.
Conditions
Despite any other term of the exchange offer, we will not be required to accept for exchange any old notes and we may terminate or amend the exchange offer as provided in this prospectus before the expiration of the exchange offer if in our reasonable judgment:
the exchange notes to be received will not be tradeable by the holder, without restriction under the Securities Act and the Exchange Act and without material restrictions under the blue sky or securities laws of substantially all of the states of the United States;
the exchange offer, or the making of any exchange by a holder of old notes, would violate applicable law or any applicable interpretation of the staff of the SEC; or
any action or proceeding has been instituted or threatened in any court or by or before any governmental agency with respect to the exchange offer that would reasonably be expected to impair our ability to proceed with the exchange offer.
We will not be obligated to accept for exchange the old notes of any holder that has not made to us:
the representations described under the caption “—Resale of Exchange Notes”; and
any other representations that may be reasonably necessary under applicable SEC rules, regulations or interpretations to make available to us an appropriate form for registration of the exchange notes under the Securities Act.
We expressly reserve the right, at any time or at various times, to extend the period of time during which the exchange offer is open. Consequently, we may delay acceptance of any old notes by giving oral or written notice of an extension to their holders. Any delay in accepting any old notes will be consistent with Rule14e-1(c) under the Exchange Act. During an extension, all old notes previously tendered will remain subject to the exchange offer, and we may accept them for exchange. We will return any old notes that we do not accept for exchange for any reason without expense to their tendering holder promptly after the expiration or termination of the exchange offer.
We expressly reserve the right to amend or terminate the exchange offer and to reject for exchange any old notes not previously accepted for exchange, upon the occurrence of any of the conditions of the exchange offer specified above. By public announcement we will give oral or written notice of any extension, amendment,non-acceptance or termination to the holders of the old notes promptly. If we amend the exchange offer in a manner determined by us to constitute a material change, including the waiver of a material condition, we will promptly disclose that amendment by means of a prospectus supplement and extend the exchange offer, if necessary, so that at least five business days remain in the exchange offer following notice of the material change.
These conditions are solely for our benefit and we may assert them regardless of the circumstances that may give rise to them or waive them in whole or in part at any time or at various times in our sole discretion. If we fail at any time to exercise any of the foregoing rights, this failure will not constitute a waiver of that right. Each of these rights will be deemed an ongoing right that we may assert at any time or at various times.
We will not accept for exchange any old notes tendered, and will not issue exchange notes in exchange for any old notes, if at that time a stop order is threatened or in effect with respect to the registration statement of which this prospectus constitutes a part or the qualification of the indenture under the Trust Indenture Act of 1939, as amended.
Procedures for Tendering
We have forwarded to you, along with this prospectus, a letter of transmittal relating to this exchange offer. Because all of the old notes are held in book-entry accounts maintained by the exchange agent at DTC, a holder should not submit a letter of transmittal. However, all holders who exchange their old notes for exchange notes in accordance with the procedures outlined below will be deemed to have acknowledged receipt of, and agreed to be bound by, and to have made all of the representations and warranties contained in the letter of transmittal.
If you beneficially own old notes and those notes are held through a broker, dealer, commercial bank, trust company or other nominee or custodian and you wish to tender your old notes in the exchange offer, you should contact the holder through whom your old notes are held as soon as possible and instruct that holder to tender the old notes on your behalf and comply with the procedures for book-entry transfer as provided under “—Book-Entry Transfer.”
The tender by a holder that is not withdrawn before expiration of the exchange offer will constitute an agreement between that holder and us in accordance with the terms and subject to the conditions set forth in this prospectus.prospectus and in the letter of transmittal. If a holder tenders less than all of the old notes held by the holder, the tendering holder should so indicate. The amount of old notes delivered to the exchange agent will be deemed to have been tendered unless otherwise indicated.
The method of delivery of old notes and all other required documents or transmission of electronic exchange instruction,an agent’s message, as described under “—Book Entry Transfer,” to the relevant clearing system,exchange agent is at the election and risk of the holder. Holders should allow sufficient time to assure delivery of old notes before expiration of the exchange offer.
We will determine in our sole discretion all questions as to the validity, form, eligibility, including time of receipt, acceptance and withdrawal of tendered old notes. Our determination will be final and binding. We reserve the absolute right to reject any old notes not properly tendered or any old notes the acceptance of which would, in the opinion of our counsel, be unlawful. We also reserve the right to waive any defects, irregularities or conditions of tender as to particular old notes. Our interpretation of the terms and conditions of the exchange offer, including the instructions in the letter of transmittal, will be final and binding on all parties.
Unless waived, any defects or irregularities in connection with tenders of old notes must be cured within the time that we determine. Although we intend to notify holders of defects or irregularities with respect to tenders of old notes, neither we, the exchange agent nor any other person will incur any liability for failure to give notification. Tenders of old notes will not be deemed made until those defects or irregularities have been cured or waived.
Old notes received by the exchange agent that are not properly tendered and as to which the defects or irregularities have not been cured or waived will be returned by the exchange agent without cost to the tendering holder, unless otherwise provided in the letter of transmittal, promptly following the expiration date.
In addition, we reserve the right in our sole discretion to (a) purchase or make offers for any old notes that remain outstanding subsequent to the expiration date, and (b) to the extent permitted by applicable law, purchase old notes in the open market, in privately negotiated transactions or otherwise. The terms of any such purchases or offers may differ from the terms of the exchange offer.
Book-Entry Transfer
A holderThe exchange agent has established an account with respect to the old notes at DTC for the purpose of facilitating the exchange offer. Any financial institution that is a participant in DTC’s system may make book-entry delivery of old notes with Euroclear or Clearstream wishingby causing DTC to participate intransfer such old notes into the exchange offer should submit, or arrange to have submitted on its behalf, an electronic exchange instruction to the relevant clearing systemagent’s DTC account in accordance with DTC’s Automated Tender Offer Program (“ATOP”) procedures for such transfer. The exchange
for old notes so tendered will only be made after a timely confirmation of a book-entry transfer of old notes into the procedures of,exchange agent’s account, and within the time limits specified by, the relevant clearing system fortimely receipt by the exchange agent.
Only direct participants in Euroclear or Clearstream may submit electronic exchange instructions through Euroclear and Clearstream. A holderagent of old notes that is not a direct participant in Euroclear or Clearstream must arrange for the direct participant through which they hold the old notes to submit an electronic exchange instruction on their behalf to the relevant clearing system prior to the deadline specified by the relevant clearing system. Beneficial owners of old notes who are not direct participants in Euroclear or Clearstream must contact their custodian bank, depositary, broker, trust company or other nominee) to arrange for the direct participant in
Euroclear or Clearstream, as the case may be, through which they hold old notes to submit a valid electronic exchange instruction to the relevant clearing system prior to the expiration date. Tender of old notes will be accepted only in minimum denominations of €100,000 and integral multiples of €1,000 excess thereof.agent’s message.
The “electronic exchange instruction”term “agent’s message” means an instruction to Euroclear or Clearstream, as applicable, that includes:
Resale of Exchange Notes
Based on interpretations by the SEC set forth in this prospectus.
Tenders of old notes including electronic exchange instructions, must be deliveredno-action letters issued to and received by the applicable clearing system in accordance with their procedures and the deadlines established by them, which must in any event be atthird parties, we believe that holders may resell or prior to the expiration date. Holders of old notes are responsible for informing themselves of those deadlines and for arranging the due and timely delivery of electronic acceptance instructions to the applicable clearing system.
Electronic Exchange Instructions; Deemed Representations
Subject to and effective upon the acceptance for exchange and issuance of exchange notes in exchange for old notes tendered by an electronic exchange instruction in accordance with the terms and subject to the conditions set forth herein, by arranging for such instruction to be submitted through a direct participant in Euroclear or Clearstream, a tendering holder of old notes:
any exchange notes that the holder receives will be acquired in the ordinary course of its business;
the holder has no arrangement or understanding with any person or entity to participate in the distribution of the exchange notes withinnotes;
if the meaningholder is not a broker-dealer, that it is not engaged in and does not intend to engage in the distribution of the Securities Act;exchange notes; and
If any holder is our “affiliate,” or is engaging in, or intends to engage in, or has any arrangement or understanding with any person to participate in, a distribution of distributing the exchange notes, or is not acquiring the exchange notes in the ordinary course of its business, then:
| • | it cannot rely on the position of the SEC set forth in Morgan Stanley & Co. Incorporated (available June 5, 1991) and Exxon Capital Holdings Corporation (available May 13, 1988), as interpreted in the SEC’s letter to Shearman & Sterling, dated July 2, 1993, or similar no-action letters; and |
in the absence of an exception from the position stated immediately above, it must comply with all applicablethe registration and prospectus delivery requirements of the Securities Act in connection with a secondaryany resale of the exchange notes.
If any holder is a broker-dealer that will receive exchange notes and it cannot rely on the position of the SEC’s stafffor its own account in theirno-action letters issuedexchange for persons who are not broker-dealers; and
In addition, a tendering holderletter of old notes in a foreign jurisdiction:
Withdrawal of Tenders
Except as otherwise provided in this prospectus, holders of old notes may withdraw their tenders at any time before expiration of the exchange offer.
For a withdrawal to be effective for Eurocleareffective:
The exchange agent must receive a written notice of withdrawal, which may be by telegram, telex, facsimile transmission or Clearstream participants, holders must comply with their respective standard operating procedures for electronic tenders and letter, at one of the addresses set forth below under the caption “—Exchange Agent”; or
the exchange agent must receive an electronica computer-generated notice of withdrawal from Euroclear or Clearstream.transmitted by DTC on behalf of the holder in accordance with the standard operating procedures of DTC.
Any notice of withdrawal must must:
specify the name and number of the account at Euroclear or Clearstreamperson who tendered the old notes to be credited withwithdrawn;
identify the withdrawn old notes to be withdrawn, including the certificate number or numbers and otherwise comply withprincipal amount of the proceduresold notes to be withdrawn;
be signed by the person who tendered the old notes in the same manner as the original signature on the letter of Euroclear or Clearstream, as applicable.transmittal, including any required signature guarantees; and
specify the name in which the old notes are to be re-registered, if different from that of the withdrawing holder.
If old notes have been tendered pursuant to the procedure for book-entry transfer described above, any notice of withdrawal must specify the name and number of the account at Euroclear or Clearstream, Luxembourg, as the case may be,DTC to be credited with the withdrawn old notes and otherwise comply with the procedures of the facility.
We will determine all questions as to the validity, form and eligibility, including time of receipt, of notices of withdrawal, and our determination shall be final and binding on all parties. We will deem any old notes so withdrawn not to have been validly tendered for exchange for purposes of the exchange offer. We will return any old notes that have been tendered for exchange but that are not exchanged for any reason to their holder without cost to the holder promptly after withdrawal, rejection of tender or termination of the exchange offer. You may retender properly withdrawn old notes by following one of the procedures described under the caption “—Procedures for Tendering” above at any time on or before expiration of the exchange offer.
Exchange Agent
D.F. King Ltd.Wells Fargo Bank, National Association has been appointed as exchange agent for the exchange offer. You should direct questions and requests for assistance and requests for additional copies of this prospectus or of the letter of transmittal to the exchange agent addressed as follows:
For all requests and deliveries:
D.F. King Ltd.Wells Fargo Bank, National Association
Email:Levi@dfkingltd.comCorporate Trust Operations
Website:https://sites.dfkingltd.com/LeviSixth & Marquette Avenue
In London:MAC: N9303-121
125 Wood StreetP.O. Box 1517
London EC2V 7ANMinneapolis, MN 55479
United KingdomAttention: Bondholder Communications
Telephone: +44 20 7920 9700By Facsimile Transmission (for Eligible Institutions Only): (612) 667-6282
In Hong Kong:To Confirm by Telephone or for Information Call: (800) 344-5128
Hong Kong
Suite 1601, 16/F, Central Tower
28 Queen’s Road Central
Hong Kong
Telephone: +852 3953 7230
Fees and Expenses
We will bear the expenses of soliciting tenders. The principal solicitation is being made by mail or electronic mail; however, we may make additional solicitations by facsimile, telephone or in person by our officers and regular employees and those of our affiliates.
We have not retained any dealer-manager in connection with the exchange offer and will not make any payments to broker-dealers or others soliciting acceptances of the exchange offer. We will, however, pay the exchange agent reasonable and customary fees for its services and reimburse it for its related reasonableout-of-pocket expenses.
We will pay the cash expenses to be incurred in connection with the exchange offer, including the following:
SEC registration fees;
fees and expenses of the exchange agent and trustee;
our accounting and legal fees; and
our printing and mailing costs.
Transfer Taxes
We will pay all transfer taxes, if any, applicable to the exchange of old notes under the exchange offer. The tendering holder, however, will be required to pay any transfer taxes, whether imposed on the registered holder or any other person, if:
certificates representing old notes for principal amounts not tendered or accepted for exchange are to be delivered to, or are to be issued in the name of, any person other than the registered holder of old notes tendered;
exchange notes are to be delivered to, or issued in the name of, any person other than the registered holder of the old notes; or
tendered old notes are registered in the name of any person other than the person signing the letter of transmittal; or
a transfer tax is imposed for any reason other than the exchange of old notes under the exchange offer.
If satisfactory evidence of payment of transfer taxes is not submitted with the letter of transmittal, the amount of any transfer taxes will be billed to the tendering holder.
Accounting Treatment
As the terms of the exchange notes and the old notes are identical in all material respects, we will record the exchange notes in our accounting records at the same carrying value as the old notes as reflected in our accounting records on the date of exchange. Accordingly, we will not recognize any gain or loss for accounting purposes in connection with the exchange offer. Costs of the exchange offer will be deferred and amortized to interest expense over the term of the notes.
Other
Participation in the exchange offer is voluntary, and you should carefully consider whether to accept. We urge you to consult your financial and tax advisors in making your own decision on what action to take.
We may in the future seek to acquire untendered old notes in open market or privately negotiated transactions, through subsequent exchange offers or otherwise. However, we have no present plans to acquire any old notes that are not tendered in the exchange offer or to file a registration statement to permit resales of any untendered old notes.
We will not receive any cash proceeds from the issuance of the exchange notes under the exchange offer. In consideration for issuing the exchange notes as contemplated by this prospectus, we will receive the old notes in like principal amount, the terms of which are identical in all material respects to the exchange notes. The old notes surrendered in exchange for the exchange notes will be retired and canceled and cannot be reissued. Accordingly, the issuance of the exchange notes will not result in any increase in our indebtedness or capital stock.
The following table sets forth our cash and cash equivalents and capitalization as of February 26, 2017, and as adjusted to give effect to the issuance of the old notes and the application of the net proceeds from issuance of the old notes, together with cash on hand, to purchase our 2022 Notes in a tender offer we concluded in February 2017 (the “Tender Offer”) and to redeem 2022 notes not tendered in the Tender Offer. There have been no material changes in our capitalization since February 26, 2017, other than as disclosed below.
| As of February 26, 2017 | ||||||||
| Actual | As Adjusted(1) | |||||||
| (Dollars in thousands) | ||||||||
Cash and cash equivalents | $ | 368,623 | $ | 316,623 | ||||
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Capital leases | $ | 15,428 | $ | 15,428 | ||||
Long-term debt: | ||||||||
Unsecured: | ||||||||
6 7⁄8% Senior notes due 2022(2) | 524,318 | — | ||||||
5.00% Senior notes due 2025(2) | 482,307 | 482,307 | ||||||
3 3⁄8% Senior notes due 2027(3) | — | 503,500 | ||||||
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Total unsecured | 1,006,625 | 985,807 | ||||||
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Less: current maturities | — | — | ||||||
Total long-term debt | $ | 1,006,625 | $ | 985,807 | ||||
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Short-term debt | ||||||||
Secured | ||||||||
Senior revolving credit facility(4) | $ | — | $ | — | ||||
Unsecured: | ||||||||
Short-term borrowings | 34,150 | 34,150 | ||||||
Current maturities of long-term debt | — | — | ||||||
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Total short-term debt | $ | 34,150 | $ | 34,150 | ||||
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Total long-term and short-term debt, excluding capital leases | $ | 1,040,775 | $ | 1,019,957 | ||||
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SELECTED HISTORICAL CONSOLIDATED FINANCIAL DATA
The following table sets forth our summary historical consolidated financial data. The summary statements of income data and cash flow data for fiscal years 2016, 2015 and 2014 and the balance sheet data as of November 27, 2016 and November 29, 2015, are derived from our audited consolidated financial statements included in this prospectus. The summary statements of income data and cash flow data for fiscal years 2013 and 2012 and the balance sheet data as of February 28, 2016, November 30, 2014, November 24, 2013 and November 25, 2012, are derived from our consolidated financial statements not included in this prospectus.
The summary statements of income data and cash flow data for the quarterly periods ended February 26, 2017, and February 28, 2016, and the balance sheet data as of February 26 2017 and February 28, 2016, have been derived from our unaudited consolidated financial statements included in this prospectus. Income data and cash flow data for the three months ended February 26, 2017 and February 28, 2016, are not necessarily indicative of the results for the Company’s full fiscal year.
The financial data set forth below should be read in conjunction with, and are qualified by reference to, “Management’s Discussion and Analysis of Financial Condition and Results of Operations,” our consolidated financial statements and the related notes to those financial statements, which for the Company’s first fiscal quarters in 2017 and 2016 and fiscal years 2016, 2015 and 2014 are included in this prospectus.
| Three Months Ended | Fiscal Year Ended | |||||||||||||||||||||||||||
| February 26, 2017 | February 28, 2016 | November 27, 2016 | November 29, 2015 | November 30, 2014 | November 24, 2013 | November 25, 2012 | ||||||||||||||||||||||
| (Dollars in thousands) | ||||||||||||||||||||||||||||
Statements of Income Data: | ||||||||||||||||||||||||||||
Net revenues | $ | 1,101,991 | $ | 1,056,500 | $ | 4,552,739 | $ | 4,494,493 | $ | 4,753,992 | $ | 4,681,691 | $ | 4,610,193 | ||||||||||||||
Cost of goods sold | 537,438 | 496,902 | 2,223,727 | 2,225,512 | 2,405,552 | 2,331,219 | 2,410,862 | |||||||||||||||||||||
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Gross profit | 564,553 | 559,598 | 2,329,012 | 2,268,981 | 2,348,440 | 2,350,472 | 2,199,331 | |||||||||||||||||||||
Selling, general and administrative expenses | 456,213 | 441,163 | 1,866,493 | 1,823,863 | 1,906,164 | 1,884,965 | 1,865,352 | |||||||||||||||||||||
Restructuring, net | — | 1,848 | 312 | 14,071 | 128,425 | — | — | |||||||||||||||||||||
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Operating income | 108,340 | 116,587 | 462,207 | 431,047 | 313,851 | 465,507 | 333,979 | |||||||||||||||||||||
Interest expense | (19,934 | ) | (14,902 | ) | (73,170 | ) | (81,214 | ) | (117,597 | ) | (129,024 | ) | (134,694 | ) | ||||||||||||||
Loss on early extinguishment of debt | — | — | — | (14,002 | ) | (20,343 | ) | (689 | ) | (8,206 | ) | |||||||||||||||||
Other income (expense), net | 408 | (2,219 | ) | 18,223 | (25,433 | ) | (22,057 | ) | (13,181 | ) | 4,802 | |||||||||||||||||
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Income before taxes | 88,814 | 99,466 | 407,260 | 310,398 | 153,854 | 322,613 | 195,881 | |||||||||||||||||||||
Income tax expense | 28,693 | 33,175 | 116,051 | 100,507 | 49,545 | 94,477 | 54,922 | |||||||||||||||||||||
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Net income | 60,121 | 66,291 | 291,209 | 209,891 | 104,309 | 228,136 | 140,959 | |||||||||||||||||||||
Net loss (income) attributable to noncontrolling interest | 22 | (455 | ) | (157 | ) | (455 | ) | 1,769 | 1,057 | 2,891 | ||||||||||||||||||
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Net income attributable to Levi Strauss & Co. | $ | 60,143 | $ | 65,836 | $ | 291,052 | $ | 209,436 | $ | 106,078 | $ | 229,193 | $ | 143,850 | ||||||||||||||
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Statements of Cash Flow Data: | ||||||||||||||||||||||||||||
Net cash flow provided by (used for): | ||||||||||||||||||||||||||||
Operating activities | $ | 49,049 | $ | 46,078 | $ | 306,550 | $ | 218,332 | $ | 232,909 | $ | 411,268 | $ | 530,976 | ||||||||||||||
Investing activities | (15,997 | ) | (17,758 | ) | (68,348 | ) | (80,833 | ) | (71,849 | ) | (92,798 | ) | (75,198 | ) | ||||||||||||||
Financing activities | (42,502 | ) | (73,571 | ) | (173,549 | ) | (94,895 | ) | (341,676 | ) | (230,509 | ) | (250,939 | ) | ||||||||||||||
Balance Sheet Data: | ||||||||||||||||||||||||||||
Cash and cash equivalents | $ | 368,623 | $ | 271,101 | $ | 375,563 | $ | 318,571 | $ | 298,255 | $ | 489,258 | $ | 406,134 | ||||||||||||||
Working capital | 927,398 | 682,501 | 924,404 | 681,982 | 603,202 | 867,158 | 765,270 | |||||||||||||||||||||
Total assets | 2,930,315 | 2,838,231 | 2,987,096 | 2,884,395 | 2,906,901 | 3,106,330 | 3,149,038 | |||||||||||||||||||||
Total debt, excluding capital leases | 1,040,775 | 1,046,022 | 1,045,178 | 1,152,541 | 1,209,624 | 1,524,998 | 1,708,172 | |||||||||||||||||||||
Total capital leases | 15,428 | 12,466 | 16,811 | 12,907 | 12,142 | 10,833 | 2,022 | |||||||||||||||||||||
Total Levi Strauss & Co. stockholders’ equity (deficit) | 504,760 | 319,365 | 509,555 | 330,268 | 153,243 | 171,666 | (106,921 | ) | ||||||||||||||||||||
Other Financial Data: | ||||||||||||||||||||||||||||
Depreciation and amortization | $ | 27,386 | $ | 25,111 | $ | 103,878 | $ | 102,044 | $ | 109,474 | $ | 115,720 | $ | 122,608 | ||||||||||||||
Capital expenditures | 25,073 | 30,725 | 102,950 | 102,308 | 73,396 | 91,771 | 83,855 | |||||||||||||||||||||
Cash dividends paid | 35,000 | (1) | — | (2) | 60,000 | 50,000 | 30,003 | 25,076 | 20,036 | |||||||||||||||||||
MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS
Overview
Our Company
We design, market and sell – directly or through third parties and licensees—products that include jeans, casual and dress pants, tops, shorts, skirts, jackets, footwear and related accessories for men, women and children around the world under our Levi’s®, Dockers®, Signature by Levi Strauss & Co.™ (“Signature”) and Denizen® brands.
Our business is operated through three geographic regions: Americas, Europe and Asia. Our products are sold in approximately 50,000 retail locations in more than 110 countries. We support our brands through a global infrastructure, developing, sourcing and marketing our products around the world. We distribute our Levi’s® and Dockers® products primarily through chain retailers and department stores in the United States and primarily through department stores, specialty retailers and approximately 2,200 franchised or other brand-dedicated stores andshop-in-shops outside of the United States. We also distribute our Levi’s® and Dockers® products through 697 company-operated retail stores located in 31 countries, including the United States, and through the ecommerce sites we operate. Our company-operated retail stores and ecommerce sites generated approximately 28% of our net revenues in 2016, as compared to 26% in the same period in 2015, with our ecommerce sites representing approximately 14% of this revenue in 2016, as compared to 13% in the same period in 2015. Our company-operated retail stores and ecommerce sites generated approximately 32% of our net revenues in the first three months of 2017, as compared to 31% in the same period in 2016, with our ecommerce sites representing approximately 16% of this revenue in 2017, as compared to 15% in the same period in 2016. In addition, we distribute our Levi’s® and Dockers® products through ecommerce sites operated by certain of our key wholesale customers and other third parties. We distribute products under our Signature and Denizen® brands primarily through mass channel retailers in the Americas.
Our Europe and Asia businesses, collectively, contributed approximately 41% of our net revenues and 39% of our regional operating income in 2016, as compared to 39% of our net revenues and 37% of our regional operating income in 2015. Sales of Levi’s® brand products represented approximately 85% of our total net sales in each of 2016 and 2015. Pants represented approximately 77% of our total units sold in 2016, as compared to 81% of our total units sold in 2015, and men’s products generated approximately 76% of our total net sales as compared to 77% in 2015.
Our Europe and Asia businesses, collectively, contributed approximately 48% of our net revenues and 53% of our regional operating income in the first three months of 2017, as compared to 46% of our net revenues and 51% of our regional operating income in the same period in 2016. Sales of Levi’s® brand products represented approximately 88% and 87% of our total net sales in the first three-month periods of 2017 and 2016, respectively. Effective as of the beginning of 2017, we revised our approach to measuring the performance of our business by allocating certain of our global expenses to our three regional business segments. Comparative period regional operating income amounts were revised to reflect this change.
Our Objectives
Our key long-term objectives are to strengthen our brands globally in order to deliver sustainable profitable growth and generate strong cash flow. Critical strategies to achieve these objectives include driving our profitable core business; expanding the reach of our brands and building a more balanced product portfolio; elevating the performance of our retail channel, including ecommerce; and leveraging our global scale to improve our cost structure.
For 2017, on a constant-currency basis, our financial objective is to grow full-year revenues, as compared to 2016, and maintain full-year gross margin at approximately 51%.
Trends Affecting Our Business
We believe the key business and marketplace factors that are impacting our business include the following:
Our First Quarter 2017 Results
Our 2016 Results
Our 2016 results reflect constant-currency net revenues growth and an increase in operating income.
Financial Information Presentation
Fiscal year. Our fiscal year ends on the last Sunday of November in each year, although the fiscal years of certain foreign subsidiaries end on November 30. Fiscal 2016 and 2015 were52-week years ending on November 27, 2016, and November 29, 2015, respectively. Fiscal 2014 was a53-week year ending on November 30, 2014. Each quarter of fiscal years 2016, 2015 and 2014 consisted of 13 weeks, with the exception of the fourth quarter of 2014, which consisted of 14 weeks.
Segments. We manage our business according to three regional segments: the Americas, Europe and Asia. Effective as of the beginning of 2015, our regional licensing revenue, previously recorded centrally in our Americas region, was revised to be recorded in our respective regions. Regional licensing revenues are not significant to any of our regional segments individually in any of the periods presented herein, and accordingly, business segment information for the prior periods has not been revised. Certain of our global expenses, including globale-commerce infrastructure, global brand merchandising and global brand marketing costs, that support all of our regional segments, are included in our Americas region segment operating income. Effective as of the beginning of 2017, certain of our global expenses that support all of our regional segments, including globale-commerce infrastructure and global brand merchandising, marketing and design, previously recorded centrally in our Americas region segment and Corporate expenses, have now been allocated to our three regional business segments, and reported in their operating results. Business segment information for the prior-year period has been revised to reflect the change in presentation.
Classification. Our classification of certain significant revenues and expenses reflects the following:
Net revenues is primarily comprised of sales of products to wholesale customers, including franchised stores, and direct sales to consumers at our company-operated ecommerce sites and stores and at our
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Gross margins may not be comparable to those of other companies in our industry since some companies may include costs related to their distribution network and occupancy costs associated with company-operated stores in cost of goods sold.
Constant currency. Constant-currency comparisons are based on translating local currency amounts in the prior-year period at actual foreign exchange rates for the current year. We routinely evaluate our financial performance on a constant-currency basis in order to facilitateperiod-to-period comparisons without regard to the impact of changing foreign currency y exchange rates.
Results of Operations for Three Months Ended February 26, 2017, as Compared to Same Period in 2016
The following table summarizes, for the periods indicated, our consolidated statements of income, the changes in these items from period to period and these items expressed as a percentage of net revenues:
| Three Months Ended | ||||||||||||||||||||
| February 26, 2017 | February 28, 2016 | % Increase (Decrease) | February 26, 2017 % of Net Revenues | February 28, 2016 % of Net Revenues | ||||||||||||||||
| (Dollars in millions) | ||||||||||||||||||||
Net revenues | $ | 1,102.0 | $ | 1,056.5 | 4.3 | % | 100.0 | % | 100.0 | % | ||||||||||
Cost of goods sold | 537.5 | 496.9 | 8.2 | % | 48.8 | % | 47.0 | % | ||||||||||||
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Gross profit | 564.5 | 559.6 | 0.9 | % | 51.2 | % | 53.0 | % | ||||||||||||
Selling, general and administrative expenses | 456.2 | 441.2 | 3.4 | % | 41.4 | % | 41.8 | % | ||||||||||||
Restructuring, net | — | 1.8 | (98.8 | )% | — | 0.2 | % | |||||||||||||
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Operating income | 108.3 | 116.6 | (7.2 | )% | 9.8 | % | 11.0 | % | ||||||||||||
Interest expense | (19.9 | ) | (14.9 | ) | 33.8 | % | (1.8 | )% | (1.4 | )% | ||||||||||
Other income (expense), net | 0.4 | (2.2 | ) | (118.4 | )% | — | (0.2 | )% | ||||||||||||
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Income before income taxes | 88.8 | 99.5 | (10.7 | )% | 8.1 | % | 9.4 | % | ||||||||||||
Income tax expense | 28.7 | 33.2 | (13.5 | )% | 2.6 | % | 3.1 | % | ||||||||||||
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Net income | 60.1 | 66.3 | (9.3 | )% | 5.5 | % | 6.3 | % | ||||||||||||
Net loss (income) attributable to noncontrolling interest | — | (0.5 | ) | (104.9 | )% | — | — | |||||||||||||
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Net income attributable to Levi Strauss & Co. | $ | 60.1 | $ | 65.8 | (8.6 | )% | 5.5 | % | 6.2 | % | ||||||||||
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Net revenues
The following table presents net revenues by reporting segment for the periods indicated and the changes in net revenues by reporting segment on both reported and constant-currency bases from period to period.
| Three Months Ended | ||||||||||||||||
| % Increase (Decrease) | ||||||||||||||||
| February 26, 2017 | February 28, 2016 | As Reported | Constant Currency | |||||||||||||
| (Dollars in millions) | ||||||||||||||||
Net revenues: | ||||||||||||||||
Americas | $ | 577.9 | $ | 571.2 | 1.2 | % | 2.0 | % | ||||||||
Europe | 310.3 | 276.5 | 12.2 | % | 14.6 | % | ||||||||||
Asia | 213.8 | 208.8 | 2.4 | % | 2.4 | % | ||||||||||
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Total net revenues | $ | 1,102.0 | $ | 1,056.5 | 4.3 | % | 5.4 | % | ||||||||
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Total net revenues increased on both a reported and constant-currency basis for the three-month periods ended February 26, 2017, as compared to the same prior-year period.
Americas. On both a reported basis and constant-currency basis, net revenues in our Americas region increased for the three-month period ended February 26, 2017, with currency affecting net revenues unfavorably by approximately $5 million.
Excluding the effects of currency, the increase in net revenues for the three-month period ended February 26, 2017 was due to higher revenues in Mexico and the performance and expansion of our company-operated retail network, including ecommerce, in the United States. This was mostly offset by lower wholesale revenues in the United States in our Levi’s® and Dockers® brands due to a soft retail environment.
Europe. Net revenues in Europe increased both on a reported basis and constant-currency basis for the three-month period ended February 26, 2017, with currency affecting net revenues unfavorably by approximately $6 million.
Constant-currency net revenues increased as a result of the expansion and strong performance of our company-operated and franchise store retail network, includinge-commerce, as well as solid wholesale performance.
Asia. Net revenues in Asia increased on both a reported and constant-currency basis for the three-month period ended February 26, 2017 with currency affecting net revenues minimally.
The increase in net revenues was primarily due to the performance and expansion of our company-operated retail network, particularly company-operated outlet ande-commerce channels, partially offset by a decline in franchised stores and wholesale performance.
Gross profit
The following table shows consolidated gross profit and gross margin for the periods indicated and the changes in these items from period to period:
| Three Months Ended | ||||||||||||
| February 26, 2017 | February 28, 2016 | % Increase (Decrease) | ||||||||||
| (Dollars in millions) | ||||||||||||
Net revenues | $ | 1,102.0 | $ | 1,056.5 | 4.3 | % | ||||||
Cost of goods sold | 537.5 | 496.9 | 8.2 | % | ||||||||
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Gross profit | $ | 564.5 | $ | 559.6 | 0.9 | % | ||||||
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Gross margin | 51.2 | % | 53.0 | % | ||||||||
Currency translation unfavorably impacted gross profit by approximately $5 million for the three-month period ended February 26, 2017. Gross margin decreased principally due to higher allowances, primarily in the United States wholesale channel, and unfavorable transactional currency impact, primarily in Europe. This was partially offset by company-operated retail growth in Europe and Americas.
Selling, general and administrative expenses
The following table shows SG&A for the periods indicated, the changes in these items from period to period and these items expressed as a percentage of net revenues:
| Three Months Ended | ||||||||||||||||||||
| February 26, 2017 | February 28, 2016 | % Increase (Decrease) | February 26, 2017 % of Net Revenues | February 28, 2016 % of Net Revenues | ||||||||||||||||
| (Dollars in millions) | ||||||||||||||||||||
Selling | $ | 210.0 | $ | 191.0 | 10.0 | % | 19.1 | % | 18.1 | % | ||||||||||
Advertising and promotion | 52.7 | 57.5 | (8.3 | )% | 4.8 | % | 5.4 | % | ||||||||||||
Administration | 84.6 | 84.2 | 0.5 | % | 7.7 | % | 8.0 | % | ||||||||||||
Other | 108.9 | 107.0 | 1.8 | % | 9.9 | % | 10.1 | % | ||||||||||||
Restructuring-related charges | — | 1.5 | (100.0 | )% | — | 0.1 | % | |||||||||||||
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Total SG&A | $ | 456.2 | $ | 441.2 | 3.4 | % | 41.4 | % | 41.8 | % | ||||||||||
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Currency impacted SG&A favorably by approximately $3 million for the three-month period ended February 26, 2017.
Selling. Currency impacted selling expenses favorably by approximately $2 million for the three-month period ended February 26, 2017. Higher selling expenses primarily reflected costs associated with the expansion of our company-operated retail network. We had 51 more company-operated stores at the end of the first quarter of 2017 than we did at the end of the first quarter of 2016.
Advertising and promotion. Currency did not have a significant impact on advertising and promotion expenses for the three-month period ended February 26, 2017. The decrease in advertising and promotion expenses reflects the timing of production and media spend for our campaigns.
Administration. Administration expenses include functional administrative and organization costs. Currency did not have a significant impact on administration expenses for the three months ended February 26, 2017.
Other. Other SG&A includes distribution, information resources and marketing organization costs. Currency did not have a significant impact on other SG&A expenses for the three months ended February 26, 2017.
Restructuring-related charges. Restructuring-related charges consisted primarily of consulting fees incurred for ourcentrally-led cost-savings, productivity projects and transition-related projects, which were implemented through the end of 2016.
Operating income
The following table shows operating income by reporting segment and corporate expenses for the periods indicated, the changes in these items from period to period and these items expressed as a percentage of net revenues:
| Three Months Ended | ||||||||||||||||||||
| February 26, 2017 | February 28, 2016 | % Increase (Decrease) | February 26, 2017 % of Net Revenues | February 28, 2016 % of Net Revenues | ||||||||||||||||
| (Dollars in millions) | ||||||||||||||||||||
Operating income: | ||||||||||||||||||||
Americas | $ | 90.4 | $ | 88.1 | 2.6 | % | 15.6 | % | 15.4 | % | ||||||||||
Europe | 64.5 | 50.9 | 26.7 | % | 20.8 | % | 18.4 | % | ||||||||||||
Asia | 35.9 | 40.9 | (12.1 | )% | 16.8 | % | 19.6 | % | ||||||||||||
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Total regional operating income | 190.8 | 179.9 | 6.1 | % | 17.3 | %* | 17.0 | % | ||||||||||||
Corporate: | ||||||||||||||||||||
Restructuring, net | — | 1.8 | (98.8 | )% | — | * | 0.2 | % | ||||||||||||
Restructuring-related charges | — | 1.5 | (100.0 | )% | — | * | 0.1 | % | ||||||||||||
Other corporate staff costs and expenses | 82.5 | 60.0 | 37.6 | % | 7.5 | %* | 5.7 | % | ||||||||||||
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Corporate expenses | 82.5 | 63.3 | 30.3 | % | 7.5 | %* | 6.0 | % | ||||||||||||
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Total operating income | $ | 108.3 | $ | 116.6 | (7.1 | )% | 9.8 | %* | 11.0 | % | ||||||||||
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Operating margin | 9.8 | % | 11.0 | % | ||||||||||||||||
Currency translation unfavorably affected total operating income by approximately $2 million for the three-month period ended February 26, 2017.
Regional operating income.
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 for the three-month periods ended February 26, 2017. As compared to the same prior-year period, corporate expenses increased primarily due to purchasing variances related to our global sourcing organization’s procurement of inventory on behalf of our regions.
Interest expense
Interest expense was $19.9 million for the three-month period ended February 26, 2017, as compared to $14.9 million for the same period in 2016. The increase in interest expense was primarily due to higher interest expense related to our deferred compensation plans.
Our weighted-average interest rate on average borrowings outstanding during the three months ended February 26, 2017 was 6.67%, as compared to 6.26% in the same period in 2016.
Other income (expense), net
Other income (expense), net, primarily consists of foreign exchange management activities and transactions. For the three-month period ended February 26, 2017, we recorded income of $0.4 million, as compared to expense of $2.2 million for the same prior-year period. The income in the three-month period in 2017 primarily reflected net gains on our foreign currency denominated balances, mostly offset by net losses on our foreign exchange derivatives. The expenses in the three-month period in 2016 primarily reflected net losses on our foreign currency denominated balances, partially offset by net gains on our foreign exchange derivatives.
Income tax expense
The effective income tax rate was 32.3% for the three months ended February 26, 2017, compared to 33.4% for the same period ended February 28, 2016. The decrease in the effective tax rate in 2017 as compared to 2016 was primarily due to lower tax rates on foreign earnings.
Results of Operations for 2016, as Compared to 2015
The following table summarizes, for the periods indicated, our consolidated statements of income, the changes in these items from period to period and these items expressed as a percentage of net revenues:
| Year Ended | ||||||||||||||||||||
| November 27, 2016 | November 29, 2015 | % Increase (Decrease) | November 27, 2016 % of Net Revenues | November 29, 2015 % of Net Revenues | ||||||||||||||||
| (Dollars in millions) | ||||||||||||||||||||
Net revenues | $ | 4,552.7 | $ | 4,494.5 | 1.3 | % | 100.0 | % | 100.0 | % | ||||||||||
Cost of goods sold | 2,223.7 | 2,225.5 | (0.1 | )% | 48.8 | % | 49.5 | % | ||||||||||||
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Gross profit | 2,329.0 | 2,269.0 | 2.6 | % | 51.2 | % | 50.5 | % | ||||||||||||
Selling, general and administrative expenses | 1,866.5 | 1,823.9 | 2.3 | % | 41.0 | % | 40.6 | % | ||||||||||||
Restructuring, net | 0.3 | 14.1 | (97.8 | )% | — | 0.3 | % | |||||||||||||
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Operating income | 462.2 | 431.0 | 7.1 | % | 10.2 | % | 9.6 | % | ||||||||||||
Interest expense | (73.2 | ) | (81.2 | ) | (9.9 | )% | (1.6 | )% | (1.8 | )% | ||||||||||
Loss on early extinguishment of debt | — | (14.0 | ) | (100.0 | )% | — | (0.3 | )% | ||||||||||||
Other income (expense), net | 18.2 | (25.4 | ) | (171.7 | )% | 0.4 | % | (0.6 | )% | |||||||||||
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Income before income taxes | 407.2 | 310.4 | 31.2 | % | 8.9 | % | 6.9 | % | ||||||||||||
Income tax expense | 116.0 | 100.5 | 15.5 | % | 2.5 | % | 2.2 | % | ||||||||||||
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Net income | 291.2 | 209.9 | 38.7 | % | 6.4 | % | 4.7 | % | ||||||||||||
Net (income) loss attributable to noncontrolling interest | (0.2 | ) | (0.5 | ) | (65.5 | )% | — | — | ||||||||||||
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Net income attributable to Levi Strauss & Co. | $ | 291.0 | $ | 209.4 | 39.0 | % | 6.4 | % | 4.7 | % | ||||||||||
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Net revenues
The following table presents net revenues by reporting segment for the periods indicated and the changes in net revenues by reporting segment on both reported and constant-currency bases from period to period:
| Year Ended | ||||||||||||||||
| % Increase (Decrease) | ||||||||||||||||
| November 27, 2016 | November 29, 2015 | As Reported | Constant Currency | |||||||||||||
| (Dollars in millions) | ||||||||||||||||
Net revenues: | ||||||||||||||||
Americas | $ | 2,682.9 | $ | 2,726.5 | (1.6 | )% | (0.3 | )% | ||||||||
Europe | 1,091.4 | 1,016.4 | 7.4 | % | 10.0 | % | ||||||||||
Asia | 778.4 | 751.6 | 3.6 | % | 6.1 | % | ||||||||||
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Total net revenues | $ | 4,552.7 | $ | 4,494.5 | 1.3 | % | 3.1 | % | ||||||||
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As compared to the same period in the prior year, total net revenues were affected unfavorably by changes in foreign currency exchange rates across all regions.
Americas. Net revenues in our Americas region decreased on reported basis and remained relatively flat on a constant-currency basis, with currency affecting net revenues unfavorably by approximately $35 million.
Excluding the effects of currency, the continued weak environment for apparel retailers in the United States resulted in a decline in the United States wholesale net revenues. This decline was mostly offset by wholesale growth in Mexico and the improved performance and expansion of our company-operated retail network in the region, includinge-commerce.
Europe. Net revenues in Europe increased on both reported and constant-currency bases, with currency affecting net revenues unfavorably by approximately $24 million.
Net revenues increased from the expansion and performance of our company-operated retail network, includinge-commerce.
Asia.Net revenues in Asia increased on both reported and constant-currency bases, with currency affecting net revenues unfavorably by approximately $18 million.
The increase in net revenues was primarily due to the expansion and improved performance of our company-operated retail network, particularly company-operated outlet ande-commerce channels. Higher traditional wholesale revenues were partially offset by a decline in the Mainland China franchise channel as a result of weakened performance and an increase in franchisee support.
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:
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| November 27, 2016 | November 29, 2015 | % Increase (Decrease) | ||||||||||
| (Dollars in millions) | ||||||||||||
Net revenues | $ | 4,552.7 | $ | 4,494.5 | 1.3 | % | ||||||
Cost of goods sold | 2,223.7 | 2,225.5 | (0.1 | )% | ||||||||
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Gross profit | $ | 2,329.0 | $ | 2,269.0 | 2.6 | % | ||||||
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Gross margin | 51.2 | % | 50.5 | % | ||||||||
Currency translation unfavorably impacted gross profit by approximately $36 million. Gross margin improved primarily due to lower negotiated product costs and streamlined supply chain operations as well as international retail growth, partially offset by the unfavorable transactional impact of currency.
Selling, general and administrative expenses
The following table shows our SG&A for the periods indicated, the changes in these items from period to period and these items expressed as a percentage of net revenues:
| Year Ended | ||||||||||||||||||||
| November 27, 2016 | November 29, 2015 | % Increase (Decrease) | November 27, 2016 % of Net Revenues | November 29, 2015 % of Net Revenues | ||||||||||||||||
| (Dollars in millions) | ||||||||||||||||||||
Selling | $ | 776.7 | $ | 734.1 | 5.8 | % | 17.1 | % | 16.3 | % | ||||||||||
Advertising and promotion | 284.0 | 276.4 | 2.8 | % | 6.2 | % | 6.1 | % | ||||||||||||
Administration | 351.9 | 364.4 | (3.4 | )% | 7.7 | % | 8.1 | % | ||||||||||||
Other | 446.7 | 418.3 | 6.8 | % | 9.8 | % | 9.3 | % | ||||||||||||
Restructuring-related charges | 7.2 | 30.7 | (76.6 | )% | 0.2 | % | 0.7 | % | ||||||||||||
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Total SG&A | $ | 1,866.5 | $ | 1,823.9 | 2.3 | % | 41.0 | % | 40.6 | % | ||||||||||
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Currency affected SG&A favorably by approximately $26 million as compared to the prior year. The constant-currency increase in SG&A reflected our strategic investments in our growth initiatives:direct-to-consumer retail and advertising.
Selling. Currency impacted selling expenses favorably by approximately $16 million as compared to the prior year. Higher selling expenses primarily reflected costs associated with the expansion of our company-operated store network. We had 41 more company-operated stores at the end of 2016 than we did at the end of 2015.
Advertising and promotion. Currency impacted advertising and promotion expense favorably by approximately $4 million as compared to the prior year. The slight increase as a percentage of net revenues reflected higher advertising investment as compared to the prior-year period, in line with our constant-currency revenue growth.
Administration. Currency impacted administration expenses favorably by approximately $3 million as compared to the prior year. As compared to 2015, administration expenses in 2016 reflect the recognition of approximately $7.0 million of benefit as a result of the resolution of a vendor dispute and the related reversal of liabilities recorded in a prior year. Lower organization costs, including salaries, benefits and long-term incentive compensation, also contributed to the decrease.
Other. Other SG&A includes distribution, information resources, and marketing organization costs. Currency impacted other SG&A expenses favorably by approximately $3 million as compared to the prior year. The increase in other SG&A primarily reflects higher information technology expenses and distribution costs. Additionally, we recorded a gain of $6.1 million in conjunction with the sale-leaseback of our distribution center in the United Kingdom in 2016 as compared to a $7.5 million gain recognized related to the sale of our finishing and distribution facility in Turkey in 2015.
Restructuring-related charges. Restructuring-related charges consist primarily of consulting fees incurred for ourcentrally-led cost-savings and productivity projects, as well as transition costs associated with our decision to outsource certain global business service activities. These related charges represent costs incurred associated with ongoing operations which will benefit future periods and thus were recorded in SG&A in our consolidated statements of income.
Restructuring, net
For the year ended November 27, 2016, we recognized restructuring charges, net, of $0.3 million, as compared to $14.1 million for the same period in 2015, related to our global productivity actions, consisting primarily of severance benefits, consulting fees and noncash pension and postretirement curtailment gains or losses.
Operating income
The following table shows operating income by reporting segment and corporate expenses for the periods indicated, the changes in these items from period to period and these items expressed as a percentage of net revenues:
| Year Ended | ||||||||||||||||||||
| November 27, 2016 | November 29, 2015 | % Increase (Decrease) | November 27, 2016 % of Net Revenues | November 29, 2015 % of Net Revenues | ||||||||||||||||
| (Dollars in millions) | ||||||||||||||||||||
Operating income: | ||||||||||||||||||||
Americas | $ | 482.2 | $ | 523.7 | (7.9 | )% | 18.0 | % | 19.2 | % | ||||||||||
Europe | 197.1 | 184.4 | 6.9 | % | 18.1 | % | 18.1 | % | ||||||||||||
Asia | 105.1 | 121.6 | (13.6 | )% | 13.5 | % | 16.2 | % | ||||||||||||
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Total regional operating income | 784.4 | 829.7 | (5.5 | )% | 17.2 | %* | 18.5 | %* | ||||||||||||
Corporate: | ||||||||||||||||||||
Restructuring, net | 0.3 | 14.1 | (97.8 | )% | — | * | 0.3 | %* | ||||||||||||
Restructuring-related charges | 7.2 | 30.7 | (76.6 | )% | 0.2 | %* | 0.7 | %* | ||||||||||||
Other corporate staff costs and expenses | 314.7 | 353.9 | (11.1 | )% | 6.9 | %* | 7.9 | %* | ||||||||||||
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Corporate expenses | 322.2 | 398.7 | (19.2 | )% | 7.1 | %* | 8.9 | %* | ||||||||||||
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Total operating income | $ | 462.2 | $ | 431.0 | 7.2 | % | 10.2 | %* | 9.6 | %* | ||||||||||
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Operating margin | 10.2 | % | 9.6 | % | ||||||||||||||||
Currency translation unfavorably affected total operating income by approximately $10 million as compared to the prior year.
Regional operating income.
Corporate.Corporate expenses represent costs that are not attributed to any of our regional operating segments. Included in corporate expenses are restructuring charges, the consulting fees incurred for ourcentrally-led cost-savings and productivity projects and other corporate staff costs. Currency translation did not have a significant impact on corporate expenses.
As compared to the prior year, other corporate staff costs and expenses decreased, primarily driven by lower restructuring and restructuring-related charges and a decrease in foreign currency transaction losses related to our global sourcing organization’s procurement of inventory on behalf of our foreign subsidiaries, of which approximately $23 million of the decrease is related to our Europe region and $10 million related to our Asia region.
Interest expense
Interest expense was $73.2 million for the year ended November 27, 2016, as compared to $81.2 million in the prior year. The decrease in interest expense was primarily due to lower average debt balances and lower average borrowing rates in 2016, resulting from our debt reduction and refinancing activities in 2015.
The weighted-average interest rate on average borrowings outstanding for 2016 was 6.37%, as compared to 6.72% for 2015.
Loss on early extinguishment of debt
For the year ended November 29, 2015, we recorded a loss of $14.0 million on early extinguishment of debt as a result of our debt refinancing activities during the year. The loss was comprised of redemption premiums of $7.5 million and thewrite-off of $3.5 million of unamortized debt issuance costs, and $3.0 million of other costs.
Other income (expense), net
Other income (expense), net, primarily consists of foreign exchange management activities and transactions. For the year ended November 27, 2016, we recorded net other income of $18.2 million as compared to net other expense of $25.4 million for the prior year. The income in 2016 primarily reflected net gains on foreign exchange derivatives partially offset by losses on our foreign currency denominated balances, which economically hedge future foreign currency cash flow obligations. The majority of the net expense in 2015 reflected net losses on our foreign currency denominated balances, partially offset by net gains on foreign exchange derivatives.
Income tax expense
Income tax expense was $116.1 million for the year ended November 27, 2016, compared to $100.5 million for the prior year. Our effective income tax rate was 28.5% for the year ended November 27, 2016, compared to 32.4% for the prior year.
The decrease in the effective tax rate in 2016 as compared to 2015 is primarily due to a higher proportion of 2016 earnings in jurisdictions where we are subject to lower tax rates.
For the year ended November 27, 2016, management asserted indefinite reinvestment on $100.0 million of undistributed foreign earnings, as management determined that this amount is required to meet ongoing working capital needs in certain foreign subsidiaries; no U.S. income taxes have been provided for such earnings. If the Company were to repatriate such foreign earnings to the United States, the deferred tax liability associated with such earnings would have been approximately $26.6 million.
Results of Operations for 2015, as Compared to 2014
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 29, 2015 | November 30, 2014 | % Increase (Decrease) | November 29, 2015 % of Net Revenues | November 30, 2014 % of Net Revenues | ||||||||||||||||
| (Dollars in millions) | ||||||||||||||||||||
Net revenues | $ | 4,494.5 | $ | 4,754.0 | (5.5 | )% | 100.0 | % | 100.0 | % | ||||||||||
Cost of goods sold | 2,225.5 | 2,405.6 | (7.5 | )% | 49.5 | % | 50.6 | % | ||||||||||||
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Gross profit | 2,269.0 | 2,348.4 | (3.4 | )% | 50.5 | % | 49.4 | % | ||||||||||||
Selling, general and administrative expenses | 1,823.9 | 1,906.1 | (4.3 | )% | 40.6 | % | 40.1 | % | ||||||||||||
Restructuring, net | 14.1 | 128.4 | (89.0 | )% | 0.3 | % | 2.7 | % | ||||||||||||
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Operating income | 431.0 | 313.9 | 37.3 | % | 9.6 | % | 6.6 | % | ||||||||||||
Interest expense | (81.2 | ) | (117.6 | ) | (30.9 | )% | (1.8 | )% | (2.5 | )% | ||||||||||
Loss on early extinguishment of debt | (14.0 | ) | (20.3 | ) | (31.2 | )% | (0.3 | )% | (0.4 | )% | ||||||||||
Other income (expense), net | (25.4 | ) | (22.1 | ) | 15.3 | % | (0.6 | )% | (0.5 | )% | ||||||||||
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Income before income taxes | 310.4 | 153.9 | 101.7 | % | 6.9 | % | 3.2 | % | ||||||||||||
Income tax expense | 100.5 | 49.6 | 102.9 | % | 2.2 | % | 1.0 | % | ||||||||||||
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Net income | 209.9 | 104.3 | 101.2 | % | 4.7 | % | 2.2 | % | ||||||||||||
Net (income) loss attributable to noncontrolling interest | (0.5 | ) | 1.8 | (125.7 | )% | — | — | |||||||||||||
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Net income attributable to Levi Strauss & Co. | $ | 209.4 | $ | 106.1 | 97.4 | % | 4.7 | % | 2.2 | % | ||||||||||
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Net revenues
The following table presents net revenues by reporting segment for the periods indicated and the changes in net revenues by reporting segment on both reported and constant-currency bases from period to period:
| Year Ended | ||||||||||||||||
| % Increase (Decrease) | ||||||||||||||||
| November 29, 2015 | November 30, 2014 | As Reported | Constant Currency | |||||||||||||
| (Dollars in millions) | ||||||||||||||||
Net revenues: | ||||||||||||||||
Americas | $ | 2,726.5 | $ | 2,862.9 | (4.8 | )% | (2.7 | )% | ||||||||
Europe | 1,016.4 | 1,143.3 | (11.1 | )% | 7.8 | % | ||||||||||
Asia | 751.6 | 747.8 | 0.5 | % | 7.7 | % | ||||||||||
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Total net revenues | $ | 4,494.5 | $ | 4,754.0 | (5.5 | )% | 1.2 | % | ||||||||
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As compared to the same period in the prior year, total net revenues were affected unfavorably by changes in foreign currency exchange rates across all regions.
Americas. Net revenues in our Americas region decreased on both reported and constant-currency bases, with currency affecting net revenues unfavorably by approximately $62 million.
Net revenues decreased primarily due to the inclusion of an additional sales week in the prior year, since 2014 had 53 fiscal weeks compared to 52 weeks in 2015, as well as a decline at wholesale in sales of Dockers®brand women’s products due to our decision in the third quarter of 2014 to exit that business in the United States. Additionally, lower sales of both Levi’s® and Dockers® brand men’s products were offset by growth in Signature and Denizen® brands and at retail in Canada and Mexico.
Europe. Net revenues in Europe decreased on a reported basis but increased on a constant-currency basis, with currency affecting net revenues unfavorably by approximately $200 million.
Net revenues increased from the expansion and performance of our company-operated retail network, particularly in the U.K. and Russia markets.
Asia.Net revenues in Asia increased on both reported and constant-currency bases, with currency affecting net revenues unfavorably by approximately $50 million.
The increase in net revenues was primarily due to the expansion of our company-operated retail network as well as increased promotional activity across channels, primarily in China and India.
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 29, 2015 | November 30, 2014 | % Increase (Decrease) | ||||||||||
| (Dollars in millions) | ||||||||||||
Net revenues | $ | 4,494.5 | $ | 4,754.0 | (5.5 | )% | ||||||
Cost of goods sold | 2,225.5 | 2,405.6 | (7.5 | )% | ||||||||
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Gross profit | $ | 2,269.0 | $ | 2,348.4 | (3.4 | )% | ||||||
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Gross margin | 50.5 | % | 49.4 | % | ||||||||
Currency translation unfavorably impacted gross profit by approximately $166 million. Gross margin improved primarily due to lower negotiated product costs and streamlined supply chain operations as well as price increases, partially offset by the unfavorable transactional impact of currency and product investment costs. Gross margin also benefited from our international retail growth.
Selling, general and administrative expenses
The following table shows our SG&A for the periods indicated, the changes in these items from period to period and these items expressed as a percentage of net revenues:
| Year Ended | ||||||||||||||||||||
| November 29, 2015 | November 30, 2014 | % Increase (Decrease) | November 29, 2015 % of Net Revenues | November 30, 2014 % of Net Revenues | ||||||||||||||||
| (Dollars in millions) | ||||||||||||||||||||
Selling | $ | 734.1 | $ | 730.9 | 0.4 | % | 16.3 | % | 15.4 | % | ||||||||||
Advertising and promotion | 276.4 | 272.8 | 1.3 | % | 6.1 | % | 5.7 | % | ||||||||||||
Administration | 364.4 | 377.7 | (3.5 | )% | 8.1 | % | 7.9 | % | ||||||||||||
Other | 418.3 | 466.4 | (10.3 | )% | 9.3 | % | 9.8 | % | ||||||||||||
Restructuring-related charges | 30.7 | 27.6 | 11.3 | % | 0.7 | % | 0.6 | % | ||||||||||||
Lump-sum pension settlement loss | — | 30.7 | (100.0 | )% | — | 0.6 | % | |||||||||||||
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Total SG&A | $ | 1,823.9 | $ | 1,906.1 | (4.3 | )% | 40.6 | % | 40.1 | % | ||||||||||
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Currency affected SG&A favorably by approximately $113 million as compared to the prior year. The constant-currency increase in SG&A reflected our strategic investments in our growth initiatives:direct-to-consumer retail and advertising. The constant-currency decline in our administrative and other costs reflected savings resulting from our global productivity initiative.
Selling. Currency impacted selling expenses favorably by approximately $62 million as compared to the prior year. Higher selling expenses primarily reflected costs associated with the expansion of our company-operated store network and investment in our ecommerce business. We had 91 more company-operated stores at the end of 2015 than we did at the end of 2014.
Advertising and promotion. Currency impacted advertising and promotion expense favorably by approximately $15 million as compared to the prior year. The increase as a percentage of net revenues reflected higher advertising spend as compared to the prior-year period, and in line with our constant-currency revenue growth.
Administration. Currency impacted administration expenses favorably by approximately $16 million as compared to the prior year.
Other. Other SG&A includes distribution, information resources, and marketing organization costs. Currency impacted other SG&A expenses favorably by approximately $20 million as compared to the prior year. Lower costs primarily reflected information resources and marketing organization savings resulting from our global productivity initiative. Lower costs also reflected a gain of $7.5 million in conjunction with the sale of our finishing and distribution facility in Turkey in the second quarter of 2015.
Restructuring-related charges. Restructuring-related charges consist primarily of consulting fees incurred for ourcentrally-led cost-savings and productivity projects, as well as transition costs associated with our decision to outsource certain global business service activities. These related charges represent costs incurred associated with ongoing operations which will benefit future periods and thus were recorded in SG&A in our consolidated statements of income.
Lump-sum pension settlement loss. Settlement loss consists of a noncash pension settlement charge taken in the fourth quarter of 2014 related to an early pension settlement for our U.S. pension plans.
Restructuring, net
For the year ended November 29, 2015, we recognized restructuring charges, net, of $14.1 million, as compared to $128.4 million for the same period in 2014, related to the global productivity initiative, consisting primarily of severance benefits, consulting fees and noncash pension and postretirement curtailment gains or losses.
Operating income
The following table shows operating income by reporting segment and corporate expenses for the periods indicated, the changes in these items from period to period and these items expressed as a percentage of net revenues:
| Year Ended | ||||||||||||||||||||
| November 29, 2015 | November 30, 2014 | % Increase (Decrease) | November 29, 2015 % of Net Revenues | November 30, 2014 % of Net Revenues | ||||||||||||||||
| (Dollars in millions) | ||||||||||||||||||||
Operating income: | ||||||||||||||||||||
Americas | $ | 523.7 | $ | 531.1 | (1.4 | )% | 19.2 | % | 18.6 | % | ||||||||||
Europe | 184.4 | 181.0 | 1.8 | % | 18.1 | % | 15.8 | % | ||||||||||||
Asia | 121.6 | 108.5 | 12.1 | % | 16.2 | % | 14.5 | % | ||||||||||||
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Total regional operating income | 829.7 | 820.6 | 1.1 | % | 18.5 | %* | 17.3 | %* | ||||||||||||
Corporate: | ||||||||||||||||||||
Restructuring, net | 14.1 | 128.4 | (89.0 | )% | 0.3 | %* | 2.7 | %* | ||||||||||||
Restructuring-related charges | 30.7 | 27.6 | 11.3 | % | 0.7 | %* | 0.6 | %* | ||||||||||||
Lump-sum pension settlement loss | — | 30.7 | (100.0 | )% | — | * | 0.6 | %* | ||||||||||||
Other corporate staff costs and expenses | 353.9 | 320.0 | 10.6 | % | 7.9 | %* | 6.7 | %* | ||||||||||||
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Corporate expenses | 398.7 | 506.7 | (21.3 | )% | 8.9 | %* | 10.7 | %* | ||||||||||||
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Total operating income | $ | 431.0 | $ | 313.9 | 37.3 | % | 9.6 | %* | 6.6 | %* | ||||||||||
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Operating margin | 9.6 | % | 6.6 | % | ||||||||||||||||
Currency translation unfavorably affected total operating income by approximately $41 million as compared to the prior year.
Regional operating income.
Corporate.Corporate expenses represent costs that are not attributed to any of our regional operating segments. Included in corporate expenses are restructuring charges, the consulting fees incurred for ourcentrally-led cost-savings and productivity projects, other corporate staff costs, and in 2014, the noncash pension settlement charge. Currency translation favorably affected corporate expenses by approximately $19 million.
As compared to the prior year, other corporate staff costs and expenses increased primarily due to foreign currency transaction losses in 2015 related to our global sourcing organization’s procurement of inventory on behalf of our foreign subsidiaries, of which approximately $25 million related to our Europe region and $6 million related to our Asia region; such amounts were immaterial in 2014.
Interest expense
Interest expense was $81.2 million for the year ended November 29, 2015, as compared to $117.6 million in the prior year. The decrease in interest expense was primarily due to lower average debt balances and lower average borrowing rates in 2015, resulting from our debt reduction and refinancing activities in 2014 and 2015.
The weighted-average interest rate on average borrowings outstanding for 2015 was 6.72%, as compared to 7.58% for 2014.
Loss on early extinguishment of debt
For the year ended November 29, 2015, we recorded a loss of $14.0 million on early extinguishment of debt as a result of our debt refinancing activities during 2015. The loss was comprised of tender and redemption premiums of $7.5 million, and thewrite-off of $3.5 million of unamortized debt issuance costs, and $3.0 million of other costs.
For the year ended November 30, 2014, we recorded a loss of $20.3 million on early extinguishment of debt as a result of our debt refinancing activities during 2014. The loss was comprised of redemption premiums of $15.2 million and thewrite-off of $5.1 million of unamortized debt issuance costs.
Other income (expense), net
Other income (expense), net, primarily consists of foreign exchange management activities and transactions. For the year ended November 29, 2015, we recorded net expense of $25.4 million as compared to $22.1 million for the prior year. The net expense in 2015 reflected net losses on our foreign currency denominated balances, partially offset by net gains on foreign exchange derivatives. The expense in 2014 reflected losses on our foreign currency denominated balances as well as losses on foreign exchange derivatives.
Income tax expense
Income tax expense was $100.5 million for the year ended November 29, 2015, compared to $49.6 million for the prior year. Our effective income tax rate was 32.4% for the year ended November 29, 2015, compared to 32.2% for the prior year.
The increase in the effective tax rate in 2015 was primarily due to aone-time, incremental annual tax benefit associated with multi-year California Enterprise Zone credits recognized in 2014, partially offset by a $8.0 million discrete tax benefit recognized in 2015 attributable to deductions taken for losses on the investment in a consolidated subsidiary.
The effective tax rate in 2014 included a tax benefit that we recorded in 2014 as a result of reversing a deferred tax liability associated with the change in assertion during the period to indefinitely reinvest certain undistributed foreign earnings.
For the year ended November 29, 2015, management asserted indefinite reinvestment on $100.0 million of undistributed foreign earnings, as management determined that this amount is required to meet ongoing working capital needs in certain foreign subsidiaries; no U.S. income taxes have been provided for such earnings. If the Company were to repatriate such foreign earnings to the United States, the deferred tax liability associated with such earnings would have been approximately $26.5 million.
Liquidity and Capital Resources
Liquidity outlook
We believe we will have adequate liquidity over the next twelve months to operate our business and to meet our cash requirements.
Cash sources
We are a privately-held corporation. We have historically relied primarily on cash flows from operations, borrowings under credit facilities, issuances of notes and other forms of debt financing. We regularly explore financing and debt reduction alternatives, including new credit agreements, unsecured and secured note issuances, equity financing, equipment and real estate financing, securitizations and asset sales.
We are borrowers under a senior secured revolving credit facility. The facility is an asset-based facility, in which the borrowing availability is primarily based on the value of our U.S. Levi’s® trademarks and the levels of accounts receivable and inventory in the United States and Canada. The maximum availability under the facility is $850 million, of which $800 million is available to us for revolving loans in U.S. Dollars and $50 million is available to us for revolving loans either in U.S. Dollars or Canadian Dollars.
As of November 27, 2016, we did not have any borrowings under the credit facility. Unused availability under the facility was $784.3 million, as our total availability of $838.0 million, based on collateral levels as defined by the agreement, was reduced by $53.7 million of other credit-related instruments. As of February 26, 2017, we did not have any borrowings under the credit facility. Unused availability under the credit facility was $746.1 million, as our total availability of $799.1 million, based on collateral levels as defined by the agreement, was reduced by $53.0 million of other credit-related instruments.
As of November 27, 2016, we had cash and cash equivalents totaling approximately $375.6 million, resulting in a total liquidity position (unused availability and cash and cash equivalents) of $1.2 billion.
As of February 26, 2017, we had cash and cash equivalents totaling approximately $368.6 million, resulting in a total liquidity position (unused availability and cash and cash equivalents) of approximately $1.1 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. The following table presents selected cash uses in 2016 and the related projected cash uses for these items in 2017 as of November 27, 2016. There have been no material changes to our estimated cash requirements for 2017, except that potential payments in 2017 under the terms of the EIP have been reduced and are now estimated to range up to approximately $30 million.
| Cash Used in 2016 | Projected Cash Uses in 2017 | |||||||
| (Dollars in millions) | ||||||||
Capital expenditures(1) | $ | 103 | $ | 120 | ||||
Interest | 67 | 67 | ||||||
Federal, foreign and state taxes (net of refunds) | 57 | 60 | ||||||
Pension plans(2) | 32 | 53 | ||||||
Postretirement health benefit plans | 14 | 14 | ||||||
Dividend(3) | 60 | 70 | ||||||
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Total selected cash requirements | $ | 333 | $ | 384 | ||||
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The following table provides information about our significant cash contractual obligations and commitments as of November 27, 2016:
| Payments Due or Projected by Period | ||||||||||||||||||||||||||||
| Total | 2017 | 2018 | 2019 | 2020 | 2021 | Thereafter | ||||||||||||||||||||||
| (Dollars in millions) | ||||||||||||||||||||||||||||
Contractual and Long-term Liabilities: | ||||||||||||||||||||||||||||
Short-term and long-term debt obligations | $ | 1,058 | $ | 39 | $ | — | $ | — | $ | — | $ | — | $ | 1,019 | ||||||||||||||
Interest(1) | 422 | 67 | 64 | 63 | 61 | 61 | 106 | |||||||||||||||||||||
Capital lease obligations | 37 | 5 | 5 | 5 | 5 | 4 | 13 | |||||||||||||||||||||
Operating leases(2) | 669 | 159 | 122 | 99 | 79 | 61 | 106 | |||||||||||||||||||||
Purchase obligations(3) | 891 | 602 | 55 | 41 | 17 | 13 | 163 | |||||||||||||||||||||
Postretirement obligations(4) | 110 | 14 | 13 | 13 | 12 | 12 | 46 | |||||||||||||||||||||
Pension obligations(5) | 327 | 53 | 45 | 45 | 43 | 42 | 99 | |||||||||||||||||||||
Long-term employee related benefits(6) | 92 | 20 | 16 | 11 | 5 | 5 | 35 | |||||||||||||||||||||
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Total | $ | 3,606 | $ | 959 | $ | 320 | $ | 277 | $ | 222 | $ | 198 | $ | 1,630 | ||||||||||||||
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This table does not include amounts related to our uncertain tax positions of $29.1 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 of November 27, 2016, future payments under the terms of the EIP could range up to approximately $70 million, which could become payable in 2017. These payments are contingent on the Company’s liquidity and the Board’s discretion.
Information in the two preceding tables 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 these tables. The inclusion of these projections and estimates should not be regarded as a representation by us that the estimates will prove to be correct.
Cash flows
The following table summarizes, for the periods indicated, selected items in our consolidated statements of cash flows:
| Three Months Ended | Year Ended | |||||||||||||||||||
| February 26, 2017 | February 28, 2016 | November 27, 2016 | November 29, 2015 | November 30, 2014 | ||||||||||||||||
| (Dollars in millions) | ||||||||||||||||||||
Cash provided by operating activities | $ | 49.0 | $ | 46.1 | $ | 306.6 | $ | 218.3 | $ | 232.9 | ||||||||||
Cash used for investing activities | (16.0 | ) | (17.8 | ) | (68.3 | ) | (80.8 | ) | (71.8 | ) | ||||||||||
Cash used for financing activities | (42.5 | ) | (73.6 | ) | (173.5 | ) | (94.9 | ) | (341.7 | ) | ||||||||||
Cash and cash equivalents | 368.6 | 271.1 | 375.6 | 318.6 | 298.3 | |||||||||||||||
Three Months Ended February 26, 2017, as Compared to Same Period in 2016
Cash flows from operating activities
Cash provided by operating activities was $49.0 million for the three-month period in 2017, as compared to $46.1 million for the same period in 2016. The increase reflects lower payments to vendors for operating expenses and an increase in cash received from customers.
Cash flows from investing activities
Cash used for investing activities was $16.0 million for the three-month period in 2017, as compared to $17.8 million for the same period in 2016. The decrease in cash used for investing activities as compared to the prior year primarily reflected increased investment in information technology systems and distribution and proceeds from the settlement of our forward foreign exchange contracts.
Cash flows from financing activities
Cash used for financing activities was $42.5 million for the three-month period in 2017, as compared to $73.6 million for the same period in 2016. Cash used in 2017 primarily reflected the payment of a $35.0 million cash dividend. Cash used in 2016 primarily reflected net repayments on our senior revolving credit facility partially offset by proceeds from our senior revolving credit facility.
2016, as Compared to 2015
Cash flows from operating activities
Cash provided by operating activities was $306.6 million for 2016, as compared to $218.3 million for 2015. Cash provided by operating activities increased compared to the prior year primarily due to higher trade receivables collections and lower payments associated with restructuring-related items and interest, reflective of the increase in our operating income, offset by our higher inventory levels which are primarily driven by lower than anticipated demand in the U.S.
Cash flows from investing activities
Cash used for investing activities was $68.3 million for 2016, as compared to $80.8 million for 2015. The decrease in cash used for investing activities as compared to the prior year was primarily driven by proceeds from the settlement of our forward exchange contracts and cash received from the sale-leaseback of our distribution center in the United Kingdom, partially offset by investment in information technology systems and distribution.
Cash flows from financing activities
Cash used for financing activities was $173.5 million for 2016, as compared to $94.9 million for 2015. Cash used in 2016 primarily reflected net repayments on our senior revolving credit facility, the payment of a $60 million cash dividend in the second quarter of 2016 and the $36 million settlement of ourYen-denominated Eurobonds. Cash used in 2015 primarily reflected the payment of a $50 million cash dividend as well as our refinancing activities and debt reduction during the period.
2015, as Compared to 2014
Cash flows from operating activities
Cash provided by operating activities was $218.3 million for 2015, as compared to $232.9 million for 2014. Cash provided by operating activities decreased compared to the prior year primarily due to higher payments to vendors and higher pension payments, partially offset by an increase in cash received from customers, reflecting our higher beginning accounts receivable balance, lower cash used for inventory purchases, and lower interest payments.
Cash flows from investing activities
Cash used for investing activities was $80.8 million for 2015, as compared to $71.8 million for 2014. The increase in cash used for investing activities as compared to the prior year primarily reflects increased investment in information technology projects and retail expansion.
Cash flows from financing activities
Cash used for financing activities was $94.9 million for 2015, as compared to cash provided of $341.7 million for 2014. Cash used in both periods primarily related to our refinancing activities and debt reduction in each year.
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 $1.04 billion as of February 26, 2017, we had fixed-rate debt of $1.02 billion (98.5% of total debt), net of capitalized debt issuance costs, and variable-rate debt of $15.8 million (1.5% of total debt). As of February 26, 2017, our required aggregate debt principal payments on our unsecured long-term debt were $1.02 billion in years after 2022. Short-term borrowings of $34.2 million at various foreign subsidiaries were expected to be either paid over the next twelve months or refinanced at the end of their applicable terms.
Our long-term debt agreements contain customary covenants restricting our activities as well as those of our subsidiaries. We were in compliance with all of these covenants as of February 26, 2017.
Subsequent Event—Senior Notes due 2027
On February 28, 2017, we issued €475 million in aggregate principal amount of 3.375% senior notes due 2027. On March 3, 2017, we completed a tender offer for $370.3 million of the 6.875% senior notes due 2022 and the remaining $154.7 million was called on March 31, 2017 for redemption on May 1, 2017. The remaining proceeds from the issuances of Senior Notes due 2027 as well as cash on hand will be used to complete the call redemption. The Company will record a net loss on the early extinguishment of debt of approximately $23 million. The estimated loss includes approximately $21 million of tender and call premiums on the retired debt. Debt issuance costs for the Senior Notes due 2027 are estimated at approximately $8 million. Refer to Note 14 “Subsequent Events” in the February 26, 2017 Form10-Q for more information.
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.
Investment and Credit Availability Risk
We manage cash and cash equivalents in various institutions at levels beyond FDIC coverage limits, and we purchase investments not guaranteed by the FDIC. Accordingly, there may be a risk that we will not recover the full principal of our investments or that their liquidity may be diminished. To mitigate this risk, our investment policy emphasizes preservation of principal and liquidity.
Multiple financial institutions are committed to provide loans and other credit instruments under our amended and restated senior secured revolving credit facility. There may be a risk that some of these institutions cannot deliver against these obligations in a timely manner, or at all.
Foreign Exchange Risk
The global scope of our business operations exposes us to the risk of fluctuations in foreign currency markets. This exposure is the result of certain product sourcing activities, some intercompany sales, foreign subsidiaries’ royalty payments, interest payments, earnings repatriations, net investment in foreign operations and funding activities. Our foreign currency management objective is to minimize the effect of fluctuations in foreign exchange rates on our nonfunctional currency cash flows and selected assets or liabilities without exposing ourselves to additional risk associated with transactions that could be regarded as speculative.
We use a centralized currency management operation to take advantage of potential opportunities to naturally offset exposures against each other. For any residual exposures under management, we may enter into various financial instruments, including forward exchange contracts, to hedge certain forecasted transactions, as well as certain firm commitments, including third-party and intercompany transactions.
Our foreign exchange risk management activities are governed by a foreign exchange risk management policy approved by our Treasury committee. Members of our Treasury committee, comprised of a group of our senior financial executives, review our foreign exchange /activities in support of monitoring our compliance with policy. The operating policies and guidelines outlined in the foreign exchange risk management policy provide a framework that allows for a managed approach to the management of currency exposures while ensuring the activities are conducted within established parameters. Our policy includes guidelines for the organizational structure of our treasury risk management function and for internal controls over foreign exchange risk management activities, including various measurements for monitoring compliance. We monitor foreign exchange risk and related derivatives using different techniques, including a review of market value, sensitivity analysis and avalue-at-risk model. We use the market approach to estimate the fair value of our foreign exchange derivative contracts.
We use derivative instruments to manage certain but not all exposures to foreign currencies. Our approach to managing foreign currency exposures is consistent with that applied in previous years. As of November 27, 2016, we had forward foreign exchange contracts to buy $674.9 million and to sell $364.9 million against various foreign currencies. These contracts are at various exchange rates and expire at various dates through February 2018.
As of November 29, 2015, we had forward foreign exchange contracts to buy $883.7 million and to sell $481.6 million against various foreign currencies. These contracts were at various exchange rates and expire at various dates through February 2017.
Derivative Financial Instruments
We are exposed to market risk primarily related to foreign currencies. We manage foreign currency risks with the objective to minimize the effect of fluctuations in foreign exchange rates on our nonfunctional currency cash flows and selected assets or liabilities without exposing ourselves to additional risk associated with transactions that could be regarded as speculative.
We are exposed to credit loss in the event of nonperformance by the counterparties to theover-the-counter forward foreign exchange contracts. However, we believe that our exposures are appropriately diversified across counterparties and that these counterparties are creditworthy financial institutions. We monitor the creditworthiness of our counterparties in accordance with our foreign exchange and investment policies. In addition, we have International Swaps and Derivatives Association, Inc. (“ISDA”) master agreements in place with our counterparties to mitigate the credit risk related to the outstanding derivatives. These agreements provide the legal basis forover-the-counter transactions in many of the world’s commodity and financial markets.
The following table presents the currency, average forward exchange rate, notional amount and fair values for our outstanding forward contracts as of November 27, 2016, and November 29, 2015. The average forward exchange rate is the weighted average of the forward rates of the contracts for the indicated currency. The notional amount represents the U.S. Dollar equivalent amount of the foreign currency at the inception of the contracts, and is the net sum of all buy and sell transactions for the indicated currency. A net positive notional amount represents a position to buy the U.S. Dollar versus the exposure currency, while a net negative notional amount represents a position to sell the U.S. Dollar versus the exposure currency. All transactions will mature before the end of February 2018.
| As of November 27, 2016 | As of November 29, 2015 | |||||||||||||||||||||||
| Average Forward Exchange Rate | Notional Amount | Fair Value | Average Forward Exchange Rate | Notional Amount | Fair Value | |||||||||||||||||||
| (Dollars in thousands) | ||||||||||||||||||||||||
Currency | ||||||||||||||||||||||||
Australian Dollar | 0.74 | $ | 1,957 | $ | (472 | ) | 0.75 | $ | 6,455 | $ | 988 | |||||||||||||
Canadian Dollar | 1.33 | 30,711 | 366 | 1.27 | 23,899 | 2,476 | ||||||||||||||||||
Swiss Franc | 0.97 | (14,227 | ) | (488 | ) | 0.99 | (12,264 | ) | (299 | ) | ||||||||||||||
Czech Koruna | 24.30 | (488 | ) | (21 | ) | 24.54 | (366 | ) | (14 | ) | ||||||||||||||
Danish Krone | 6.70 | (2,357 | ) | (96 | ) | 6.80 | (1,311 | ) | (39 | ) | ||||||||||||||
Euro | 1.13 | 87,304 | 4,734 | 1.11 | 180,379 | 9,795 | ||||||||||||||||||
British Pound Sterling | 1.32 | 67,935 | 5,945 | 1.53 | 53,569 | 602 | ||||||||||||||||||
Hong Kong Dollar | 7.75 | (5,096 | ) | (2 | ) | 7.75 | (1,107 | ) | — | |||||||||||||||
Hungarian Forint | 278.41 | (1,510 | ) | (70 | ) | 287.35 | (823 | ) | (17 | ) | ||||||||||||||
Japanese Yen | 112.16 | 44,648 | (140 | ) | 118.59 | 32,590 | 1,227 | |||||||||||||||||
South Korean Won | 1,178.38 | 13,721 | (41 | ) | 1,115.95 | 13,332 | 504 | |||||||||||||||||
Mexican Peso | 18.95 | 99,454 | 11,124 | 15.84 | 92,270 | 5,914 | ||||||||||||||||||
Malaysian Ringgit | — | — | — | 3.46 | 65 | 65 | ||||||||||||||||||
Norwegian Krone | 8.21 | (1,686 | ) | (73 | ) | 8.55 | (1,327 | ) | (20 | ) | ||||||||||||||
New Zealand Dollar | 0.72 | (4,172 | ) | (75 | ) | 0.66 | (2,890 | ) | (53 | ) | ||||||||||||||
Polish Zloty | 3.95 | (4,078 | ) | (412 | ) | 3.93 | (8,827 | ) | (237 | ) | ||||||||||||||
Swedish Krona | 8.44 | 9,319 | 827 | 8.48 | 13,603 | 266 | ||||||||||||||||||
Singapore Dollar | 1.41 | (28,230 | ) | (359 | ) | 1.38 | (763 | ) | (187 | ) | ||||||||||||||
South African Rand | 15.71 | 16,721 | (1,873 | ) | 12.84 | 15,620 | 2,268 | |||||||||||||||||
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Total | $ | 309,926 | $ | 18,874 | $ | 402,104 | $ | 23,239 | ||||||||||||||||
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Interest rate risk
The following table provides information about our financial instruments that may be sensitive to changes in interest rates. The table presents principal (face amount) outstanding balances of our debt instruments and the related weighted-average interest rates for the years indicated based on expected maturity dates. All amounts are stated in U.S. Dollar equivalents.
| As of November 27, 2016 | As of November 29, 2015 Total | |||||||||||||||||||||||||||||||
| Expected Maturity Date | Total | |||||||||||||||||||||||||||||||
| 2017 | 2018 | 2019 | 2020 | 2021 | Thereafter | |||||||||||||||||||||||||||
| (Dollars in thousands) | ||||||||||||||||||||||||||||||||
Debt Instruments | ||||||||||||||||||||||||||||||||
Fixed Rate (US$) | $ | — | $ | — | $ | — | $ | — | $ | — | $ | 1,025,000 | $ | 1,025,000 | $ | 1,025,000 | ||||||||||||||||
Average Interest Rate | — | — | — | — | — | 5.96 | % | 5.96 | % | 5.96 | % | |||||||||||||||||||||
Fixed Rate (Yen 4.0 billion) | — | — | — | — | — | — | — | 32,634 | ||||||||||||||||||||||||
Average Interest Rate | — | — | — | — | — | — | — | 4.25 | % | |||||||||||||||||||||||
Fixed Rate (Euro 300 million) | — | — | — | — | — | — | — | — | ||||||||||||||||||||||||
Average Interest Rate | — | — | — | — | — | — | — | — | ||||||||||||||||||||||||
Variable Rate (US$) | — | — | — | — | — | — | — | — | ||||||||||||||||||||||||
Average Interest Rate | — | — | — | — | — | — | — | — | ||||||||||||||||||||||||
Total Principal (face amount) of our debt instruments(1) | $ | — | $ | — | $ | — | $ | — | $ | — | $ | 1,025,000 | $ | 1,025,000 | $ | 1,057,634 | ||||||||||||||||
Off-Balance Sheet Arrangements, Guarantees and Other Contingent Obligations
Off-balance sheet arrangements and other.We have contractual commitments fornon-cancelable operating leases; for more information, see Note 14 to our audited consolidated financial statements included in this prospectus. 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 plan for other participating employers’ obligations are not material. We have no other materialnon-cancelable guarantees or commitments, and no material special-purpose entities or otheroff-balance sheet debt obligations.
Indemnification agreements. In the ordinary course of our business, the Company enters into agreements containing indemnification provisions under which the Company agrees to indemnify the other party for specified claims and losses. For example, the Company’s 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 the Company to pay certain amounts associated with claims brought against the other party as the result of trademark infringement, negligence or willful misconduct of Company employees, breach of contract by the Company including inaccuracy of representations and warranties, specified lawsuits in which the Company and the other party areco-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. The Company has insurance coverage that minimizes the potential exposure to certain of such claims. The Company also believes 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 with generally accepted accounting principles in the United States 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. Net sales is primarily comprised of sales of products to wholesale customers, including franchised stores, and direct sales to consumers at our company-operated and online stores and at our company-operatedshop-in-shops located within department stores. We recognize revenue on sale of product when the goods are shipped or delivered and title to the goods passes to the customer provided that: there are no uncertainties regarding customer acceptance; persuasive evidence of an arrangement exists; the sales price is fixed or determinable; and collectability is reasonably assured. Revenue is recorded net of an allowance for estimated returns, discounts and retailer promotions and other similar incentives. Licensing 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 licensing agreements.
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 estimatenon-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 thefirst-infirst-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 reviewingon-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 othernon-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 andnon-amortized intangible assets to determine whether it is more likely than not that the fair value of a reporting unit or othernon-amortized intangible asset is less than its carrying amount. During fiscal 2016, the Company 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 it carrying amount. As such, no further analysis was required. If goodwill and othernon-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, atwo-step quantitative 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 othernon-amortized intangible assets as of November 27, 2016, 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 another 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 assets and liabilities. The future effective tax rate will ultimately depend on the mix of earnings between domestic and foreign operations, the impact of certain undistributed foreign earnings for which no U.S. taxes have been provided because such earnings are planned to be indefinitely reinvested outside of the United States, changes in tax laws and regulations and potential resolutions on tax examinations, refund claims and litigation. Remittances of foreign earnings to the United States are planned based on projected cash flow, working capital and investment needs of our foreign and domestic operations. Based on these assumptions, we estimate the amount that will be distributed to the United States and provide U.S. federal taxes on these amounts. Material changes in our estimates as to how much of our foreign earnings will be distributed to the United States or tax legislation that limits or restricts the amount of undistributed foreign earnings that we consider indefinitely reinvested outside the United States could materially impact our income tax provision and effective tax rate. 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 valuation allowance.
We are subject to income taxes in both the 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 atwo-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 severalnon-contributory defined benefit retirement plans covering eligible employees. We also provide certain health care benefits for U.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 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 our U.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 of November 27, 2016, a 25 basis point change in the discount rate would yield an approximately three percent change in the projected benefit obligation and an approximately two percent change in the annual service cost of our pension plans, and an approximately two percent change in the projected benefit obligation and an approximately three percent change in the annual service cost of our 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 againstpre-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 certainpre-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.
Recently Issued Accounting Standards
See Note 1 to our audited and unaudited consolidated financial statements included in this prospectus for recently issued accounting standards, including the expected dates of adoption and estimated effects on our consolidated financial statements.
Overview
From our California Gold Rush beginnings, we have grown into one of the world’s largest brand-name apparel companies. A history of responsible business practices, rooted in our core values, has helped us build our brands and engender consumer trust around the world. Under our Levi’s®, Dockers®, Signature by Levi Strauss & Co.™ and Denizen®brands, we design, market and sell—directly or through third parties and licensees—products that include jeans, casual and dress pants, tops, shorts, skirts, jackets, footwear, and related accessories for men, women and children around the world.
An Authentic American Icon
Our Levi’s® brand has become one of the most widely recognized brands in the history of the apparel industry. Its broad distribution reflects the brand’s appeal across consumers of all ages and lifestyles. Its merchandising and marketing reflect the brand’s core attributes: authentic, courageous, confident, effortless, connected and purposeful.
Our Dockers® brand offers an alternative to suit dressing in the form of the American staple—the khaki pant. The Dockers® brand has evolved around the world as a market leader in the casual pant category, while also providing tops and accessories to complete ahead-to-toe offering.
Our Global Reach
Our products are sold in more than 110 countries, grouped into three geographic regions: Americas, Europe and Asia. We support our brands throughout these regions through a global infrastructure, developing, sourcing and marketing our products around the world. Although our brands are recognized as authentically “American,” we derive approximately half of our net revenues from outside the United States. A summary of financial information for each geographical region, which comprise our three reporting segments, is found in Note 20 to our audited consolidated financial statements included in this prospectus. As a global company with sales and operations in foreign countries, we are subject to risks of doing business in foreign countries. See “Risk Factors”, specifically “Risks Relating to Our Industry—Our business is subject to risks associated with sourcing and manufacturing overseas” and “Risks Relating to Our Business—We are a global company with significant revenues and earnings generated internationally, which exposes us to political and economic risks as well as the impact of foreign currency fluctuations”.
Our products are sold in approximately 50,000 retail locations worldwide, including approximately 2,900 retail stores, both franchised and company-operated, andshop-in-shops dedicated to our brands. We distribute our Levi’s® and Dockers® products primarily through chain retailers and department stores in the United States and primarily through department stores, specialty retailers, franchised or other brand-dedicated stores andshop-in-shops outside of the United States. Levi’s® and Dockers® products are also sold through our brand-dedicated company-operated retail stores and through the ecommerce sites we operate, as well as the ecommerce sites operated by certain of our key wholesale customers and other third parties. We distribute Signature by Levi Strauss & Co.™ and Denizen® brand products primarily through mass channel retailers in the Americas.
Levi Strauss & Co. was founded in San Francisco, California, in 1853 and incorporated in Delaware in 1971. We conduct our operations outside the United States through foreign subsidiaries owned directly or indirectly by Levi Strauss & Co. We have headquarter offices in San Francisco, Brussels and Singapore. Our corporate offices are located at Levi’s Plaza, 1155 Battery Street, San Francisco, California 94111, and our main telephone number is(415) 501-6000.
Our common stock is primarily owned by descendants of the family of Levi Strauss and their relatives.
Our website—www.levistrauss.com—contains additional and detailed information about our history, our products and our commitments. Financial news and reports and related information about our company can be found athttp://levistrauss.com/investors/financial-news. Information contained on our website is not incorporated by reference into this prospectus.
Our Business Strategies
Our goal is to generate and sustain profitable growth over the long term in order to significantly improve the value of the enterprise. The management team is focused on four key strategies to achieve this goal:
Our Brands and Products
We offer a broad range of products, including jeans, casual and dress pants, tops, shorts, skirts, jackets, footwear and related accessories. Across all of our brands, pants—including jeans, casual pants and dress pants—represented approximately 77%, 81% and 82% of our total units sold in fiscal years 2016, 2015 and 2014, respectively. Men’s products generated approximately 76%, 77% and 77% of our total net sales in fiscal years 2016, 2015 and 2014, respectively.
Levi’s® Brand
The Levi’s® brand epitomizes classic American style and effortless cool and is positioned as the authentic, original and definitive jeanswear brand. Since their inception in 1873, Levi’s® jeans have become one of the
most recognizable garments in the world—reflecting the aspirations and earning the loyalty of people for generations. Consumers around the world instantly recognize the distinctive traits of Levi’s® jeans—the double arc of stitching, known as the Arcuate Stitching Design, and the Red Tab Device, a fabric tab stitched into the back right pocket. The Levi’s® brand continues to evolve to meet the tastes of today’s consumers, driven by its distinctive pioneering and innovative spirit. Our range of leading jeanswear, other apparel items and accessories for men, women and children are available in more than 110 countries, allowing individuals around the world to express their personal style.
The Levi’s® brand encompasses a range of products. Levi’s® Red Tab™ products are the foundation of the brand, consisting of a wide spectrum of jeans and jeanswear offered in a variety of fits, fabrics, finishes, styles and price points intended to appeal to a broad spectrum of consumers. The line includes the iconic 501® jean, the original and best-selling five-pocket jean of all time. The line also incorporates a full range of jeanswear fits and styles designed specifically for women. Sales of Red Tab™ products represented the majority of our Levi’s® brand net sales in all three of our regions in fiscal years 2016, 2015 and 2014. We also offer premium products around the world including a range of premium pants, tops, shorts, skirts, jackets, footwear, and related accessories.
Our Levi’s® brand products accounted for approximately 85% of our total net sales in each of fiscal years 2016, 2015 and 2014, approximately half of which were generated in our Americas region.
Dockers® Brand
Founded in 1986, the Dockers® brand sparked a revolution in the way millions of men dressed around the world, shifting from the standard issue suit to a more casual look. Thirty years later, the Dockers® brand continues to embody the spirit of khakis and define business casual. Since its introduction, the brand has focused on men’s khakis and the essential clothing accessories to go with them.
Our Dockers® brand products accounted for approximately 10% of our total net sales in fiscal years 2016 and 2015, and 11% of our total net sales in fiscal year 2014. Although the substantial majority of these net sales were in the Americas region, Dockers® brand products are sold in more than 50 countries.
Signature by Levi Strauss & Co.™ Brand and Denizen® Brand
In addition to our Levi’s® and Dockers® brands, we offer two brands focused on consumers who seek high-quality and fashionable jeanswear at a value price. We offer denim jeans, casual pants, tops and jackets in a variety of fits, fabrics and finishes for men, women and kids under the Signature by Levi Strauss & Co.™ brand through the mass retail channel in the United States and Canada. The Denizen® brand was introduced in Target stores in the United States starting in 2011, and includes a variety of jeans to complement active lifestyles and to empower consumers to express their aspirations, individuality and attitudes at a value price point.
Signature by Levi Strauss & Co.™brand and Denizen® brand products accounted for approximately 5% of our total net sales in fiscal years 2016 and 2015, and 4% of our total net sales in fiscal year 2014.
Licensing
The appeal of our brands across consumer groups and our global reach enable us to license our Levi’s® and Dockers® trademarks for a variety of product categories in multiple markets in each of our regions, including footwear, belts, wallets and bags, outerwear, sweaters, dress shirts, kidswear, sleepwear and hosiery. We also license our Signature by Levi Strauss & Co.™ and our Denizen® trademarks in various markets for certain product categories.
In addition to product category licenses, we enter into regional license agreements with third parties to produce, market and distribute our products in several countries around the world, including various Latin
American, Middle Eastern and Asia Pacific countries. Licensing accounted for approximately 2% of our total net revenues in each of fiscal years 2016, 2015 and 2014.
We enter into licensing agreements with our licensees covering royalty payments, product design and manufacturing standards, marketing and sale of licensed products, and protection of our trademarks. We require our licensees to comply with our code of conduct for contract manufacturing and engage independent monitors to perform regularon-site inspections and assessments of production facilities.
Sales, Distribution and Customers
We distribute our products through a wide variety of retail formats around the world, including chain and department stores, franchise stores andshop-in-shops dedicated to our brands, our own company-operated retail network, multi-brand specialty stores, mass channel retailers, and both company-operated and retailer ecommerce sites.
Multi-brand Retailers
We seek to make our products available where consumers shop, including offering products and related assortments that are appropriately tailored for our wholesale customers and their retail consumers. Our products are also sold through authorized third-party ecommerce sites. Sales to our top ten wholesale customers accounted for approximately 30% of our total net revenues in 2016 and approximately 31% of net revenues for both 2015 and 2014. No customer represented 10% or more of net revenues in any of these years. The loss of or significant business decline of any major wholesale customer could have a material adverse effect on one or more of our segments or on the company as a whole. See “Risk Factors”, specifically “Risks Relating to Our Business—We depend on a group of key wholesale customers for a significant portion of our revenues. A significant adverse change in a customer relationship or in a customer’s performance or financial position could harm our business and financial condition”.
Dedicated Stores
We believe retail stores dedicated to our brands are important for the growth, visibility, availability and commercial success of our brands, and they are an increasingly important part of our strategy for expanding distribution of our products. Our brand-dedicated stores are either operated by us or by independent third parties such as franchisees. In addition to the dedicated stores, we maintain brand-dedicated ecommerce sites that sell products directly to consumers.
Company-operated retail stores. Our company-operated ecommerce sites and retail stores, including both mainline and outlet stores, generated approximately 28%, 26% and 25% of our net revenues in fiscal 2016, 2015 and 2014, respectively. As of November 27, 2016, we had 697 company-operated stores, predominantly Levi’s® stores, located in 31 countries across our three regions. We had 234 stores in the Americas, 267 stores in Europe and 196 stores in Asia. During 2016, we added 68 company-operated stores and closed 27 stores.
Franchised and other stores. Franchised, licensed, or other forms of brand-dedicated stores operated by independent third parties sell Levi’s® and Dockers® products in markets outside the United States. There were approximately 1,300 of these stores as of November 27, 2016, and they are a key element of our international distribution. In addition to these stores, we consider our network of dedicatedshop-in-shops, which are located within department stores and may be either operated directly by us or third parties, to be an important component of our retail distribution in international markets. Outside of the United States, approximately 400 dedicatedshop-in-shops were operated directly by us and approximately 500 were operated by third parties as of November 27, 2016.
Seasonality of Sales
We typically achieve our largest quarterly revenues in the fourth quarter, reflecting the “holiday” season. In fiscal 2016, our net revenues in the first, second, third and fourth quarters represented 23%, 22%, 26% and 29%,
respectively, of our total net revenues for the year. In fiscal 2015, our net revenues in the first, second, third and fourth quarters represented 23%, 23%, 25% and 29%, respectively, of our total net revenues for the year.
Our fiscal year ends on the last Sunday of November in each year, although the fiscal years of certain foreign subsidiaries end on November 30. Fiscal 2016 and 2015 were52-week years, ending on November 27, 2016, and November 29, 2015, respectively. Fiscal 2014 was a53-week year ending on November 30, 2014. Each quarter of fiscal years 2016, 2015 and 2014 consisted of 13 weeks, with the exception of the fourth quarter of fiscal 2014, which consisted of 14 weeks.
Marketing and Promotion
Our marketing is rooted in globally consistent brand messages that reflect the unique attributes of our brands, including the Levi’s® brand as the authentic and original jeanswear brand and the Dockers® brand as the definitive khaki. We support our brands with a diverse mix of marketing initiatives to drive consumer demand, such as through social media and digital and mobile outlets, sponsorships, product placement in leading fashion magazines and with celebrities, television and radio advertisements, personal sponsorships and endorsements,on-the-ground efforts such as street-level events and similar targeted “viral” marketing activities.
We also use our websites,www.levi.com,www.dockers.com,www.levistrausssignature.com, andwww.denizen.com, in relevant markets to enhance consumer understanding of our brands and help consumers find and buy our products.
Sourcing and Logistics
Organization. Our global sourcing and logistics organizations are responsible for taking a product from the design concept stage through production to delivery to our customers. Our objective is to leverage our global scale to achieve product development and sourcing efficiencies and reduce total product and distribution costs while maintaining our focus on product quality, local service levels and working capital management.
Product procurement. We source nearly all of our products through independent contract manufacturers. The remainder is sourced from our company-operated manufacturing and finishing plants. See “Properties” for more information about those manufacturing facilities.
Sources and availability of raw materials. The principal fabrics used in our products include cotton, blends, synthetics and wools. The prices we pay our suppliers for our products are dependent in part on the market price for raw materials used to produce them, primarily cotton. The price and availability of cotton may fluctuate substantially, depending on a variety of factors. The price fluctuations impact the cost of our products in future seasons due to the lead time of our product development cycle. Fluctuations in product costs can cause a decrease in our profitability if product pricing actions taken in response are insufficient or if those actions cause our wholesale customers or retail consumers to reduce the volumes they purchase.
Sourcing locations. We use numerous independent contract manufacturers located throughout the world for the production and finishing of our garments. We conduct assessments of political, social, economic, trade, labor and intellectual property protection conditions in the countries in which we source our products before placing production in those countries and on an ongoing basis.
In 2016, we sourced products from contractors located in approximately 25 countries around the world. We sourced products in North and South Asia, South and Central America (including Mexico and the Caribbean), Europe and Africa. No single country accounted for more than 15% of our sourcing in 2016.
Sourcing practices. Our sourcing practices include these elements:
We require all third-party contractors and subcontractors who manufacture or finish products for us to comply with our code of conduct relating to supplier working conditions as well as environmental,
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We disclose the names and locations of our contract manufacturers to encourage collaboration among apparel companies in factory monitoring and improvement. We regularly evaluate and refine our code of conduct processes.
Logistics. We operate dedicated distribution centers in a number of countries. For more information, see “Properties.” Distribution center activities include receiving finished goods from our contractors and plants, inspecting those products, preparing them for retail presentation, and shipping them to our customers and to our own stores. Our distribution centers maintain a combination of replenishment and seasonal inventory. In certain locations around the globe, we have consolidated our distribution centers to service multiple countries. In addition, we outsource some of our logistics activities to third-party logistics providers.
Competition
The global apparel industry is highly competitive and fragmented. It is characterized by low barriers to entry, brands targeted at specific consumer segments, many regional and local competitors, and an increasing number of global competitors. Principal competitive factors include:
We face competition from a broad range of competitors at the global, regional and local levels in diverse channels across a wide range of retail price points, and some of our competitors are larger and have more resources than we do in the markets in which we operate. Our primary competitors include vertically integrated specialty stores, jeanswear brands, khakiwear brands, athletic wear companies, retailers’ private or exclusive labels, and certain ecommerce sites. For more information on the factors affecting our competitive position, see “Risk Factors.”
Trademarks
We have more than 5,000 trademark registrations and pending applications in approximately 180 jurisdictions worldwide, and we acquire rights in new trademarks according to business needs. Substantially all of our global trademarks are owned by Levi Strauss & Co., the parent and U.S. operating company. We regard our trademarks as our most valuable assets and believe they have substantial value in the marketing of our products. The Levi’s®, Dockers® and 501® trademarks, the Arcuate Stitching Design, the Tab Device, the Two Horse® Design, the Housemark and the Wings and Anchor Design are among our core trademarks.
We protect these trademarks by registering them with the U.S. Patent and Trademark Office and with governmental agencies in other countries, particularly where our products are manufactured or sold. We work vigorously to enforce and protect our trademark rights by engaging in regular market reviews, helping local law enforcement authorities detect and prosecute counterfeiters, issuingcease-and-desist letters against third parties infringing or denigrating our trademarks, opposing registration of infringing trademarks, and initiating litigation as necessary. We currently are pursuing over 200 infringement matters around the world. We also work with trade groups and industry participants seeking to strengthen laws relating to the protection of intellectual property rights in markets around the world.
Employees
As of November 27, 2016, we employed approximately 13,200 people, approximately 6,200 of whom were located in the Americas, 3,800 in Europe, and 3,200 in Asia. Approximately 1,900 of our employees were associated with the manufacturing and procurement of our products, 6,600 worked in retail, including seasonal employees, 1,300 worked in distribution and 3,400 were othernon-production employees.
History and Corporate Citizenship
Our history and longevity are unique in the apparel industry. Our commitment to quality, innovation and corporate citizenship began with our founder, Levi Strauss, who infused the business with the principle of responsible commercial success that has been embedded in our business practices throughout our more than160-year history. This mixture of history, quality, innovation and corporate citizenship contributes to the iconic reputations of our brands.
In 1853, during the California Gold Rush, Mr. Strauss opened a wholesale dry goods business in San Francisco that became known as “Levi Strauss & Co.” Seeing a need for work pants that could hold up under rough conditions, he and Jacob Davis, a tailor, created the first jean. In 1873, they received a U.S. patent for “waist overalls” with metal rivets at points of strain. The first product line designated by the lot number “501” was created in 1890.
In the 19th and early 20th centuries, our work pants were worn primarily by cowboys, miners and other working men in the western United States. Then, in 1934, we introduced our first jeans for women, and after World War II, our jeans began to appeal to a wider market. By the 1960s, they had become a symbol of American culture, representing a unique blend of history and youth. We opened our export and international businesses in the 1950s and 1960s. In 1986, we introduced the Dockers® brand of casual apparel which revolutionized the concept of business casual.
Throughout this long history, we have upheld our strong belief that we can help shape society through civic engagement and community involvement, responsible labor and workplace practices, philanthropy, ethical conduct, environmental stewardship and transparency. We have engaged in a “profits through principles” business approach from the earliest years of the business. Among our milestone initiatives over the years, we integrated our factories two decades prior to the U.S. civil rights movement and federally mandated desegregation, we developed a comprehensive supplier code of conduct requiring safe and healthy working
conditions among our suppliers (a first of its kind for a multinational apparel company), and we offered full medical benefits to domestic partners of employees prior to other companies of our size, a practice that is widely accepted today.
Properties
We conduct manufacturing, distribution and administrative activities in owned and leased facilities. We operate two manufacturing-related facilities abroad and seven distribution centers around the world. We have renewal rights for most of our property leases. We anticipate that we will be able to extend these leases on terms satisfactory to us or, if necessary, locate substitute facilities on acceptable terms. We believe our facilities and equipment are in good condition and are suitable for our needs. Information about our key operating properties in use as of November 27, 2016, is summarized in the following table:
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Our global headquarters and the headquarters of our Americas region are both located in leased premises in San Francisco, California. Our Europe and Asia headquarters are located in leased premises in Diegem, Belgium and Singapore, respectively. In addition to the above, we operate finance shared service centers in Eugene, Oregon and Singapore. We also operate aback-up data center located in Westlake, Texas. As of November 27, 2016, we also leased or owned 81 administrative and sales offices in 42 countries, as well as leased 12 warehouses in 6 countries.
In addition, as of November 27, 2016, we had 697 company-operated retail and outlet stores in leased premises in 31 countries. We had 234 stores in the Americas region, 267 stores in the Europe region and 196 stores in the Asia region.
Legal Proceedings
In the ordinary course of business, we have various pending cases involving contractual matters, facility and employee-related matters, distribution matters, product liability claims, trademark infringement and other matters. We do not believe any of these pending legal proceedings will have a material impact on our financial condition, results of operations or cash flows.
DIRECTORS AND EXECUTIVE OFFICERS
The following provides information about our directors and executive officers as of April 5, 2017.
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Peter E. Haas Jr. is a descendant of the family of our founder, Levi Strauss.
Directors
Stephen C. Neal, a director since 2007, is our Chairman of the Board, a position he has held since September 2011. He has also served as the Chairman of the law firm Cooley LLP since 2001, where he was also Chief Executive Officer from 2001 until 2008. In addition to his extensive experience as a trial lawyer on a broad range of corporate issues, Mr. Neal has represented and advised numerous boards of directors, special committees of boards and individual directors on corporate governance and other legal matters. Prior to joining Cooley in 1995, Mr. Neal was a partner at the law firm Kirkland & Ellis LLP. Mr. Neal also currently serves as advisor to the Family Council, an advisory body for the LS&Co. family shareholders and a liaison among and between family shareholders and the Board and senior management. Mr. Neal brings to the Board deep knowledge and broad experience in corporate governance as well as his perspectives drawn from advising many companies throughout his career.
Charles V. Bergh,a director since he joined the Company in September 2011, is our President and Chief Executive Officer. Prior to joining the Company, Mr. Bergh held a progression of leadership roles during his28-year career at P&G. Mr. Bergh is currently a director of HP Inc. (“HPQ”) and previously served on the Board of Directors for VF Corporation and on the Singapore Economic Development Board. He also serves on the board of the Levi Strauss Foundation. Mr. Bergh brings to the Board his past experience as a leader of large, global consumer brands. Additionally, his position as our Chief Executive Officer makes him well-suited to be a member of our board of directors.
Troy Alstead,a director since 2012, is the founder of Harbor O5, which is developing a new consumer-facing concept to open in 2017, and founder of the Ocean5 Foundation focused on raising awareness and funding for sustainability of the world’s oceans and seas. In February 2016, he retired from Starbucks Corporation after 24 years with the company, having most recently served as Chief Operating Officer. Mr. Alstead previously held the positions of Group President, Chief Financial Officer and Chief Administrative Officer of Starbucks. He joined Starbucks in 1992, and over the years served in a number of operational, general management and finance roles. Mr. Alstead spent a decade in Starbucks international business, including roles as Senior Leader of Starbucks International, President of Europe, Middle East and Africa headquartered in Amsterdam and Chief Operating Officer of Starbucks Greater China headquartered in Shanghai. Mr. Alstead currently serves as director of TopGolf and Harley-Davidson. Mr. Alstead brings to the board his broad financial and business perspective developed over many years in the global consumer goods industry.
Jill Beraud, a director since 2013, is Chief Executive Officer of Ippolita (Seno Jewelry), a privately-held luxury jewelry company with distribution inhigh-end department stores, flagship stores and ecommerce sites, a position she has held since October 2015. Previously, she served as Executive Vice President for Tiffany & Co., with responsibility for its Global Retail Operations and oversight of strategic store development and real estate from October 2014 until June 2015. From 2011 to 2014, she served as Chief Executive Officer for Living Proof, Inc., a privately-held company that uses advanced medical and materials technologies to create hair care and skin care products for women. She served as President of Starbucks/Lipton Joint Ventures and Chief Marketing Officer of PepsiCo Americas Beverages from 2009 to 2011, and as PepsiCo’s Global Chief Marketing Officer from 2008 to 2009. Before PepsiCo, Ms. Beraud spent 13 years at Limited Brands in various roles, including Chief Marketing Officer of Victoria’s Secret and Executive Vice President of Marketing for its broader portfolio of specialty brands, including Bath & Body Works, C.O. Bigelow, Express, Henri Bendel, and Limited Stores. She served on the board of New York & Company from 2011 to 2015. Ms. Beraud brings to the Board her extensive marketing, social media and consumer branding experience, as well as her managerial and operational knowledge in the apparel and other consumer goods industries.
Robert A. Eckert, a director since 2010, is Operating Partner of FFL Partners, LLC (“FFL”), a private equity firm, a position he has held since September 2014. Mr. Eckert is also Chairman Emeritus of Mattel, Inc., a role he has held since January 2013. He was Mattel’s Chairman and Chief Executive Officer from 2000 until 2011, and he continued to serve as its Chairman until December 2012. He worked for Kraft Foods, Inc. for 23 years, and served as President and Chief Executive Officer from October 1997 until May 2000. From 1995 to 1997, Mr. Eckert was Group Vice President of Kraft Foods, and from 1993 to 1995, Mr. Eckert was President of the Oscar Mayer foods division of Kraft Foods. Mr. Eckert served on the board of Smart & Final Stores, Inc. from 2013 to 2014, prior to it becoming a publicly-traded company. He is currently a director of McDonald’s Corporation, Amgen, Inc., Eyemart Express Holdings, LLC, Enjoy Beer, LLC, and Quinn Company. Mr. Eckert brings to the Board his experience as a senior executive engaged with the dynamics of building global consumer brands through high performance expectations, integrity and decisiveness in driving businesses to successful results.
Spencer C. Fleischer,a director since 2013, is Managing Partner of FFL Partners, LLC (“FFL”), a private equity firm. Beforeco-founding FFL in 1997, Mr. Fleischer spent 19 years at Morgan Stanley & Company as an investment banker and senior leader where he led business units across the globe, including serving as Head of Investment Banking in Asia, Head of Corporate Finance for Europe and Head of Corporate Finance in San
Francisco. Mr. Fleischer currently serves as a director of The Clorox Company, Strategic Investment Group, and Transtar Holding Company. During the past five years, he was also a director of Banner Bank and its predecessor, American West Bank. Mr. Fleischer brings to the Board extensive and broad financial and international business perspectives developed over many years in both the investment banking and private equity industries.
Mimi L. Haas, a director since April 2014, is President of the Mimi and Peter Haas Fund, a position she has held since 1981. Mrs. Haas is also Vice Chair of the Board of Trustees and Chair of the Compensation Committee of the New York Museum of Modern Art; Vice Chair of the San Francisco Museum of Modern Art; and serves on the Board of Directors of Lincoln Center for the Performing Arts. She is also a member of the National Advisory Board of the Haas Center for Public Service at Stanford University, the Council on Foreign Relations, and of the Global Philanthropists Circle. Mrs. Haas is a Fellow at the Stanford Distinguished Careers Institute. She previously served as a director of The Terry Sanford Institute for Public Policy at Duke University, the San Francisco Symphony, San Francisco University High School, Summerbridge National, and Children Now. In addition, Mrs. Haas served on our Board from 2004 to 2006. Mrs. Haas brings to the Board her long and deep knowledge of the Company and her extensive experience in corporate citizenship endeavors.
Peter E. Haas Jr., a director since 1985, is the President of the Red Tab Foundation and a director of the Levi Strauss Foundation, a trustee of the Walter and Elise Haas Fund, an Honorary Board member of the Novato Youth Center, a Trustee Emeritus of the San Francisco Foundation, and Vice President of the Peter E. Haas Jr. Fund. Mr. Haas was one of our managers from 1972 to 1989. He was Director of Product Integrity of The Jeans Company, one of our former operating units, from 1984 to 1989. He served as Director of Materials Management for Levi Strauss USA in 1982 and Vice President and General Manager in the Menswear Division in 1980. Mr. Haas brings to the Board his deep knowledge of the Company resulting from his several operating roles at the Company combined with his long tenure on the Board.
Christopher J. McCormick,a director since April 2016, most recently served as President and CEO of L.L. Bean, Inc. from 2001 until 2016. Mr. McCormick joined L.L. Bean in 1983, previously serving in a number of senior and executive level positions in advertising and marketing. Prior to becoming President and CEO of LL Bean, he was Senior Vice President and Chief Marketing Officer from 2000-2001. Mr. McCormick brings to the Board his deep channel knowledge, ecommerce and direct marketing experience.
Jenny Ming,a director since September 2014, is President and Chief Executive Officer of Charlotte Russe Inc., a fast-fashion specialty retailer of apparel and accessories catering to young women, a position she has held since 2009. From March 1999 to October 2006, Ms. Ming served as President of Old Navy, a $7 billion brand in The Gap, Inc.’s portfolio, where she oversaw all aspects of Old Navy and its 900 retail clothing stores in the U.S. and Canada. Ms. Ming joined The Gap, Inc. in 1986, serving in various executive capacities at its San Francisco headquarters, and in 1994, she was a member of the executive team who launched Old Navy. Ms. Ming serves on the boards of Paper Source and Tower Foundation. She served as Special Advisor to the board of Barney’s New York from 2012 to 2016. She is also a member of the Committee of 100, anon-profit organization of accomplished Chinese Americans. Ms. Ming brings to the Board her extensive operational and retail leadership experience in the apparel industry.
Patricia Salas Pineda, a director since 1991, retired in October 2016 as Group Vice President of Hispanic Business Strategy for Toyota Motor North America, Inc., an affiliate of one of the world’s largest automotive firms, a position she held since May 2013. Ms. Pineda served Toyota Motor North America as Group Vice President of National Philanthropy and the Toyota USA Foundation from 2004 to 2013. During this period, Ms. Pineda also served as General Counsel and Group Vice President of Administration from 2006 to 2008 and as Group Vice President of Corporate Communications and General Counsel from 2004 to 2006. Ms. Pineda was Vice President of Legal, Human Resources and Government Relations, and Corporate Secretary of New United Motor Manufacturing, Inc. with which she had been associated since 1984. She served on the board of The Rand Corporation from 1995 to 2005. She is currently a Chairwoman and member of the Latino Corporate Directors
Association, a director of Frontier Airlines and a member of the advisory board of the Latinos and Society Program at The Aspen Institute. Ms. Pineda brings to the Board her expertise in government relations, regulatory oversight, corporate governance and human resources matters.
Executive Officers
Charles V. Bergh’s biography is set forth under the heading Directors above.
Carrie Askis currently serving as our Executive Vice President and President of Global Retail since February 2016. Ms. Ask was previously with NIKE, Inc., where most recently she was Vice President and General Manager of Nike Stores North America. Ms. Ask held various leadership roles with NIKE, Inc. from 2012 to 2015, including Vice President and General Manager of Global Retail where she created and led the global retail strategy for Converse, a Nike subsidiary. Ms. Ask has more than 15 years of global retail anddirect-to-consumer experience. Prior to Nike, she held retail and merchandising positions at Petco Animal Supplies, Inc. from 2009 to 2012, at Target Corporation from 2004 to 2009 and at Booth Creek Natural Foods, LLC from 2003 to 2004. Her early career started in consulting with McKinsey & Company, and prior to that she was an officer in the U.S. Navy for five years.
Roy Bagattiniis currently serving as our Executive Vice President and President of our Americas region, a position he has held since June 2016. Mr. Bagattini joined the Company in June 2013 as Executive Vice President and President for Asia, Middle East and Africa (“AMA”) region. Mr. Bagattini was Senior Vice President for Asia and Africa at Carlsberg Group, a leading brewing and beverage company, from 2009 to 2013. Prior to that, Mr. Bagattini served in a variety of executive and leadership roles in Russia, China, India and the United States for SABMiller plc, one of the world’s largest brewing companies, from 1991 to 2009.
James Curleigh is currently serving as our Executive Vice President and President of the Global Brands, a position he has held since June 2016. Mr. Curleigh joined the Company in July 2012 as Executive Vice President and President of the Global Levi’s® Brand. Prior to joining the Company, Mr. Curleigh served as the President and Chief Executive Officer of Keen Footwear, Inc., a footwear and accessory company, from March 2008 to May 2012. Before Keen, he was President and Chief Executive Officer of Salomon Sports North America, an innovative performance sports company, from 2001 to 2007. He also established and led TaylorMade adidas golf division in Europe and held various leadership positions in the London office of M&M Mars, a global consumer goods company.
Seth M. Ellison is currently serving as our Executive Vice President and President of our Europe region. Mr. Ellison joined the Company in September 2012 as Executive Vice President and President of the Global Dockers® Brand before assuming his current role in July 2013. Prior to joining the Company, Mr. Ellison was Executive Vice President and Chief Commercial Officer at Alternative Apparel from February 2009 to July 2012. Before Alternative Apparel, Mr. Ellison was President of the Swimwear Group at Perry Ellis from 2005 to 2009, and held various leadership positions at NIKE, Inc. from 1996 to 2005, including Vice President and General Manager of Nike EMEA Apparel and President of Hurley.
Seth R. Jaffe is currently serving as our Senior Vice President and General Counsel, a position he has held since September 2011. Prior to joining the Company, Mr. Jaffe served as Senior Vice President, General Counsel and Secretary of Williams-Sonoma, Inc. from January 2002 to August 2011. From 2000 to 2001, Mr. Jaffe served as Chief Administrative Officer and General Counsel of CareThere, Inc., a healthcare technology company. Mr. Jaffe also held various legal roles at the Company from 1984 to 1999 with increasing responsibilities in the United States and Europe during that time.
David Love is currently serving as our Executive Vice President and President of our Asia, Middle East and Africa region, a position he has held since September 2016. Mr. Love assumed his current role after having served as President and Chief Supply Chain Officer since 2004. In 2015, Mr. Love also served as Chief
Transformation Officer, leading the Company’scentrally-led cost-savings and global productivity initiative. Mr. Love is responsible for development, sourcing and delivery of our products worldwide. Previously, Mr. Love was Vice President of our U.S. Supply Chain organization from 2001 to 2004 and Senior Director of Product Services for the U.S. Levi’s® brand from 1999 to 2001. From 1981, when he joined the Company, to 2001, Mr. Love held various managerial positions.
Kelly McGinnisis currently serving as our Senior Vice President of Corporate Affairs and Chief Communications Officer, a position she has held since August 2013. Prior to joining the Company, Ms. McGinnis served as Vice President of Global Communications at Dell Inc. from March 2010 to 2013. Before Dell, from March 2008 to 2010, she was President of Axicom U.S., a global technology public relations company. From 2001 to 2008, Ms. McGinnis was a senior partner at Fleishman-Hillard, Inc. and served as general manager of the firm’s San Francisco office.
Elizabeth O’Neillcurrently serves as our Senior Vice President and Chief Supply Chain Officer a position she has held since 2016. Ms. O’Neill joined the Company in September 2013 as Senior Vice President, Product Development & Sourcing, overseeing sourcing strategy and production of over 150 million units annually, produced in 20 countries with over 150 suppliers and vendors worldwide. Prior to joining LS&Co, Ms. O’Neill was at Gap, Inc., in leadership roles in both Gap Brand and Old Navy, overseeing sourcing and production management for Gap’s global brands, from 2001 to 2013. Ms. O’Neill previously spent several years at The Disney Store in Los Angeles and Abercrombie and Fitch in Ohio, holding positions in both merchandising and product management.
Marc Rosenis currently serving as our Executive Vice President and President of Global eCommerce, a position he has held since April 2014. He is responsible for leading the Company’s global ecommerce business to drive new growth, consumer loyalty and sustainable profitability. Mr. Rosen brings more than 20 years of retail and ecommerce leadership to the role, most recently as Senior Vice President of Global eCommerce atWal-Mart Stores, Inc., a role he held from January 2011 to April 2014. He was responsible for designing, building, operating and expandingWal-Mart’s ecommerce platforms globally. From January 2006 to December 2010, Mr. Rosen was Senior Vice President of Information Systems, with responsibility forWal-Mart’s global merchandising, supply chain and store systems. He also held senior leadership positions forWal-Mart’s international business unit and Ernst & Young LLP. He currently serves on the board of directors of Arby’s Restaurants.
Harmit Singh is currently serving as our Executive Vice President and Chief Financial Officer, a position he has held since January 2013. He is responsible for managing the Company’s finance, information technology, strategic sourcing and global business services functions globally. Previously, Mr. Singh wasExecutive Vice President andChief Financial Officer of Hyatt Hotels Corporation from August 2008 to December 2012. Prior to that, he spent 14 years at Yum! Brands, Inc. in a variety of global leadership roles including Senior Vice President and Chief Financial Officer of Yum Restaurants International from 2005 to 2008. Before joining Yum!, Mr. Singh worked in various financial capacities for American Express India & Area Countries. Mr. Singh served on the board of directors and was also the Audit Committee Chair of Avendra, LLC through August 2012. In October 2016, Harmit was named to the board of directors of Buffalo Wild Wings Inc., the owner, operator and franchisor of Buffalo Wild Wings® restaurants.
Elizabeth Wood is currently serving as our Senior Vice President and Chief Human Resources Officer. Ms. Wood joined the Company in November 2014 as Interim Chief Human Resources Officer and assumed the role permanently in May 2015. Previously, Ms. Wood was Senior Vice President of Human Resources at Toys “R” Us, Inc. from May 2013 to August 2014. Prior to that, she served as Executive Vice President of Human Resources at The Warnaco Group, Inc. from September 2005 to March 2013. Ms. Wood is an experienced retail executive with a deep background in apparel. She has also worked at Brooks Brothers Group, Inc. and Marks and Spencer Group plc, and has expertise in shepherding brands and businesses through transformational change.
Our Board of Directors
Our board of directors currently has eleven members. Our board is divided into three classes with directors elected for overlapping three-year terms. The term for directors in Class I (Ms. Beraud, Mr. Fleischer, Mr. McCormick, and Mr. Neal) will end at our annual stockholders’ meeting in 2020. The term for directors in Class II (Mrs. Haas, Mr. P. E. Haas Jr. and Ms. Ming) will end at our annual stockholders’ meeting in 2018. The term for directors in Class III (Mr. Alstead, Mr. Bergh, Mr. Eckert and Ms. Pineda) will end at our annual stockholders’ meeting in 2019.
Committees. Our board of directors has four standing committees.
—Members: Mr. Alstead (Chair), Ms. Beraud, Mr. Fleischer, Mr. McCormick and Ms. Ming.
Each of Messrs. Alstead and Fleischer have been determined to be our Audit Committee financial experts as currently defined under SEC rules. We believe that the composition of our Audit Committee meets the criteria for independence under, and the functioning of our Audit Committee complies with the applicable requirements of, the Sarbanes-Oxley Act and SEC rules and regulations.
—Members: Mr. Fleischer (Chair), Ms. Beraud, Mrs. Haas and Mr. McCormick.
—Members: Mr. Eckert (Chair), Mr. Alstead, Mr. P.E. Haas Jr. and Ms. Pineda.
—Members: Mr. Neal (Chair), Mr. Eckert, Mrs. Haas, Mr. P.E. Haas Jr. and Ms. Pineda.
Board Composition and Risk Management Practices
Board Leadership
While ourby-laws do not require separation of the offices of chairman and chief executive officer, these positions are held by different individuals. The Board believes that the separation of the roles of chairman and chief executive officer is a matter to be addressed as part of the succession planning process for those roles and that it is in the best interests of the Company for the board, upon the review and advice of the Nominating, Governance and Corporate Citizenship Committee, to make such a determination when it elects a new chairman or chief executive officer or otherwise as the circumstances may require.
Board Selection Criteria
According to the board’s written membership policy, the board seeks directors who are committed to the values of the Company and are, by reason of their character, judgment, knowledge and experience, capable of contributing to the effective governance of the Company. Additionally, the board is committed to maintaining a diverse and engaged board of directors composed of both stockholders andnon-stockholders. Upon any vacancy on the board, it seeks to fill that vacancy with any specific skills, experiences or attributes that will enhance the overall perspective or functioning of the board.
Board’s Role in Risk Management
Management is responsible for theday-to-day management of the risks facing the Company, while the board, as a whole and through its committees, has responsibility for the oversight of risk management. Management engages the board in discussions concerning risk periodically and as needed, and addresses the topic as part of the annual planning discussions where the board and management review key risks to the Company’s plans and strategies and the mitigation plans for those risks. In addition, the Audit Committee of the board has the responsibility to review the Company’s major financial risk exposuresand the steps management has taken to monitor and control such exposures, with management, the senior internal auditing executive and the independent registered public accounting firm.
Worldwide Code of Business Conduct
We have a Worldwide Code of Business Conduct which applies to all of our directors and employees, including the chief executive officer, the chief financial officer, the controller and our other senior financial officers. The Worldwide Code of Business Conduct covers a number of topics including:
A copy of the Worldwide Code of Business Conduct is an exhibit to our Annual Report onForm 10-K for 2016.
Compensation Discussion and Analysis For Named Executive Officers
The Compensation Discussion and Analysis describes our compensation program, the compensation decisions we made under our program, and the reasoning underlying those decisions. This discussion and analysis focuses on the compensation of our named executive officers, who in fiscal 2016 were:
Our compensation policies and programs are designed to support the achievement of our strategic business plans by motivating, retaining and attracting exceptional talent. Our ability to compete effectively in the marketplace depends on the knowledge, capabilities and integrity of our leaders. Our compensation programs help create a high-performance, outcome-driven and principled culture by holding leaders accountable for delivering results, developing our employees and exemplifying our core values. In addition, we believe that our compensation policies and programs for leaders and employees are appropriately balanced, reinforcing short-term and long-term results, and as such would not drive behavior that would have a material adverse effect on the Company.
The Human Resources Committee (the “HR Committee”) of our Board of Directors (the “Board”) is responsible for overseeing our executive compensation practices. Each year, the HR Committee conducts a review of our compensation and benefits programs to assess whether the programs are aligned with our business strategies, the competitive practices of our peer companies and our stockholders’ interests.
Compensation Philosophy and Objectives
Our executive compensation philosophy, which applies to all members of our executive leadership team, focuses on the following key goals:
Policies and Practices for Establishing Compensation Packages
Elements of compensation
The HR Committee establishes the elements of compensation for our executives after an extensive review of market data on the executives from the peer group described below. The HR Committee reviews each element of compensation independently and in the aggregate to determine the right mix of elements, and associated amounts, for each executive that it believes best helps us further our goals of motivating and retaining our executives, achieving our strategic business plans, and enhancing total stockholder return.
A consistent approach is used across the executive leadership team when establishing each compensation element. However, the HR Committee (and the Board with respect to the CEO) maintains flexibility to exercise its independent judgment in how it applies the standard approach to each executive, taking into account unique considerations existing at an executive’s time of hire, promotion or annual performance review, and the current and future estimated value of previously granted long-term incentives, both performance and time-vested.
Competitive peer group
In determining the design and the amount of each element of compensation, the HR Committee, with the assistance of its compensation consultant, conducts a thorough annual review of competitive market information. The HR Committee reviews data from major published surveys and proxy information of peer companies in the consumer products, apparel and retail industry segments. The peer group is comprised of companies with median revenue and other industry related characteristics (such as apparel, retail and select consumer products companies with premium branded products) that are comparable to us and that we compete with for executive talent. The peer group used in establishing our executives’ 2016 compensation packages is presented below.
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In addition to the companies noted with an asterisk (*) in the table above, the following companies are part of an expanded peer group for purposes of measuring total shareholder return for the performance-based stock appreciation rights granted in 2016 that are further described below under “Performance-based SARs”.
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Establishing compensation for executives other than the CEO
While the HR Committee uses peer group market data percentiles as reference points in setting executive compensation, the HR Committee does not target specific benchmark percentiles for any element of compensation or total direct compensation for the executive officers. Instead, the HR Committee uses a number of factors in determining compensation for our executives in a manner that it believes best helps us further our goals of motivating and retaining our executives, achieving our strategic business plans, and enhancing total stockholder return. The factors considered in establishing compensation for our executives include, among others, our performance, the individual’s performance in the prior year, the scope of each individual’s responsibilities, internal and external pay equity, the guidelines used for setting annual cash, long-term and total compensation for the executives, succession planning strategies, and data regarding pay practices and trends.
The CEO conducts an annual performance review of each executive and makes recommendations to the HR Committee about the structure of the executive compensation program and individual arrangements. The HR Committee carefully considers the CEO’s recommendation and also consults with its consultant, Exequity, an independent board advisory firm, which informs the HR Committee of market trends and conditions, comments on market data relative to each executive’s current compensation, and provides perspective on other company executive compensation practices.
Establishing the CEO compensation package
Annually, the Board’s Nominating, Governance and Corporate Citizenship Committee (the “NG&CC Committee”) assesses the CEO’s performance and submits its performance assessment to the HR Committee. The HR Committee then reviews the performance assessment and peer group compensation data. The HR Committee also consults with its consultant, Exequity, which informs the HR Committee of market trends and conditions, comments on market data relative to the CEO’s current compensation, and provides perspective on other companies’ CEO compensation practices. Based on all of these inputs, the Company’s performance, and the guidelines used for setting annual cash, long-term and total compensation for the other executives, the HR Committee prepares a recommendation to the full Board on all aspects of the CEO’s compensation. The full Board then considers the HR Committee’s recommendation and approves the final compensation package for the CEO.
Role of the Compensation Consultant in compensation decisions
The HR Committee has engaged Exequity to provide the HR Committee with periodic advice on the compensation program structure and individual compensation arrangements for all executives. The consultant was selected by the HR Committee in its sole discretion and does not provide any other services to the Company. The consultant attends HR Committee meetings from time to time, presents an annual briefing on general and retail-industry compensation trends and developments, and is available to the HR Committee outside of meetings as necessary. The consultant reports directly to the HR Committee, although the consultant meets with management from time to time to obtain information necessary to advise the HR Committee.
In addition, the HR Committee periodically reviews its relationship with its independent compensation consultant. The HR Committee believes that the consultant is able to provide it with independent advice.
Elements of Compensation
The primary elements of compensation for our executives including our named executive officers are:
Base Salary
The objective of base salary is to reward each executive for his or her current contributions to the Company, reflect the scope of the executive’s role and responsibilities and compensate each executive for his or her expectedday-to-day performance, as well as provide fixed compensation that generally reflects what the market pays to individuals in similar roles with comparable experience. The peer group data serves as a general guideline only. The HR Committee, and for the CEO, the Board, retains the authority to exercise its independent judgment in establishing the base salary levels for each executive. The HR Committee reviews base salaries for executives on an annual basis in the first fiscal quarter considering the factors described above under “Establishing compensation for executives other than the CEO,” and as needed in connection with promotions or other changes in responsibilities. The table below summarizes base salaries during fiscal 2015 and 2016, and changes that occurred during the year for our named executive officers.
Name | Base Salary as of November 27, 2016(1) | Base Salary as of November 29, 2015 | ||||||
Charles V. Bergh | $ | 1,350,000 | $ | 1,310,000 | ||||
Harmit Singh | 750,000 | 730,000 | ||||||
Carrie Ask(2) | 500,000 | — | ||||||
Roy Bagattini(3) | 750,000 | 626,382 | ||||||
Seth Ellison | 615,000 | 585,000 | ||||||
Annual Incentive Plan
Our Annual Incentive Plan (“AIP”) provides the executives, and other eligible employees, an opportunity to share in any success that they help create by aligning annual incentive compensation with annual performance. The AIP encourages the achievement of our internal annual business goals and rewards attainment of those goals
based on Company, business unit and individual performance as measured against those annual objectives. The alignment of the AIP with our internal annual business goals is intended to motivate all participants to achieve and exceed our annual performance objectives. Actual AIP bonus payments were based on the following two components:
Financial performance
Individual performance
Financial performance above minimum thresholds is required before any bonus payout is made to executives.
The table below describes the target AIP participation rate and potential AIP payout range for each named executive officer. Mr. Bergh’s AIP target percentage of base salary was higher to ensure competitiveness and to recognize the impact of his role on Company performance relative to the other executives.
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Performance measures
Our priorities for 2016 were to drive business growth and create stockholder value. Our 2016 AIP funding goals were aligned with these key priorities through the use of three performance measures:
We used these measures because we believe they are key drivers in increasing stockholder value and because every AIP participant can impact them in some way. EBIT and free cash flow are used as indicators of our earnings and operating cash flow performance, and net revenues is used as an indicator of our growth. These measures may change from time to time based on business priorities. The HR Committee approves the minimum,
target and maximum goals for each measure each year. The reward for meeting the AIP goals is set by the HR Committee. If goal levels are not met, but financial performance reaches minimum thresholds, participants may receive partial payouts to recognize their efforts that contributed to Company and/or business unit performance.
The table below shows the 2016 total Company performance goals at target for each of our three performance measures and the actual 2016 payout percentage. In the case of Messrs. Bergh and Singh, 75% of their total AIP opportunity was based on financial performance of the Company. For Messrs. Bagattini, and Ellison, and Ms. Ask, a combination of Company (weighted 25%) and their respective business unit performance (weighted 50%) was used to calculate their actual financial performance achievement. EBIT, free cash flow, and net revenues goals for each business unit were set using the same methodology as the Company goals.
| EBIT Goal | Free Cash Flow Goal | Net Revenues Goal | Actual Percentage Achieved After Adjustments* | |||||||||||||
| (Dollars in millions) | ||||||||||||||||
Total Company | $ | 506 | $ | 130 | $ | 4,564 | 108 | % | ||||||||
At the close of the fiscal year, the HR Committee reviews and approves the final AIP payout results based on the level of attainment of the designated financial measures at the business unit and total Company levels. The Committee’s review includes an analysis of the fundamentals of the underlying business performance and adjustments for items that are not indicative of ongoing results. Such adjustments may include external factors or internal business decisions that may have impacted financial results during the year. For example, EBIT, free cash flow and net revenues are expressed in constant currencies (i.e., excluding the effects of foreign currency translation), since we believe thatperiod-to-period changes in foreign exchange rates can cause our reported results to appear more or less favorable than business fundamentals indicate.
Individual performance measures
Executives were eligible to receive bonuses based on individual performance. For executives other than the CEO, individual performance and resulting individual performance payout percentage is based on the CEO’s assessment of the executive’s performance against his or her annual objectives and performance relative to his or her internal peers. The CEO’s individual performance is based on the HR Committee’s assessment of Mr. Bergh’s performance against his annual objectives, including the NG&CC Committee’s assessment of the CEO’s performance against annual objectives, and the HR Committee’s assessment of his leadership in 2016. Based on all of these inputs, the HR Committee prepares a recommendation to the full Board on the CEO’s individual performance. The full Board then considers the HR Committee’s recommendation and approves the final individual performance payout percentage for the CEO. Individual annual objectives includenon-financial goals which are not stated in quantitative terms, and a particular weighting is not assigned to any one of these individual goals. Thenon-financial objectives are not established in terms of how difficult or easy they are to attain; rather, they are taken into account in assessing the overall quality of the individual’s performance. For fiscal 2016, these objectives consisted of initiatives that focused on five key behaviors: (1) understanding the Company’s business in the context of the market, (2) owning and delivering on commitments, (3) placing Company success over individual or group success, (4) collaboration, and (5) leading by positive example.
Actual AIP awards
For fiscal 2016, financial performance applicable to each named executive officer was mixed, and AIP payouts reflect the different performance outcomes. The table below shows the inputs used for the calculation of the actual bonus for fiscal 2016 for each eligible named executive officer.
Name | Base Salary | AIP Target | Actual Percentage Achieved: Total Company | Actual Percentage Achieved: Business Unit | Actual Percentage Achieved: Individual Performance | Actual Bonus(1) | ||||||||||||||||||
Charles V. Bergh | $ | 1,350,000 | 160 | % | 108 | % | N/A | 120 | % | $ | 2,400,000 | |||||||||||||
Harmit Singh | 750,000 | 100 | % | 108 | % | N/A | 120 | % | 832,500 | |||||||||||||||
Carrie Ask(2) | 392,308 | 70 | % | 108 | % | 169 | % | 110 | % | 381,716 | ||||||||||||||
Roy Bagattini(3) | 750,000 | 80 | % | 108 | % | 64 | % | 100 | % | 504,000 | ||||||||||||||
Seth Ellison | 615,000 | 80 | % | 108 | % | 173 | % | 190 | % | 792,120 | ||||||||||||||
Long-Term Incentives
The HR Committee believes a large part of an executive’s compensation should be linked to long-term stockholder value creation as an incentive for sustained, profitable growth. Therefore, our long-term incentives for our executives are in the form of equity awards, both performance and time-vested, and provide reward opportunities competitive with those offered by companies in the peer group for similar jobs. Consistent with the other elements of compensation, the HR Committee does not target specific benchmark percentiles for long-term incentive awards for our executives and uses a number of factors in establishing the long-term incentive award levels for each individual, including a review of each individual’s accumulated vested and unvested awards, the current and potential realizable value over time using stock appreciation assumptions, vesting schedules, comparison of individual awards between executives and in relation to other compensation elements, market data, stockholder dilution and accounting expense. Should we deliver against our long-term goals, the long-term equity incentive awards become a significant portion of the total compensation of each executive. For more information on the 2016 long-term equity grants, see the 2016 Grants of Plan-Based Awards table. Stock-based awards are granted under our 2016 Equity Incentive Plan, as amended to date (“EIP”), which enables the HR Committee to select from a variety of stock awards, including stock options, restricted stock, restricted stock units, and stock appreciation rights (“SARs”).
During fiscal 2016, stock settled SARs were the only form of equity granted to our executives under the EIP. The HR Committee chose to grant SARs to align the interests of executives to our stockholders. SARs provide value to the executive only if the price of our stock increases. The terms of the SAR grants made to our executives to date provide for stock settlement only. When a SAR is exercised and settled in stock, the shares issued are subject to the terms of the Company’s Stockholders’ Agreement, including restrictions on transfer. After the participant has held the shares issued under the EIP for six months, he or she may require the Company to repurchase, or the Company may require the participant to sell to the Company, those shares of common stock. The value of shares repurchased or sold back to the Company will be based on the most recent valuation conducted by Evercore Group LLC (“Evercore”), an independent third-party valuation firm. The Company’s obligations to repurchase shares under the EIP are subject to certain restrictive covenants in our various debt agreements (see Note 6 to our audited consolidated financial statements included in this prospectus for more details).
SARs with Service Conditions (“Service SARs”)
Service SARs are typically granted annually (or, in the case of new executives, at the HR Committee meeting generally held in February or July following the date they join the Company or first become an executive) with four-year vesting periods and exercise periods of up to seven years. (See the table entitled “Outstanding Equity Awards at 2016 FiscalYear-End” for details concerning the Service SARs’ vesting schedule, including any individual variations from the typical four-year vesting period). During fiscal 2016, Service SARs with a four-year vesting period again accounted for 60% of each executive’s total 2016 annual SAR grant value.
Performance-based SARs
Performance-based SARs drive greater accountability for the achievement of the strategic plan of the Company and create long-term value for stockholders. During fiscal 2016, performance-based SARs again accounted for 40% of each executive’s total 2016 annual SAR grant value. The key features of the 2016 performance-based SARs are described below:
The Board has the discretion under the EIP to make adjustments in the method of calculating the attainment of performance goals for a performance period.
2014 Performance-based SARs
As described in our Annual Report on Form10-K for fiscal 2014, we granted performance-based SARs during fiscal 2014 which were based on the same performance metrics described above but covered the period from the beginning of fiscal 2014 through the end of fiscal 2016: 1) 50% based on the Company’s average margin of net earnings over the three-year period adjusted for certain items such as interest and taxes, and the target compound annual growth rate in the Company’s net revenues over the three-year period, and 2) 50% based on the Company’s TSR over the three-year period covering fiscal 2014 through fiscal 2016. The potential vesting range as a percentage of the target award was 0% to 150%.
The table below summarizes the goals at target for each of the two performance measures and our actual adjusted achievement. The actual percentage achieved was 0% for the 50% based on the internal performance metrics and 115% for the 50% based on TSR for a weighted attainment of 57.5%. However, excluding the impact
of currency fluctuations on results for fiscal 2014 through fiscal 2016, the weighted percentage achievement would have been approximately 111%. In December 2016, based on its review of the negative impact of currency fluctuations on the results for the completed fiscal 2014 through fiscal 2016 performance period, the Board exercised its discretion to adjust actual percentage achieved from 0% to 75%.
| Average Margin of Net Earnings Goal | CAGR of Net Revenues Goal | Actual Percentage Achieved After Adjustment | ||||||||||
Total Company | 11.4 | % | 3.2 | % | 75 | % | ||||||
Based on the 75% achievement level as set forth in the table above, the fiscal 2014 performance-based SARs (for which the three year performance cycle has been completed) vested as follows:
Name | Target Performance- based SARs | Actual Percentage Achieved After Adjustment | Vested Performance- based SARs | |||||||||
Charles V. Bergh | 128,770 | 75 | % | 96,577 | ||||||||
Harmit Singh | 29,369 | 75 | % | 22,026 | ||||||||
Roy Bagattini | 15,249 | 75 | % | 11,436 | ||||||||
Seth Ellison | 14,120 | 75 | % | 10,590 | ||||||||
Long-term incentive grant practices
The Company does not have any program, plan, or practice to time equity grants to take advantage of the release of material,non-public information. The Company’s common stock is not listed on any stock exchange. Accordingly, the price of a share of our common stock for all purposes, including setting the grant price of SARs, is established by the Board based on an independent third-party valuation conducted by Evercore. The valuation process is typically conducted three times a year, with interim valuations occurring from time to time based on stockholder and Company needs. Please see “Stock-Based Compensation” under Note 1 to our audited consolidated financial statements included in this prospectus for more information about the valuation process.
Benefits and Perquisites
Executives generally are eligible for the same health and welfare insurance plans offered to all employees such as medical, dental, supplemental life, long-term disability and business travel insurance. In addition, although not a significant part of total compensation, the Company provides limited perquisites to executives. The primary perquisite provided to the executives is a flexible allowance to cover expenses such as auto-related expenses, financial and tax planning, legal assistance and excess medical costs. The Company also requires and pays for an annual medical exam for its executives and other members of its executive leadership team. Like many of the companies in the peer group, the Company also offers anon-qualified supplement to the 401(k) plan, which is not subject to the IRS and ERISA limitations, through a Deferred Compensation Plan for Executives and Outside Directors. The Deferred Compensation Plan for Executives and Outside Directors is a U.S.non-qualified, unfunded tax deferred savings plan provided to senior level executives, including our named executive officers, and the outside directors.
Prior to his transfer and relocation to San Francisco in June 2016, Mr. Bagattini was based in Singapore and was provided certain benefits under our global assignment program, including a housing allowance to cover the cost of his rent and utilities. In addition, as an Italian citizen, he did not participate in the local retirement plan offered in Singapore. Mr. Bagattini participated in an international supplemental retirement savings plan designed for globally mobile employees. The Company contributed 14% of Mr. Bagattini’s annual base salary on his behalf to such plan. Mr. Bagattini may voluntarily contribute funds to this plan above and beyond what the Company contributed on his behalf. The Company’s contribution was grossed up to provide atax-advantaged contribution. As a participant under this plan, Mr. Bagattini could direct investments similar to a 401(k) plan. Mr. Bagattini was allowed to make partial withdrawals from the plan two times per calendar year. Following his transfer to San Francisco, Mr. Bagattini’s global assignment benefits ceased, including his participation in the
international supplemental retirement savings plan. Mr. Bagattini is eligible for the same health and welfare insurance plans offered to all employees in San Francisco.
The benefits and perquisites received by our named executive officers and their value are described in more detail in the footnotes to the Summary Compensation Table.
Tax and Accounting Considerations
We have structured our compensation program in a manner intended to comply with Internal Revenue Code Section 409A. Because our common stock is not registered on any exchange, we are not subject to Section 162(m) of the Internal Revenue Code.
Severance and Change in Control Benefits
The terms of Mr. Bergh’s severance and change in control benefits were determined during the negotiation of his employment agreement in 2011 at the time he was hired. As part of this negotiation, the HR Committee determined that the benefits and structure of these benefits were within normal competitive practice, reasonable and appropriate for the circumstances, and necessary to attract Mr. Bergh to the Company. Enhanced termination benefits in the case of a change in control of the Company were included in his employment agreement for the same reasons and to help ensure retention of Mr. Bergh in the case of a potential or actual change in control.
We maintain an Executive Severance Plan that is meant to provide a reasonable and competitive level of financial transitional support to executives who are involuntarily terminated. If an executive’s employment is involuntarily terminated by the Company due to reduction in force, layoff or position elimination, the executive is eligible for severance payments and benefits. Severance benefits are not payable upon a change in control if the executive is still employed by or offered a comparable position with the surviving entity.
While compensation decisions affect potential payouts under these severance arrangements, these arrangements generally did not affect such decisions as these severance provisions are conditional and may never come into effect.
More information about the severance benefits payable to our named executive officers under the Executive Severance Plan and to Mr. Bergh under his employment agreement is set forth in the sections entitled “Potential Payments Upon Termination Or Change In Control” and “Employment Contracts.”
Under the EIP, in the event of a change in control in which the surviving corporation does not assume or continue the outstanding SARs program or substitute similar awards for such outstanding SARs, the vesting schedule of all SARs held by executives that are still employed upon the change in control will be accelerated in full as of a date prior to the effective date of the transaction as the Board determines. This accelerated vesting structure is designed to encourage the executives to remain employed with the Company through the date of the change in control and to ensure that the equity incentives awarded to the executives are not eliminated by the surviving company.
Compensation Committee Report
The Human Resources Committee has reviewed and discussed the Compensation Discussion and Analysis with management. Based on the review and discussion, the Committee recommended to the Board of Directors that the Compensation Discussion and Analysis be included in the Company’s annual report on Form10-K for the fiscal year ended November 27, 2016.
The Human Resources Committee
Robert Eckert (Chair)
Troy Alstead
Peter E. Haas Jr.
Patricia Salas Pineda
Summary Compensation Data
The following table provides compensation information for (i) our chief executive officer, (ii) our chief financial officer, and (iii) three other executive officers who were our most highly compensated executive officers and who were serving as executive officers as of the last day of the fiscal year ended November 27, 2016. The table also shows compensation information for fiscal 2015 and fiscal 2014, which ended November 29, 2015, and November 30, 2014, respectively, for those current named executive officers who also were named executive officers in either of those years.
Name and Principal | Year | Salary | Bonus(2) | Option Awards(3) | Non-Equity Incentive Plan Compensation(4) | Change in Pension Value andNon- qualified Deferred Compensation Earnings(5) | All Other Compensation(6) | Total | ||||||||||||||||||||||||
Charles V. Bergh | ||||||||||||||||||||||||||||||||
President and Chief Executive Officer | 2016 | $ | 1,343,077 | $ | — | $ | 6,489,989 | $ | 2,400,000 | $ | — | $ | 341,996 | $ | 10,575,062 | |||||||||||||||||
| 2015 | 1,304,808 | — | 5,799,993 | 2,426,775 | — | 321,275 | 9,852,851 | |||||||||||||||||||||||||
| 2014 | 1,298,846 | — | 5,793,629 | 2,270,400 | — | 312,374 | 9,675,249 | |||||||||||||||||||||||||
Harmit Singh | ||||||||||||||||||||||||||||||||
Executive Vice President and Chief Financial Officer | 2016 | $ | 746,538 | $ | — | $ | 1,399,970 | $ | 832,500 | $ | — | $ | 152,649 | $ | 3,131,657 | |||||||||||||||||
| 2015 | 724,808 | — | 1,399,992 | 901,550 | — | 128,360 | 3,154,710 | |||||||||||||||||||||||||
| 2014 | 708,654 | — | 1,321,350 | 676,200 | — | 38,587 | 2,744,791 | |||||||||||||||||||||||||
Carrie Ask | ||||||||||||||||||||||||||||||||
Executive Vice President and President, Global Retail | 2016 | $ | 392,308 | $ | 750,000 | $ | 999,976 | $ | 381,716 | $ | — | $ | 100,413 | $ | 2,624,413 | |||||||||||||||||
Roy Bagattini | ||||||||||||||||||||||||||||||||
Executive Vice President and President, Americas | 2016 | $ | 690,433 | $ | 1,000,000 | $ | 2,474,969 | $ | 504,000 | $ | — | $ | 1,451,783 | $ | 6,121,185 | |||||||||||||||||
| 2015 | 619,394 | — | 699,987 | 722,844 | — | 442,073 | 2,484,298 | |||||||||||||||||||||||||
| 2014 | 608,053 | 244,713 | 686,077 | 536,506 | — | 449,647 | 2,524,996 | |||||||||||||||||||||||||
Seth Ellison | ||||||||||||||||||||||||||||||||
Executive Vice President and President, Europe | 2016 | $ | 609,808 | $ | — | $ | 724,992 | $ | 792,120 | $ | — | $ | 472,432 | $ | 2,599,352 | |||||||||||||||||
Name | Executive Perquisites (a) | Relocation (b) | 401(k) Plan Match (c) | Deferred Compensation Match (d) | Tax Payments (e) | Charitable Match (f) | Total | |||||||||||||||||||||
Charles V. Bergh | $ | 44,130 | $ | — | $ | 18,500 | $ | 269,239 | $ | 3,377 | $ | 6,750 | $ | 341,996 | ||||||||||||||
Harmit Singh | 24,167 | — | 19,875 | 108,607 | — | 152,649 | ||||||||||||||||||||||
Carrie Ask | 11,888 | 43,224 | 18,911 | 5,609 | 20,781 | 100,413 | ||||||||||||||||||||||
Roy Bagattini | 82,718 | 210,753 | 122,512 | 2,349 | 1,033,451 | — | 1,451,783 | |||||||||||||||||||||
Seth Ellison | 19,500 | 334,690 | 16,876 | 72,285 | 29,081 | — | 472,432 | |||||||||||||||||||||
Please refer to “Compensation Discussion and Analysis for Named Executive Officers” for more details on the items in the table above.
Other Matters
Employment Contracts
Mr. Bergh. We have an employment agreement with Mr. Bergh effective September 1, 2011. The agreement initially provided for an annual base salary of $1,200,000 and an AIP target participation rate of 135%, which have since been adjusted, and may be further adjusted, pursuant to annual review. For 2016, his base salary and target participation rate under the AIP were $1,350,000 and 160% of base salary, respectively.
Mr. Bergh also participates in our EIP. This element of Mr. Bergh’s compensation for 2016 is reflected and discussed in “Compensation Discussion and Analysis for Named Executive Officers.”
Mr. Bergh’s employment agreement also provides that if Mr. Bergh is involuntarily terminated without Cause, as defined in his employment agreement, Mr. Bergh is eligible to receive certain benefits and payments upon his separation from the Company under certain circumstances under the terms of the Executive Severance Plan for U.S. executives and the EIP; provided however that if Mr. Bergh’s employment is terminated for Good Reason in connection with a Change in Control of the Company (each as defined in his employment agreement), he will be entitled to receive, among other standard benefits, (1) an aggregate amount equal to two times the sum of his then-effective base salary plus his then-effective target AIP amount, (2) a prorated AIP award in respect of the performance period at the time, and (3) company-paid continuation coverage for certain benefits for 18 months. In addition, the unvested portion of his SAR awards that would have vested during the 24 months following the date of such termination will immediately vest, and all vested SAR awards will be exercisable for 18 months following such termination.
Mr. Bergh’s right to any severance or vesting acceleration is subject to his execution of an effective release of claims in favor of the Company and compliance with certain restrictive covenants.
Mr. Bergh is eligible to receive standard healthcare, life insurance and long-term savings program benefits, as well as relocation program benefits. He also receives benefits under the Company’s various executive perquisite programs consistent with that provided to his predecessor.
Mr. Bergh’s employment isat-will and may be terminated by the Company or by him at any time. Mr. Bergh does not receive any separate compensation for his services as a member of our Board.
Mr. Singh. We have an employment arrangement with Mr. Singh effective January 16, 2013. It provides for his annual base salary and participation in our AIP, which are subject to annual review and adjustment, and his participation in our EIP. These elements of Mr. Singh’s compensation for 2016 are reflected and discussed in “Compensation Discussion and Analysis for Named Executive Officers.”
Mr. Singh also receives standard healthcare, life insurance and long-term savings program benefits, as well as benefits under our various executive perquisite programs.
Mr. Singh’s employment isat-will and may be terminated by the Company or by Mr. Singh at any time.
Ms. Ask. We have an employment arrangement with Ms. Ask effective February 16, 2016. It provides for her annual base salary and participation in our AIP, which are subject to annual review and adjustment, and her participation in our EIP. These elements of Ms. Ask’s compensation for 2016 are reflected and discussed in “Compensation Discussion and Analysis for Named Executive Officers.”
Ms. Ask also receives standard healthcare, life insurance and long-term savings program benefits, as well as benefits under our various executive perquisite programs.
Ms. Ask’s employment isat-will and may be terminated by us or by Ms. Ask at any time.
Mr. Bagattini. We have an employment arrangement with Mr. Bagattini effective June 1, 2016. His arrangement provides for his annual base salary and participation in our AIP, which are subject to annual review and adjustment, and his participation in our EIP. These elements of Mr. Bagattini’s compensation for 2016 are reflected and discussed in “Compensation Discussion and Analysis for Named Executive Officers.”
Mr. Bagattini also receives standard healthcare, life insurance, and long-term savings program benefits, as well as benefits under our various executive perquisite programs.
Prior to June 2016, he was eligible to receive benefits under our global assignment program, including, education assistance fees and a housing allowance of up to approximately $18,000 per month to cover the cost of his rental and utilities.
Mr. Bagattini’s employment isat-will and may be terminated by the Company or by Mr. Bagattini upon 3 months’ notice or pay in lieu of notice.
Mr. Ellison. We have an employment arrangement with Mr. Ellison effective September 10, 2012. It provides for his annual base salary and participation in our AIP, which are subject to annual review and adjustment, and his participation in our EIP. These elements of Mr. Ellison’s compensation for 2016 are reflected and discussed in “Compensation Discussion and Analysis for Named Executive Officers.”
Mr. Ellison also receives standard healthcare, life insurance and long-term savings program benefits, as well as benefits under our global assignment program and our various executive perquisite programs.
Mr. Ellison’s employment isat-will and may be terminated by us or by Mr. Ellison at any time.
2016 Grants of Plan-Based Awards
The following table provides information on all plan-based awards granted to each of our named executive officers during the year ended November 27, 2016. The awards and the unvested portion of stock appreciation rights (“SARs”) identified below are also reported in the Outstanding Equity Awards at FiscalYear-End table.
| Estimated Future Payouts UnderNon-Equity Incentive Plan Awards(1) | Estimated Future Payouts Under Equity Incentive Plan Awards(2) | All Other Option Awards | ||||||||||||||||||||||||||||||||||||||
Name | Grant Date | Threshold ($) | Target ($) | Maximum ($) | Threshold (#) | Target (#) | Maximum (#) | Number of Securities Underlying Options(3) (#) | Exercise or Base Price of Option Awards(4) ($) | Full Grant Date Fair Value(5) ($) | ||||||||||||||||||||||||||||||
Charles V. Bergh | N/A | $ | — | $ | 2,160,000 | $ | 4,320,000 | |||||||||||||||||||||||||||||||||
| 2/9/2016 | — | 164,595 | 246,893 | $ | 61.00 | $ | 2,618,706 | |||||||||||||||||||||||||||||||||
| 2/9/2016 | 246,893 | 61.00 | 3,871,282 | |||||||||||||||||||||||||||||||||||||
Harmit Singh | N/A | — | 750,000 | 1,500,000 | ||||||||||||||||||||||||||||||||||||
| 2/9/2016 | — | 35,505 | 53,258 | 61.00 | 564,885 | |||||||||||||||||||||||||||||||||||
| 2/9/2016 | 53,258 | 61.00 | 835,085 | |||||||||||||||||||||||||||||||||||||
Carrie Ask | N/A | — | 274,616 | 549,231 | ||||||||||||||||||||||||||||||||||||
| 7/13/2016 | — | 24,906 | 37,359 | 68.50 | 400,738 | |||||||||||||||||||||||||||||||||||
| 7/13/2016 | 37,359 | 68.50 | 599,238 | |||||||||||||||||||||||||||||||||||||
Roy Bagattini | N/A | — | 600,000 | 1,200,000 | ||||||||||||||||||||||||||||||||||||
| 2/9/2016 | — | 18,387 | 27,580 | 61.00 | 292,537 | |||||||||||||||||||||||||||||||||||
| 2/9/2016 | 27,580 | 61.00 | 432,454 | |||||||||||||||||||||||||||||||||||||
| 7/13/2016 | 43,586 | 65,379 | 68.50 | 701,299 | ||||||||||||||||||||||||||||||||||||
| 7/13/2016 | 65,379 | 68.50 | 1,048,679 | |||||||||||||||||||||||||||||||||||||
Seth Ellison | N/A | 492,000 | 984,000 | |||||||||||||||||||||||||||||||||||||
| 2/9/2016 | — | 18,387 | 27,580 | 61.00 | 292,537 | |||||||||||||||||||||||||||||||||||
| 2/9/2016 | 27,580 | 61.00 | 432,454 | |||||||||||||||||||||||||||||||||||||
Outstanding Equity Awards at 2016 FiscalYear-End
The following table shows all outstanding equity awards held by each of our named executive officers as of November 27, 2016. The vesting schedule for each grant is shown following this table.
| SAR Awards | ||||||||||||||||||||
Name | Number of Securities Underlying Unexercised SARs Exercisable | Number of Securities Underlying Unexercised SARs Unexercisable(1) | Equity Incentive Plan Awards: Number of Securities Underlying Unexercised(2) | SAR Exercise Price(3) | SAR Expiration Date | |||||||||||||||
Charles V. Bergh | 436,720 | — | $ | 32.00 | 2/2/2019 | |||||||||||||||
| 498,864 | — | 32.00 | 2/2/2019 | |||||||||||||||||
| 275,882 | 11,996 | (a) | 37.75 | 2/5/2020 | ||||||||||||||||
| 132,792 | 60,362 | (b) | 64.50 | 2/5/2021 | ||||||||||||||||
| 82,547 | 106,132 | (c) | 74.25 | 2/4/2022 | ||||||||||||||||
| 246,893 | (d) | 61.00 | 2/9/2023 | |||||||||||||||||
| 143,939 | (a) | 37.75 | 2/5/2020 | |||||||||||||||||
| 96,577 | (a) | 64.50 | 2/5/2021 | |||||||||||||||||
| 125,786 | (b) | 74.25 | 2/4/2022 | |||||||||||||||||
| 164,595 | (c) | 61.00 | 2/9/2023 | |||||||||||||||||
Harmit Singh | 62,920 | 2,736 | (a) | 37.75 | 2/5/2020 | |||||||||||||||
| 30,282 | 13,770 | (b) | 64.50 | 2/5/2021 | ||||||||||||||||
| 19,925 | 25,618 | (c) | 74.25 | 2/4/2022 | ||||||||||||||||
| 53,258 | (d) | 61.00 | 2/9/2023 | |||||||||||||||||
| 32,828 | (a) | 37.75 | 2/5/2020 | |||||||||||||||||
| 22,026 | (a) | 64.50 | 2/5/2021 | |||||||||||||||||
| 30,362 | (b) | 74.25 | 2/4/2022 | |||||||||||||||||
| 35,505 | (c) | 61.00 | 2/9/2023 | |||||||||||||||||
Carrie Ask | 37,359 | 68.50 | 7/13/2023 | |||||||||||||||||
| 24,906 | (c) | 68.50 | 7/13/2023 | |||||||||||||||||
Roy Bagattini | 27,504 | 4,696 | (f) | 59.25 | 7/11/2020 | |||||||||||||||
| 15,718 | 7,155 | (b) | 64.50 | 2/5/2021 | ||||||||||||||||
| 9,962 | 12,809 | (c) | 74.25 | 2/4/2022 | ||||||||||||||||
| 27,580 | (d) | 61.00 | 2/9/2023 | |||||||||||||||||
| 65,379 | (e) | 68.50 | 7/13/2023 | |||||||||||||||||
| 16,100 | (a) | 59.25 | 7/11/2020 | |||||||||||||||||
| 11,436 | (a) | 64.50 | 2/5/2021 | |||||||||||||||||
| 15,181 | (b) | 74.25 | 2/4/2022 | |||||||||||||||||
| 18,387 | (c) | 61.00 | 2/9/2023 | |||||||||||||||||
| 43,586 | (c) | 68.50 | 7/13/2023 | |||||||||||||||||
Seth Ellison | 24,198 | 1,054 | (a) | 37.75 | 2/5/2020 | |||||||||||||||
| 14,555 | 6,623 | (b) | 64.50 | 2/5/2021 | ||||||||||||||||
| 9,962 | 12,809 | (c) | 74.25 | 2/4/2022 | ||||||||||||||||
| 27,580 | (d) | 61.00 | 2/9/2023 | |||||||||||||||||
| 2,626 | (a) | 37.75 | 2/5/2020 | |||||||||||||||||
| 10,590 | (a) | 64.50 | 2/5/2021 | |||||||||||||||||
| 15,181 | (b) | 74.25 | 2/4/2022 | |||||||||||||||||
| 18,387 | (c) | 61.00 | 2/9/2023 | |||||||||||||||||
(a) SARs vest 25% on 2/5/2014 and then monthly over the remaining 36 months.
(b) SARs vest 25% on 2/5/2015 and then monthly over the remaining 36 months.
(c) SARs vest 25% on 2/4/2016 and then monthly over the remaining 36 months.
(d) SARs vest 25% on 2/9/2017 and then monthly over the remaining 36 months.
(e) SARs vest 25% on 7/13/2017 and then monthly over the remaining 36 months.
(f) SARs vest 25% on 7/10/2014 and then monthly over the remaining 36 months.
(a) Represents actual number of earned SARs that vested and remain outstanding pursuant to certification of performance results.
(b) SARs vesting subject to certification of performance results in the first quarter of fiscal 2018. The total number of SARs that could vest if the maximum performance is achieved over the three-year performance period for each named executive is as follows: Mr. Bergh (188,679), Mr. Singh (45,543), Mr. Bagattini (22,772), and Mr. Ellison (22,772).
(c) SARs vesting subject to certification of performance results in the first quarter of fiscal 2019. The total number of SARs that could vest if the maximum performance is achieved over the three-year performance period for each named executive is as follows: Mr. Bergh (246,893), Mr. Singh (53,258), Ms. Ask (37,359), Mr. Bagattini (92,960), and Mr. Ellison (27,580).
Option Exercises
The following table shows all SARs exercised and the value realized upon exercise by each of our named executive officers for the year ended November 27, 2016.
Name | Number of Shares Acquired on Exercise (#) | Value Realized on Exercise ($) | ||||||
Charles V. Bergh | — | $ | — | |||||
Harmit Singh | — | — | ||||||
Carrie Ask | — | — | ||||||
Roy Bagattini | — | — | ||||||
Seth Ellison | 10,000 | 307,496 | ||||||
Executive Retirement Plans
Non-Qualified Deferred Compensation
The Deferred Compensation Plan for Executives and Outside Directors (“Deferred Compensation Plan”) is a U.S.non-qualified, unfunded deferred tax effective savings plan provided to the executives, among other executives and the directors, as part of competitive compensation.
Participants may elect to defer all or a portion of their base salary and AIP payment and may elect anin-service and/or retirement distribution. Executive officers who defer salary or bonus under this plan are credited with market-based returns depending upon the investment choices made by the executive applicable to each deferral. The investment options under the plan, which closely mirror the options provided under our qualified 401(k) plan, include a number of mutual funds with varying risk and return profiles. Participants may change their investment choices as frequently as they desire, consistent with our 401(k) plan.
In addition, under the Deferred Compensation Plan, the Company provides a match up to 6% of eligible deferred compensation that cannot be provided under the qualified 401(k) plan due to IRS qualified plan compensation limits. The amounts in the table below reflectnon-qualified contributions over the 401(k) limit by the executive officers and the resulting Company match.
The table below provides information on thenon-qualified deferred compensation activity for each of our named executive officers for the year ended November 27, 2016.
| Year Ended November 27, 2016 | ||||||||||||||||||||
Name | Company Contributions(1) | Executive Contributions | Aggregate Earnings | Aggregate Withdrawals / Distributions | Aggregate Balance at November 27, 2016 | |||||||||||||||
Charles V. Bergh | $ | 269,239 | $ | 214,819 | $ | 143,345 | $ | — | $ | 2,260,550 | ||||||||||
Harmit Singh | 108,607 | 86,328 | 24,478 | — | 374,971 | |||||||||||||||
Carrie Ask | 5,609 | 4,487 | 29 | — | 10,124 | |||||||||||||||
Roy Bagattini(2) | 128,117 | 2,192 | 4 | — | 130,313 | |||||||||||||||
Seth Ellison | 72,285 | 180,210 | 13,023 | — | 611,585 | |||||||||||||||
Potential Payments Upon Termination Or Change In Control
On June 9, 2011, the Company and Charles V. Bergh, our President and CEO, executed an employment agreement in connection with Mr. Bergh joining the Company. The employment agreement provides that if Mr. Bergh is involuntarily terminated without Cause, Mr. Bergh is eligible to receive certain benefits and payments upon his separation from the Company under certain circumstances under the terms of the Executive Severance Plan for U.S. executives and the EIP; provided however that if Mr. Bergh’s employment is terminated for Good Reason in connection with a Change in Control of the Company (each as defined in his employment agreement), he will be entitled to receive, among other standard benefits, (1) an aggregate amount equal to two times the sum of his then-effective base salary plus his then-effective target AIP amount, (2) a prorated AIP award in respect of the performance period at the time, and (3) company-paid continuation coverage for certain benefits for 18 months. In addition, the unvested portion of his SAR awards that would have vested during the 24 months following the date of such termination will immediately vest, and all vested SAR awards will be exercisable for 18 months following such termination.
Mr. Bergh’s right to any severance or vesting acceleration is subject to his execution of an effective release of claims in favor of the Company and compliance with certain restrictive covenants.
In 2016, our U.S. severance arrangements under our Executive Severance Plan offered the named executive officers eighty (80) weeks of severance pay equal to base salary plus the beneficiaries’ AIP target amount, upon execution of a General Release Agreement, if their employment ceases due to a reduction in force, layoff or position elimination. We also cover the cost of the COBRA health coverage premium for the duration of the executive’s severance payment period, up to a maximum of 18 months. The COBRA premium coverage is shared between the individual and the Company at the same shared percentage that was effective during the executive’s employment. We also provide life insurance, career counseling and transition services. These severance benefits would not be payable upon a change in control if the executive is still employed or offered a comparable position with the surviving entity.
Under the EIP, in the event of a change in control in which the surviving corporation does not assume or continue the outstanding SARs or substitute similar awards for the outstanding SARs, the vesting schedule of all SARs held by executives that are still employed will be accelerated in full to a date prior to the effective time of the transaction as determined by the Board. If the SARs are not exercised at or prior to the effective time of the transaction, all rights to exercise them will terminate, and any reacquisition or repurchase rights held by the Company with respect to such SARs shall lapse.
The information in the tables below reflects the estimated value of the compensation to be paid by us to each of the named executive officers in the event of termination or a change in control. The amounts shown below assume that each named individual was employed and that a termination or change in control was effective as of November 27, 2016. The actual amounts that would be paid can only be determined at the time of an actual termination event. The amounts also assume a share price of $69.00 for the SAR grants, which is based on the Evercore share valuation dated as of December 31, 2016.
Charles V. Bergh
Executive Benefits and Payments Upon Termination | Voluntary Termination | Retirement | Involuntary Not for Cause Termination | For Cause Termination | Change in Control | |||||||||||||||
Compensation: | ||||||||||||||||||||
Severance(1) | $ | — | $ | — | $ | 5,400,000 | $ | — | $ | 9,180,000 | ||||||||||
Stock Appreciation Rights(2) | — | — | — | 3,938,408 | ||||||||||||||||
Benefits: | ||||||||||||||||||||
COBRA & Life Insurance(3) | — | — | 17,118 | — | 17,118 | |||||||||||||||
Harmit Singh
Executive Benefits and Payments Upon Termination | Voluntary Termination | Retirement | Involuntary Not for Cause Termination | For Cause Termination | Change in Control | |||||||||||||||
Compensation: | ||||||||||||||||||||
Severance(1) | $ | — | $ | — | $ | 2,307,692 | $ | — | $ | — | ||||||||||
Stock Appreciation Rights(2) | — | — | — | — | 857,569 | |||||||||||||||
Benefits: | ||||||||||||||||||||
COBRA & Life Insurance(3) | — | — | 17,118 | — | — | |||||||||||||||
Carrie Ask
Executive Benefits and Payments Upon Termination | Voluntary Termination | Retirement | Involuntary Not for Cause Termination | For Cause Termination | Change in Control | |||||||||||||||
Compensation: | ||||||||||||||||||||
Severance(1) | $ | — | $ | — | $ | 1,307,692 | $ | — | $ | — | ||||||||||
Stock Appreciation Rights(2) | — | — | — | — | 31,133 | |||||||||||||||
Benefits: | ||||||||||||||||||||
COBRA & Life Insurance(3) | — | — | 23,610 | — | — | |||||||||||||||
Roy Bagattini
Executive Benefits and Payments Upon Termination | Voluntary Termination | Retirement | Involuntary Not for Cause Termination | For Cause Termination | Change in Control | |||||||||||||||
Compensation: | ||||||||||||||||||||
Severance(1) | $ | — | $ | — | $ | 2,076,923 | $ | — | $ | — | ||||||||||
Stock Appreciation Rights(2) | — | — | — | �� | — | 500,202 | ||||||||||||||
Benefits: | ||||||||||||||||||||
COBRA & Life Insurance(3) | — | — | 23,610 | — | — | |||||||||||||||
Seth Ellison
Executive Benefits and Payments Upon Termination | Voluntary Termination | Retirement | Involuntary Not for Cause Termination | For Cause Termination | Change in Control | |||||||||||||||
Compensation: | ||||||||||||||||||||
Severance(1) | $ | — | $ | — | $ | 1,703,077 | $ | — | $ | — | ||||||||||
Stock Appreciation Rights(2) | — | — | — | — | 430,477 | |||||||||||||||
Benefits: | ||||||||||||||||||||
COBRA & Life Insurance(3) | — | — | 26,242 | — | — | |||||||||||||||
DIRECTOR COMPENSATION
The following table provides compensation information for our directors who were not employees in fiscal 2016:
Name | Fees Earned or Paid in Cash | Stock Awards(1) | All Other Compensation(2) | Total | ||||||||||||
Stephen C. Neal(3) | $ | 215,000 | $ | 234,955 | $ | 22,384 | $ | 472,339 | ||||||||
Troy Alstead | 120,000 | 134,945 | 11,529 | 266,474 | ||||||||||||
Jill Beraud | 100,000 | 134,945 | 7,381 | 242,326 | ||||||||||||
Robert A. Eckert | 120,000 | 134,945 | 21,777 | 276,722 | ||||||||||||
Spencer Fleischer(4) | 115,000 | 134,945 | 9,028 | 258,973 | ||||||||||||
Mimi L. Haas | 100,000 | 134,945 | 5,246 | 240,191 | ||||||||||||
Peter E. Haas, Jr. | 100,000 | 134,945 | 8,296 | 243,241 | ||||||||||||
Christopher J. McCormick | 71,667 | 168,647 | — | 240,314 | ||||||||||||
Jenny Ming | 100,000 | 134,945 | 4,575 | 239,520 | ||||||||||||
Patricia Salas Pineda(5) | 100,000 | 134,945 | 29,155 | 264,100 | ||||||||||||
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Name | Fair Value of Dividend Equivalent RSUs Granted | |||
Stephen C. Neal | $ | 14,884 | ||
Troy Alstead | 11,529 | |||
Jill Beraud | 7,381 | |||
Robert A. Eckert | 21,777 | |||
Spencer Fleischer | 9,028 | |||
Mimi L. Haas | 5,246 | |||
Peter E. Haas, Jr. | 8,296 | |||
Christopher J. McCormick | — | |||
Jenny Ming | 4,575 | |||
Patricia Salas Pineda | 21,655 | |||
Board compensation is reviewed by the NG&CC Committee and approved by the Board. In fiscal 2016, director compensation consisted of an annual retainer paid in cash and equity compensation in the form of RSUs. Committee chairpersons also received an additional cash retainer, as described below.
Annual Cash Retainer
In fiscal 2016, eachnon-employee director received compensation consisting of an annual cash retainer fee of $100,000 and was eligible to participate in the provisions of the Deferred Compensation Plan for Executives and Outside Directors that apply to directors. In fiscal 2016, Mr. Neal, Mr. Fleischer, and Ms. Pineda participated in this Deferred Compensation Plan for Executives and Outside Directors.
Equity Compensation
In fiscal 2016, eachnon-employee director also received an annual equity award in the form of RSUs which are granted under the EIP. The annual equity award value in the form of RSUs granted under the EIP is $135,000. RSU recipients have target stock ownership guidelines of $300,000 worth of equity ownership within five years of participation in the program. The value of the RSUs is tracked against the Company’s share prices, established by the Evercore valuation process.
RSUs are units, representing beneficial ownership interests, corresponding in number and value to a specified number of underlying shares of stock. The RSUs vest in three equal installments after thirteen, twenty-four andthirty-six months following the grant date. After the recipient of the RSU has held the shares for six months, he or she may require the Company to repurchase, or the Company may require the participant to sell to the Company, those shares of common stock. If the director’s service terminates for reason other than cause after the first, but prior to full, vesting period, then any unvested portion of the award will fully vest as of the date of such termination. In addition, each director’s initial RSU grant includes a deferral delivery feature, under which the director will not receive the vested awards until six months following the cessation of service on the Board.
Under the terms of the EIP, recipients of RSUs receive additional grants as a dividend equivalent when the Board declares a dividend to all stockholders. Therefore, all directors who held RSUs as of February 19, 2016, received additional RSUs as a dividend equivalent. Dividend equivalents are subject to all the terms and conditions of the underlying Restricted Stock Unit Award Agreement to which they relate.
Compensation of Committee Chairpersons
In addition to the compensation described above, committee chairpersons receive an additional retainer fee in the amount of $20,000 for the Audit Committee and the HR Committee and $15,000 for the Finance Committee and the Nominating, Governance and Corporate Citizenship Committee.
Mr. Neal is the Chairman of the Board. As the Chairman of the Board, he is entitled to receive an additional annual retainer in the amount of $200,000, 50% of which is paid in cash and 50% of which is paid in the form of RSUs. The Chairman may also receive the additional retainers attributable to committee chairmanship if applicable.
Compensation Committee Interlocks and Insider Participation
The HR Committee serves as the compensation committee of our Board. Its members are Mr. Eckert (Chair), Mr. Alstead, Mr. P.E. Haas Jr., and Ms. Pineda. In 2016, no member of the HR Committee was a current officer or employee of ours. There are no compensation committee interlocks between us and other entities involving our executive officers and our Board members who serve as executive officers of those other entities.
SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT AND RELATED STOCKHOLDER MATTERS
Our common stock is primarily owned by descendants of the family of Levi Strauss and their relatives. Shares of our common stock are not publicly held or traded. All shares are subject to a stockholders’ agreement described below. The following table contains information about the beneficial ownership of our common stock as of April 5, 2017, by:
Under the rules of the SEC, a person is deemed to be a “beneficial owner” of a security if that person has or shares “voting power,” which includes the power to vote or to direct the voting of the security, or “investment power,” which includes the power to dispose of or to direct the disposition of the security. Under these rules, more than one person may be deemed a beneficial owner of the same securities and a person may be deemed to be a beneficial owner of securities as to which that person has no economic interest. Except as described in the footnotes to the table below, the individuals named in the table have sole voting and investment power with respect to all common stock beneficially owned by them, subject to community property laws where applicable.
As of April 5, 2017, there were 273 record holders of common stock. The percentage of beneficial ownership shown in the table is based on 37,612,891 shares of common stock outstanding as of April 5, 2017. The business address of all persons listed is 1155 Battery Street, San Francisco, California 94111.
Name | Number of Shares Beneficially Owned | Percentage of Shares Outstanding | ||||||
Mimi L. Haas | 6,519,856 | 17.3 | % | |||||
Peter E. Haas Jr. | 5,733,069 | (1) | 15.2 | % | ||||
Margaret E. Haas | 4,449,581 | (2) | 11.8 | % | ||||
Robert D. Haas | 3,931,642 | (3) | 10.5 | % | ||||
Peter E. Haas Jr. Family Fund | 2,911,770 | (4) | 7.7 | % | ||||
Daniel S. Haas | 2,021,597 | (5) | 5.4 | % | ||||
Troy Alstead | 4,001 | * | ||||||
Jill Beraud | 4,001 | * | ||||||
Robert A. Eckert | 4,955 | — | ||||||
Spencer Fleischer | — | — | ||||||
Christopher J. McCormick | — | — | ||||||
Jenny Ming | — | — | ||||||
Stephen C. Neal | 21,345 | * | ||||||
Patricia Salas Pineda | 9,167 | * | ||||||
Charles V. Bergh | 592,105 | (6) | 1.6 | % | ||||
Seth M. Ellison | 15,464 | (7) | * | |||||
Harmit Singh | 33,384 | (8) | * | |||||
Carrie Ask | — | * | ||||||
Roy Bagattini | 9,716 | (9) | * | |||||
Directors and executive officers as a group (22 persons) | 13,142,114 | (10) | 34.9 | % | ||||
Equity Compensation Plan Information
The following table sets forth certain information, as of November 27, 2016, with respect to the EIP, our only equity compensation plan. This plan was amended and restated by the Board in February 2016 and approved by our stockholders at the Annual Meeting of Stockholders in April 2016. See Note 11 to our audited consolidated financial statements included in this prospectus for more information about the EIP.
Number of Outstanding Options, Warrants | Number of Securities to Be Issued Upon Exercise of Outstanding Options, Warrants and Rights(2) | Weighted-Average Exercise Price of Outstanding Options, Warrants and Rights(1) | Number of Securities Remaining Available for Future Issuance Under Equity Compensation Plans(3) | |||||||||
4,381,167 | 1,157,347 | $ | 52.66 | 2,906,683 | ||||||||
Stockholders’ Agreement
Our common stock is primarily owned by descendants of the family of Levi Strauss and their relatives and are not publicly held or traded. All shares are subject to a stockholders’ agreement. The agreement limits the
transfer of shares and certificates to other holders, family members, specified charities and foundations and to the Company. The agreement does not provide for registration rights or other contractual devices for forcing a public sale of shares or certificates, or other access to liquidity. The Stockholders’ Agreement will terminate on April 15, 2019, (unless extended for a maximum of two,two-year periods), or earlier upon the first of the following to occur: (1) the Company’s receipt of a written notice signed by stockholders holding at leasttwo-thirds of the shares of common stock seeking to terminate the Stockholders’ Agreement, or (2) 180 days following the consummation of an initial public offering (“IPO”) (or such earlier date following the consummation of an IPO that the Company’s Board of Directors may determine).
CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS, AND DIRECTOR INDEPENDENCE
Charles V. Bergh, President and Chief Executive Officer, Peter E. Haas Jr., a director of the Company, Kelly McGinnis, Senior Vice President of Corporate Affairs and Chief Communications Officer, and Liz O’Neil, Senior Vice President and Chief Supply Chain Officer, are board members of the Levi Strauss Foundation, which is not a consolidated entity of the Company. Seth R. Jaffe, Senior Vice President and General Counsel, is Vice President of the Levi Strauss Foundation. During 2016, we donated $6.9 million to the Levi Strauss Foundation.
Procedures for Approval of Related Party Transactions
We have a written policy concerning the review and approval of related party transactions. Potential related party transactions are identified through an internal review process that includes a review of director and officer questionnaires and a review of any payments made in connection with transactions in which related persons may have had a direct or indirect material interest. Any business transactions or commercial relationships between the Company and any director, stockholder, or any of their immediate family members, are reviewed by the Nominating, Governance and Corporate Citizenship Committee of the board and must be approved by at least a majority of the disinterested members of the board. Business transactions or commercial relationships between the Company and named executive officers who are not directors or any of their immediate family members requires approval of the chief executive officer with reporting to the Audit Committee.
Director Independence Policy
Although our shares are not registered on a national securities exchange, we review and take into consideration the director independence criteria required by the New York Stock Exchange in determining the independence of our directors on an annual basis. In addition, the charters of our board committees prohibit members from having any relationship that would interfere with the exercise of their independence from management and the Company. The fact that a director may own stock in the Company is not, by itself, considered an “interference” with independence under the committee charters. Family stockholders or other family member directors are not eligible for membership on the Audit Committee. These independence standards are disclosed on our website at http://www.levistrauss.com/investors/corporate-governance. Except as described below, all of our directors are independent under the independence criteria required by the New York Stock Exchange.
Charles V. Bergh, who serves as our full-time President and Chief Executive Officer, is not considered independent due to his employment with the Company. The Board does not have a lead director.
DESCRIPTION OF OTHER INDEBTEDNESS
Amended and Restated Senior Secured Revolving Credit Facility
We are a party to a credit agreement for a senior secured revolving credit facility. The credit facility, which was amended and restated on March 21, 2014, as further described below, provides for an asset-based facility, in which the borrowing availability is primarily based on the value of the U.S. Levi’s® trademarks and the levels of accounts receivable and inventory in the United States and Canada, as further described below.
Availability, interest and maturity. The maximum availability under the credit facility is $850.0 million, of which $800.0 million is available to us for revolving loans in U.S. Dollars and $50.0 million is available to us for revolving loans either in U.S. Dollars or Canadian Dollars. Subject to the availability under the borrowing base, we may make and repay borrowings from time to time until the maturity of the credit facility.
We may make voluntary prepayments of borrowings at any time and must make mandatory prepayments if certain events occur. The current maturity date of the credit facility is March 21, 2019. Of the maximum availability of $850.0 million, $350.0 million is secured by the U.S. Levi’s® trademarks. The interest rate for borrowing under the credit facility is LIBOR plus 125 to 200 basis points, depending on borrowing base availability, and the range of the rate for undrawn availability is 25 to 30 basis points (depending on the Company’s credit ratings). Upon the maturity date, all of the obligations outstanding under the credit agreement become due.
The unused availability under our amended and restated senior secured revolving credit facility was $784.3 million at November 27, 2016, as the total availability of $838.0 million, based on the collateral levels discussed above, was reduced by $53.7 million of letters of credit and other credit usage allocated under the facility. The $53.7 million was comprised of $2.4 million of other credit usage and $51.3 million ofstand-by letters of credit with various international banks which serve as guarantees to cover U.S. workers’ compensation claims and the working capital requirements for certain subsidiaries, primarily India.
Guarantees and security. Our obligations under the credit agreement are guaranteed by our domestic subsidiaries. The obligations under the agreement are secured by specified domestic assets, including certain U.S. trademarks associated with the Levi’s® brand and accounts receivable, goods and inventory in the United States. Additionally, the obligations of Levi Strauss & Co. (Canada) Inc. under the credit agreement are secured by Canadian accounts receivable, goods, inventory and other Canadian assets. The lien on the U.S. Levi’s® trademarks and related intellectual property may be released at our discretion so long as we meet certain conditions; such release would reduce the borrowing base.
Covenants. The credit agreement contains customary covenants restricting our activities as well as those of our subsidiaries, including limitations on the ability to sell assets; engage in mergers; enter into transactions involving related parties or derivatives; incur or prepay indebtedness or grant liens or negative pledges on our assets; make loans or other investments; pay dividends or repurchase stock or other securities; guaranty third-party obligations; and make changes in our corporate structure. There are exceptions to these covenants, and some are only applicable when unused availability falls below specified thresholds. In addition, the credit agreement includes, as a financial covenant, a springing fixed charge coverage ratio of 1.0:1.0, which arises when availability falls below a specified threshold.
Events of default. The credit agreement contains customary events of default, including payment failures; failure to comply with covenants; failure to satisfy other obligations under the credit agreements or related documents; defaults in respect of other indebtedness; bankruptcy, insolvency and inability to pay debts when due; material judgments; pension plan terminations or specified underfunding; substantial stock ownership changes; and specified changes in the composition of our board of directors. The cross-default provisions in the agreement apply if a default occurs on other indebtedness in excess of $50.0 million and the applicable grace period in respect of the indebtedness has expired, such that the lenders of or trustee for the defaulted indebtedness have the right to accelerate. If an event of default occurs under the credit agreement, the lenders may terminate their commitments, declare immediately payable all borrowings under the agreement and foreclose on the collateral.
Senior Notes due 2022
On May 8, 2012, we issued our 2022 Notes in an aggregate principal amount of $385.0 million to qualified institutional buyers and to purchasers outside the United States in compliance with the Securities Act. The 2022 Notes are unsecured obligations that rank equally with all of our other existing and future unsecured and unsubordinated debt. On March 14, 2013, we issued an additional $140.0 million of 2022 Notes to qualified institutional buyers in compliance with the Securities Act. The 2022 Notes mature on May 1, 2022. Interest on the 2022 Notes is payable semi-annually in arrears on May 1 and November 1. We may redeem some or all of the 2022 Notes prior to May 1, 2017, at a price equal to 100% of the principal amount plus accrued and unpaid interest and a “make-whole” premium. On or after May 1, 2017, we may redeem all or any portion of the 2022 Notes, at once or over time, at redemption prices specified in the indenture governing the 2022 Notes.
We used a portion of the proceeds from the issuance of the old notes, together with borrowings under our amended and restated senior secured revolving credit facility to purchase the 2022 Notes that were tendered and accepted by us in the Tender Offer we concluded in February 2017 and to pay related fees and expenses of the offering of the old notes and the Tender Offer. On May 1, 2017, we will redeem the remaining 2022 Notes that were not tendered by holders and accepted by us in the Tender Offer and will use the remaining net proceeds of the old notes to pay for such redemption and related costs and for general corporate purposes, which may include repaying other outstanding indebtedness.
Senior Notes due 2025
On April 27, 2015, we issued our 2025 Notes in an aggregate principal amount of $500.0 million to qualified institutional buyers and to purchasers outside the United States in compliance with the Securities Act. The 2025 Notes are unsecured obligations that rank equally with all of our other existing and future unsecured and unsubordinated debt. The 2025 Notes mature on May 1, 2025. Interest on the 2025 Notes is payable semi- annually in arrears on May 1 and November 1. We may redeem some or all of the 2025 Notes prior to May 1, 2020, at a price equal to 100% of the principal amount plus accrued and unpaid interest and a “make-whole” premium. On or after May 1, 2020, we may redeem all or any portion of the 2025 Notes, at once or over time, at redemption prices specified in the indenture governing the 2025 Notes. In addition, at any time prior to May 1, 2018, we may redeem up to a maximum of 40% of the original aggregate principal amount of the 2025 Notes with the proceeds of certain equity offerings at a redemption price of 105.00% of the principal amount of the 2025 Notes, plus accrued and unpaid interest, if any, to the date of redemption.
You can find the definitions of capitalized terms used in this description and not defined elsewhere under the subheading “Definitions.” In this description, the words “Company,” “we,” “us” and “our” refer only to Levi Strauss & Co. and not to any of its subsidiaries.
The old notes were, and the exchange notes will be, issued under an indenture, dated as of February 28, 2017,April 27, 2015, as supplemented by a first supplemental indenture, dated as of April 17, 2020, between the Company and Wells Fargo Bank, National Association, as trustee. The indenture is governed by the Trust Indenture Act of 1939, as amended (the “Trust Indenture Act”). The indenture has been filed as an exhibit to the registration statement of which this prospectus is a part. The terms of the exchange notes include those stated in the indenture and those made part of the indenture by reference to the Trust Indenture Act.
The old notes, the exchange notes offered hereby, together with the $500.0 million aggregate principal amount of the 5.00% Senior Notes due 2025 which we issued on April 27, 2015 (the “2025 Notes”), will be treated as a single series of notes under the indenture, including for purposes of determining whether the required percentage of noteholders has given its approval or consent to an amendment or waiver or joined in directing the trustee to take certain actions on behalf of all noteholders. For purposes of this description, unless the context indicates otherwise, references to “notes” include“Senior Notes” means the 2025 Notes, the old notes, previously issued under the indenture and the exchange notes offered hereby, and references to the “indenture” meansmean the indenture governing the old note and the exchange notes.Senior Notes.
The following is a summary of the material provisions of the indenture. It does not include all of the provisions of the indenture. We urge you to read the indenture, which was filed as Exhibit 4.1 to the Company’s Current Report on Form8-K filed with the SEC on March 3, 2017,April 27, 2015, including the definitions of certain terms contained therein and those terms made part of the indenture by reference to the Trust Indenture Act as in effect on the date of the indenture, because the indenture, and not this description, defines your rights as a holder of the notes. Copies of the indenture are available upon request to the Company at the following address: Levi Strauss & Co., Levi’s Plaza, 1155 Battery Street, San Francisco, California 94111.
Principal, Maturity and Interest
We have issued €475$500 million in initial aggregate principal amount of old notes and $500 million in aggregate principal amount of 2025 Notes under the indenture, and, subject to compliance with the covenant described under “—Certain Covenants—Limitation on Debt,” we can issue an unlimited amount of additional notes at later dates. Any additional notes that we issue in the future will be substantially the same as the notes offered hereby, except that the notes issued in the future will have different issuance prices, issuance dates and, in some cases, may have a different first interest payment date and ISIN number and/or Common Code.CUSIP number. We will issue notes only in fully registered form without coupons, in a minimum denomination of €100,000$2,000 and integral multiples of €1,000$1,000 in excess thereof.
The notesSenior Notes will mature on March 15, 2027.May 1, 2025.
Interest on the notesSenior Notes will accrue at a rate of 3 3⁄8%5.00% per annum. Interest on the notes will be payable semi-annually in arrears on March 15May 1 and September 15, commencing September 15, 2017.November 1. We will pay interest to those persons who were holders of record on the March 1April 15 or September 1October 15 immediately preceding each interest payment date.
Interest on the notesSenior Notes will accrue from the date of original issuance or, if interest has already been paid, from the date it was most recently paid. Interest will be computed on the basis of a360-day year comprised of twelve30-day months.
The old notes and the exchange notesSenior Notes will be denominated in eurosU.S. dollars and all payments of principal and interest thereon will be paid in euros.U.S. dollars.
Additional interest is payable with respect to the notes in certain circumstances if we do not consummate the exchange offer (or shelf registration, if applicable) as described in this offering memorandumprospectus under the heading “Exchange Offer; Registration Rights.”
Listing
Application will be made to admit the notes to listing on the Official List of the Luxembourg Stock Exchange and to admit the notes to trading on the Euro MTF market.
Ranking
The 2025 Notes and the old notes are and the exchange notes offered hereby will be:
senior unsecured obligations of the Company;
effectively subordinated in right of payment to existing and future secured debt, including obligations under our Existing Bank Credit Facility;revolving credit facility;
structurally subordinated to all debt of our subsidiaries;
equal in ranking (“pari passu”) with all our existing and future senior debt; and
senior in right of payment to all our future subordinated debt.
Secured debt of the Company will be effectively senior to the notesSenior Notes to the extent of the value of the assets securing such debt. As of February 26, 2017, after giving effect to the issuance of the old notes and the application of the proceeds thereof,May 24, 2020, our total debt would have beenwas approximately $1.02$1.8 billion, all of which would have been unsecured,approximately $300 million was secured, and we would have had approximately $746.1$448 million of additional borrowing capacity under our revolving credit facility. To the extent we enter into secured financings in the future, the notesSenior Notes will also be effectively subordinated to such secured debt to the extent of the value of the additional assets securing such debt.
A significant portion of our operations are conducted through our subsidiaries. Therefore, our ability to service our debt, including the notes,Senior Notes, is dependent upon the earnings of our subsidiaries, joint ventures and minority investments and the distribution of those earnings to us, or upon loans, advances or other payments made by these entities to us. The ability of these entities to pay dividends or make other payments or advances to us will depend upon their operating results and will be subject to applicable laws and contractual restrictions contained in the instruments governing their debt, including our Existing Bank Credit Facility.revolving credit facility.
We only have a stockholder’s claim in the assets of our subsidiaries. This stockholder’s claim is junior to the claims that creditors of our subsidiaries have against our subsidiaries. Holders of the notesSenior Notes will only be creditors of the Company, and not of our subsidiaries. As a result, all the existing and future liabilities of our subsidiaries, including any claims of trade creditors and preferred stockholders, will be effectively senior to the notes.Senior Notes.
We conduct our foreign operations through foreign subsidiaries, which in fiscal year 20162019 accounted for approximately 49%56% of our consolidated net revenues. As a result, we depend in part upon dividends or other intercompany transfers of funds from our foreign subsidiaries for the funds necessary to meet our debt service obligations, including payments on the notes.Senior Notes. We only receive the cash that remains after our foreign subsidiaries satisfy their obligations. If those subsidiaries are unable to pass on the amount of cash that we need, we may be unable to make payments to you. Any agreements our foreign subsidiaries enter into with other parties, as well as applicable laws and regulations limiting the right and ability ofnon-U.S. subsidiaries and affiliates to pay dividends and remit earnings to affiliated companies absent special conditions, may restrict the ability of our foreign subsidiaries to pay dividends or make other distributions to us.
As of February 26, 2017,May 24, 2020, the liabilities, including trade payables but excluding intercompany obligations, of our subsidiaries were approximately $496.6 million.$1.8 billion. Our subsidiaries have other liabilities, including contingent liabilities, which may be significant.
The indenture will containcontains limitations on the amount of additional Debtdebt that we and the Restricted Subsidiariesrestricted subsidiaries may incur. However, the amounts of this Debtdebt could nevertheless be substantial.
Optional Redemption
Except as set forth in the second and third succeeding paragraphs, the notes will not be redeemable at the option of the Company prior to March 15, 2022. Starting on that date,Beginning May 1, 2020, the Company may redeem all or any
portion of the notes,Senior Notes, at once or over time, after giving the required notice under the indenture. The notesSenior Notes may be redeemed at the redemption prices set forth below, plus accrued and unpaid interest, if any, to the redemption date (subject to the right of holders of record on the relevant record date to receive interest due on the relevant interest payment date). The following prices are for notesSenior Notes redeemed during the12-month period commencing on March 15May 1 of the years set forth below, and are expressed as percentages of principal amount:
Redemption Year | Price | |||
2022 | 101.688 | % | ||
2023 | 101.125 | % | ||
2024 | 100.563 | % | ||
2025 and thereafter | 100.000 | % | ||
At any time and from time to time, prior to March 15, 2020, the Company may redeem up to a maximum of 40% of the original aggregate principal amount of the notes (including additional notes, if any) with the proceeds of one or more Equity Offerings, at a redemption price equal to 103.375% of the principal amount thereof, plus accrued and unpaid interest thereon, if any, to the redemption date (subject to the right of holders of record on the relevant record date to receive interest due on the relevant interest payment date); provided, however, that after giving effect to any redemption of this kind, at least 60% of the original aggregate principal amount of notes (including additional notes, if any) remains outstanding. Any redemption of this kind shall be made within 90 days of such Equity Offering.
In addition, the Company may choose to redeem all or any portion of the notes, at once or over time, prior to March 15, 2022. If it does so, it may redeem the notes after giving the required notice under the indenture. To redeem the notes, the Company must pay a redemption price equal to the sum of:
Redemption Year | Price | |||
2020 | 102.500 | % | ||
2021 | 101.667 | % | ||
2022 | 100.833 | % | ||
2023 | 100.000 | % | ||
In connection with any redemption of notesSenior Notes described above, such redemption may, at the Company’s discretion, be subject to one or more conditions precedent, including any related Equity Offering, issuance of Debt or other transaction. If such redemption or notice is subject to satisfaction of one or more conditions precedent, such notice shall state that, in the Company’s discretion, such redemption may not occur and such notice may be rescinded in the event that any or all of such conditions shall not have been satisfied by the redemption date. If less than all of the notes are to be redeemed, the notes to be redeemed will be selected by the trustee on a pro rata basis, by lot or another method the trustee deems to be fair and appropriate in accordance with the applicable procedures of the depository. Notwithstanding the foregoing, if less than all of the notes are to be redeemed, no notes of a principal amount of €100,000 or less shall be redeemed in part. If money sufficient to pay the redemption price on the notes (or portions thereof) to be redeemed on the redemption date is deposited with the paying agent on or before the redemption date and certain other conditions are satisfied, then on and after such redemption date, interest will cease to accrue on such notes (or such portion thereof) called for redemption.
Any notice to holders of notesSenior Notes of such redemption needs to include the appropriate calculation of the redemption price, but does not need to include the redemption price itself. The actual redemption price, calculated as described above, must be set forth in an Officers’ Certificate delivered to the trustee no later than two business days prior to the redemption date.
If the Company effects an optional redemption of the notes, it will, if and for so long as any notes are listed on the Official List of the Luxembourg Stock Exchange and the rules of the Luxembourg Stock Exchange so
require, inform the Luxembourg Stock Exchange of such optional redemption and confirm the aggregate principal amount of the notes that will remain outstanding immediately after such redemption.
The Company will send notice of any redemption at least 10 days but not more than 60 days before the redemption date to each registered holder of notes to be redeemed.
Sinking Fund
There will be no mandatory sinking fund payments for the notes.
Paying Agent and Registrar for the Notes
The Company will maintain one or more Paying Agents (each, a “Paying Agent”) for the notes, including one Paying Agent in the City of London (the “Principal Paying Agent”). The initial Principal Paying Agent for the notes will be HSBC Bank plc in the City of London.
The Company will also maintain one or more registrars (each, a “Registrar”) and one or more transfer agents in the City of London or a European Union member state. The initial Registrar and transfer agent will be HSBC Bank plc. The Registrar will maintain a register reflecting ownership of definitive registered notes outstanding from time to time, if any, and will facilitate transfers of definitive registered notes on behalf of the Company. The transfer agent shall perform the functions of a transfer agent.
The Company may change any Paying Agent, Registrar or transfer agent for the notes without prior notice to the Holders of the notes. However, if and for so long as any notes are listed on the Official List of the Luxembourg Stock Exchange and the rules of the Luxembourg Stock Exchange so require, the Company will publish notice of the change in a Paying Agent, Registrar or transfer agent in a leading newspaper of general circulation in Luxembourg (which is expected to be theLuxemburger Wort) or, to the extent and in the manner permitted by such rules, post such notice on the official website of the Luxembourg Stock Exchange (www.bourse.lu). The Company or any of its subsidiaries may act as Paying Agent or Registrar in respect of the notes.
Redemption for Tax Reasons
If, as a result of any change in, or amendment to, the laws (or any regulations or rulings promulgated under the laws) of the United States (or any political subdivision or taxing authority of or in the United States), or any change in, or amendments to, an official position regarding the application or interpretation of such laws, regulations or rulings, which change or amendment is announced and becomes effective after the date of this offering memorandum, we become or, based upon a written opinion of independent counsel selected by us, will become obligated to pay additional amounts as described herein under the heading “—Payment of Additional Amounts” with respect to the notes, then we may at any time at our option redeem, in whole, but not in part, the notes on not less than 10 nor more than 60 days prior notice, at a redemption price equal to 100% of their principal amount, together with interest accrued but unpaid on those notes to the date fixed for redemption. Any such redemption may not take place more than 60 days prior to the date on which we would first be required to pay any additional amounts.
Payment of Additional Amounts
We will, subject to the exceptions and limitations set forth below, pay additional amounts on the notes as are necessary in order that each payment made by us or a paying agent on the notes to a beneficial owner of the notes who is not a United States person (as defined below), after deduction by any applicable withholding agent of any present or future tax, assessment or other governmental charge (including any interest, penalties, or other additions to tax) of the United States or a political subdivision or taxing authority of or in the United States,
imposed by withholding with respect to the payment, will not be less than the amount provided in the notes to be then due and payable; provided, however, that the foregoing obligation to pay additional amounts shall not apply:
|
The notes are subject in all cases to any tax, fiscal or other law or regulation or administrative or judicial interpretation applicable to the notes. Except as specifically provided under this heading “—Payments of Additional Amounts,” we will not be required to make any payment for any tax, assessment or other governmental charge imposed by any government or a political subdivision or taxing authority of or in any government or political subdivision.
As used under this heading “—Payments of Additional Amounts” and under the heading “—Redemption for Tax Reasons”, the term “United States” means the United States of America (including the states and the District of Columbia) and its territories, possessions and other areas subject to its jurisdiction, and the term “United States person” means any person who is, for U.S. federal income tax purposes, an individual who is a citizen or resident of the United States, a corporation, partnership or other entity created or organized in or under the laws of the United States, any state of the United States or the District of Columbia (other than a partnership that is not treated as a United States person under any applicable Treasury regulations), or any estate or trust the income of which is subject to United States federal income taxation regardless of its source.Senior Notes.
Repurchase at the Option of Holders Upon a Change of Control
Upon the occurrence of a Change of Control, unless we have exercised our right, if any, to redeem the notes in full, each holder of notesSenior Notes will have the right to require us to repurchase all or any part of that holder’s notesSenior Notes pursuant to the offer described below (the “Change of Control Offer”) at a purchase price (the “Change of Control Purchase Price”) equal to 101% of the principal amount thereof, plus accrued and unpaid interest, if any, to the purchase date (subject to the right of holders of record on the relevant record date to receive interest due on the relevant interest payment date).
Within 30 days following any Change of Control, the Company shall:
| (a) | cause a notice of the Change of Control Offer to be sent at least once to the Dow Jones News Service or similar business news service in the United States, and |
| (b) | send, by first-class mail (or electronic transmission in the case of |
iii. the circumstances and relevant facts regarding the Change of Control (including information with respect to pro forma historical income, cash flow and capitalization after giving effect to the Change of Control); and
iv. the procedures that holders of Senior Notes must follow in order to tender their Senior Notes (or portions thereof) for payment, and the procedures that holders of Senior Notes must follow in order to withdraw an election to tender Senior Notes (or portions thereof) for payment.
We will not be required to make a Change of Control Offer following a Change of Control if a third party makes the Change of Control Offer in the manner, at the times and otherwise in compliance with the requirements set forth in the indenture applicable to a Change of Control Offer made by us and purchases all notesSenior Notes validly tendered and not withdrawn under such Change of Control Offer.
If and for so long as the notes are listed on the Official List of the Luxembourg Stock Exchange and admitted for trading on the Euro MTF Market, the Company will publish notices relating to the Change of Control Offer (including with respect to the results thereof) in a leading newspaper of general circulation in Luxembourg (which is expected to be theLuxemburger Wort) or, to the extent and in the manner permitted by such rules, post such notices on the official website of the Luxembourg Stock Exchange (www.bourse.lu).
We will comply, to the extent applicable, with the requirements of Section 14(e) of the Exchange Act and any other securities laws or regulations in connection with the repurchase of notesSenior Notes pursuant to a Change of Control Offer. To the extent that the provisions of any securities laws or regulations conflict with the provisions of the covenant described above, we will comply with the applicable securities laws and regulations and will not be deemed to have breached our obligations under this covenant by virtue of such compliance.
The Change of Control repurchase feature is a result of negotiations between us and the initial purchasers. Management has no present intention to engage in a transaction involving a Change of Control, although it is possible that we would decide to do so in the future. Subject to the covenants described below, we could, in the future, enter into transactions, including acquisitions, refinancings or other recapitalizations, that would not constitute a Change of Control under the indenture, but that could increase the amount of debt outstanding at such time or otherwise affect our capital structure or credit ratings.
The definition of Change of Control includes a phrase relating to the sale, transfer, assignment, lease, conveyance or other disposition of “all or substantially all” of our assets. Although there is a developing body of case law interpreting the phrase “substantially all,” there is no precise established definition of the phrase under applicable law. Accordingly, if we dispose of less than all our assets by any of the means described above, the ability of a holder of notesSenior Notes to require us to repurchase its notes may be uncertain. In such a case, holders of the notes may not be able to resolve this uncertainty without resorting to legal action.
The Existing Bank Credit FacilityOur revolving credit facility restricts us in certain circumstances from purchasing any notesSenior Notes prior to maturity of the notesSenior Notes and also provides that the occurrence of some of the events that would constitute a Change of Control would constitute a default under that existing debt. The terms of our Existing3.375% Senior Notes due 2027 (the “2027 Notes”) require us to offer to repurchase such notes2027 Notes upon the occurrence of a Change of Control. Future debt of the Company, including any new bank credit facility, may contain prohibitions of certain events which would constitute a Change of Control or require that future debt be repurchased upon a Change of Control. Moreover, the exercise by holders of notesSenior Notes or our Existingthe 2027 Notes of their right to require us to repurchase their notesSenior Notes or 2027 Notes could cause a default under existing or future debt of the Company, even if the Change of Control itself does not, due to the financial effect of that repurchase on us. Finally, our ability to pay cash to holders of notesSenior Notes or Existing2027 Notes upon a required repurchase may be limited by our financial resources at that time. We cannot assure you that sufficient funds will be available when necessary to make any required repurchases. Our failure to purchase notesSenior Notes in connection with a Change of Control would result in a default under the indenture and our failure to purchase Existing2027 Notes in connection with a Change of Control would result in a default under the respective indenturesindenture governing such notes.the 2027 Notes. Any such default would, in turn, constitute a default under our existing debt, and may constitute a default under future debt as well. Our obligation to make an offer to repurchase the notesSenior Notes as a result of a Change of Control may be waived or modified at any time prior to the occurrence of that Change of Control with the written consent of the holders of a majority in principal amount of the notes.Senior Notes. See “—Amendments and Waivers.”
Certain Covenants
Set forth below are summaries of certain of the covenants to be contained in the indenture.
Covenant Suspension
During any period of time that:
| (a) | the |
| (b) | no Default or Event of Default has occurred and is continuing under the indenture, the Company and the Restricted Subsidiaries will not be subject to the following provisions of the indenture: |
“—Limitation on Debt,”
“—Limitation on Restricted Payments,”
“—Limitation on Asset Sales,”
“—Limitation on Restrictions on Distributions from Restricted Subsidiaries,”
clause (x) of the third paragraph (and as referred to in the first paragraph) of “—Designation of Restricted and Unrestricted Subsidiaries,” and
clause (d) of the first paragraph of “—Merger, Consolidation and Sale of Property”
(collectively, the “Suspended Covenants”). In the event that the Company and the Restricted Subsidiaries are not subject to the Suspended Covenants for any period of time as a result of the preceding sentence and, subsequently, one or both of the Rating Agencies withdraws its ratings or downgrades the ratings assigned to the notesSenior Notes below the required Investment Grade Ratings or a Default or Event of Default occurs and is continuing, then the Company and the Restricted Subsidiaries will thereafter again be subject to the Suspended Covenants for all periods after that withdrawal, downgrade, Default or Event of Default and, furthermore, compliance with the provisions of the covenant described in “—Limitation on Restricted Payments” with respect to Restricted Payments made after the time of the withdrawal, downgrade, Default or Event of Default will be calculated in accordance with the terms of that covenant as though that covenant had been in effect during the entire period of time from the Issue Date, provided that there will not be deemed to have occurred a Default or Event of Default with respect to that covenant during the time that the Company and the Restricted Subsidiaries were not subject to the Suspended Covenants (or after that time based solely on events that occurred during that time).
Limitation on Debt
The Company shall not, and shall not permit any Restricted Subsidiary to, Incur, directly or indirectly, any Debt unless, after giving effect to the application of the proceeds thereof, no Default or Event of Default would occur as a consequence of the Incurrence or be continuing following the Incurrence and either:
(1) the Debt is Debt of the Company or a Restricted Subsidiary and after giving effect to the Incurrence of the Debt and the application of the proceeds thereof, the Consolidated Fixed Charges Coverage Ratio would be greater than 2.00 to 1.00; provided, that the aggregate amount of Debt that may be Incurred pursuant to the foregoing by a Restricted Subsidiary that is not a Future Guarantor shall not at any one time be outstanding in an amount exceeding the greater of (i) $200.0 million and (ii) 12% of Consolidated Net Tangible Assets, or
(2) the Debt is Permitted Debt.
The term “Permitted Debt” is defined to include the following:
| (a) | Debt of the Company evidenced by the |
| (b) | Debt of the Company or a Restricted Subsidiary Incurred under any Credit Facilities, Incurred by the Company or a Restricted Subsidiary pursuant to a Real Estate Financing Transaction, a Sale and Leaseback Transaction, an Equipment Financing Transaction or Debt Issuances, Debt Incurred by the Company or a Restricted Subsidiary in respect of Capital Lease Obligations and Purchase Money Debt, |
| or Incurred by a Receivables Entity in a Qualified Receivables Transaction that is not recourse to the Company or any other Restricted Subsidiary of the Company (except for Standard Securitization Undertakings), provided that the aggregate principal amount of all Debt of this kind at any one time outstanding shall not exceed the greater of: |
| (1) | $1.9 billion, which amount shall be permanently reduced by the amount of Net Available Cash from an Asset Sale used to Repay Debt Incurred pursuant to this clause (b), pursuant to the covenant described under “—Limitation on Asset Sales,” and |
| (2) | the sum of the amounts equal to: |
| (A) | 60% of the book value of the inventory of the Company and the Restricted Subsidiaries, and |
| (B) | 85% of the book value of the accounts receivable of the Company and the Restricted Subsidiaries, in the case of each of clauses (A) and (B) as of the most recently ended quarter of the Company for which financial statements of the Company have been provided to the holders of the |
| (c) | Debt of the Company owing to and held by any Restricted Subsidiary and Debt of a Restricted Subsidiary owing to and held by the Company or any Restricted Subsidiary; |
| (d) | Debt of a Restricted Subsidiary outstanding on the date on which that Restricted Subsidiary was acquired by the Company or otherwise became a Restricted Subsidiary (other than Debt Incurred as consideration in, or to provide all or any portion of the funds or credit support utilized to consummate, a transaction or series of transactions pursuant to which the Restricted Subsidiary became a Restricted Subsidiary of the Company or was otherwise acquired by the Company); provided that at the time that Person was acquired by the Company or otherwise became a Restricted Subsidiary and after giving effect to the Incurrence of that Debt, (i) the Company would have been able to Incur $1.00 of additional Debt pursuant to clause (1) of the first paragraph of this covenant or (ii) the Consolidated Fixed Charges Coverage Ratio would have been greater than such ratio immediately prior to such transaction; |
| (e) | Debt Incurred as consideration in, or to provide all or any portion of the funds or credit support utilized to consummate, a transaction or series of transactions pursuant to which a Person became a Restricted Subsidiary of the Company or was otherwise acquired by the Company;providedat the time that Person was acquired by the Company or otherwise became a Restricted Subsidiary and after giving effect to the Incurrence of that Debt, (i) the Company would have been able to Incur $1.00 of additional Debt pursuant to clause (1) of the first paragraph of this covenant or (ii) the Consolidated Fixed Charges Coverage Ratio would have been greater than such ratio immediately prior to such transaction and would be at least 1.75 to 1.0; |
| (f) | Debt under Interest Rate Agreements entered into by the Company or a Restricted Subsidiary for the purpose of limiting interest rate risk in the ordinary course of the financial management of the Company or that Restricted Subsidiary and not for speculative purposes, provided that the obligations under those agreements are related to payment obligations on Debt otherwise permitted by the terms of this covenant; |
| (g) | Debt under Currency Exchange Protection Agreements entered into by the Company or a Restricted Subsidiary for the purpose of limiting currency exchange rate risks directly related to transactions entered into by the Company or that Restricted Subsidiary in the ordinary course of business and not for speculative purposes; |
| (h) | Debt under Commodity Price Protection Agreements entered into by the Company or a Restricted Subsidiary in the ordinary course of the financial management of the Company or that Restricted Subsidiary and not for speculative purposes; |
| (i) | Debt in connection with one or more standby letters of credit or performance bonds issued by the Company or a Restricted Subsidiary in the ordinary course of business or pursuant to self- insurance obligations and not in connection with the borrowing of money or the obtaining of advances or credit; |
| (j) | Debt arising from agreements of the Company or a Restricted Subsidiary providing for indemnification, adjustment of purchase price or similar obligations, in each case, incurred in connection with the disposition of any business, assets or Capital Stock of a Subsidiary, other than Guarantees of Debt Incurred by any Person acquiring all or any portion of such business, assets or Capital Stock; provided, however, that the maximum aggregate liability in respect of all such Debt shall at no time exceed the gross proceeds actually received by the Company or such Restricted Subsidiary in connection with such disposition; |
| (k) | Debt outstanding on the Issue Date not otherwise described in clauses (a) through (j) above; |
| (l) | Debt of the Company or a Restricted Subsidiary in an aggregate principal amount outstanding at any one time not to exceed the greater of $200.0 million and 12% of the Company’s Consolidated Net Tangible Assets (as calculated at the time of incurrence); |
| (m) | Debt of one or more Foreign Restricted Subsidiaries in an aggregate principal amount outstanding at any one time not to exceed the greater of $200.0 million and 12% of Consolidated Net Tangible Assets (as calculated at the time of incurrence); |
| (n) | Guarantees of Debt otherwise permitted herein by a Future Guarantor; and |
| (o) | Permitted Refinancing Debt Incurred in respect of Debt Incurred pursuant to clause (1) of the first paragraph of this covenant and clauses (a), (d), (e) and (k) above. |
For purposes of determining compliance with any restriction on the incurrence of Debt in dollars where Debt is denominated in a different currency, the amount of such Debt will be the Dollar Equivalent determined on the date of such determination;determination, providedthat if any such Debt denominated in a different currency is subject to a Currency Exchange Protection Agreement (with respect to dollars) covering principal amounts payable on such Debt, the amount of such Debt expressed in eurosEuros will be adjusted to take into account the effect of such agreement. The principal amount of any Permitted Refinancing Debt Incurred in the same currency as the Debt being refinanced will be the Dollar Equivalent of the Debt refinanced determined on the date such Debt being refinanced was initially incurred.Incurred. Notwithstanding any other provision of this covenant, for purposes of determining compliance with this “Limitation on Debt” covenant, increases in Debt solely due to fluctuations in the exchange rates of currencies will not be deemed to exceed the maximum amount that the Company or any Restricted Subsidiary may Incur under any of clauses (a) through (o) of this “Limitation on Debt” covenant.
For purposes of determining compliance with the covenant described above:
| (A) | in the event that an item of Debt meets the criteria of more than one of the types of Debt described above, the Company, in its sole discretion, will classify such item of Debt at the time of Incurrence and only be required to include the amount and type of such Debt in one of the above clauses; and |
| (B) | the Company will be entitled to divide and classify and reclassify an item of Debt in more than one of the types of Debt described above. |
Limitation on Restricted Payments
The Company shall not make, and shall not permit any Restricted Subsidiary to make, directly or indirectly, any Restricted Payment if at the time of, and after giving effect to, the proposed Restricted Payment,
| (a) | a Default or Event of Default shall have occurred and be continuing, |
| (b) | the Company could not Incur at least $1.00 of additional Debt pursuant to clause (1) of the first paragraph of the covenant described under “—Limitation on Debt,” or |
| (c) | the aggregate amount of that Restricted Payment and all other Restricted Payments declared or made after the Issue Date (the amount of any Restricted Payment, if made other than in cash, to be based upon Fair Market Value) would exceed an amount equal to the sum of: |
| (1) | 50% of the aggregate amount of Consolidated Net Income accrued during the period (treated as one accounting period) from |
| (2) | Capital Stock Sale Proceeds received after the Issue Date, plus |
| (3) | the sum of: |
| (A) | the aggregate net cash proceeds received by the Company or any Restricted Subsidiary from the issuance or sale after the Issue Date of convertible or exchangeable Debt that has been converted into or exchanged for Capital Stock (other than Disqualified Stock) of the Company, and |
| (B) | the aggregate amount by which Debt of the Company or any Restricted Subsidiary is reduced on the Company’s consolidated balance sheet on or after the Issue Date upon the conversion or exchange of any Debt issued or sold on or prior to the Issue Date that is convertible or exchangeable for Capital Stock (other than Disqualified Stock) of the Company, excluding, in the case of clause (A) or (B): |
| (x) | any Debt issued or sold to the Company or a Subsidiary of the Company or an employee stock ownership plan or trust established by the Company or any Subsidiary for the benefit of their employees, and |
| (y) | the aggregate amount of any cash or other Property distributed by the Company or any Restricted Subsidiary upon any such conversion or exchange, |
plus
| (4) | an amount equal to the sum of: |
| (A) | the net reduction in Investments in any Person other than the Company or a Restricted Subsidiary resulting from dividends, repayments of loans or advances or other transfers of Property made after the Issue Date, in each case to the Company or any Restricted Subsidiary from that Person, less the cost of the disposition of those Investments, and |
| (B) | the lesser of the net book value or the Fair Market Value of the Company’s equity interest in an Unrestricted Subsidiary at the time the Unrestricted Subsidiary is designated a Restricted Subsidiary (provided that such designation occurs after the Issue Date); |
provided, however, that the foregoing sum shall not exceed, in the case of any Person, the amount of Investments previously made (and treated as a Restricted Payment) by the Company or any Restricted Subsidiary in that Person,
plus
| (5) | an amount equal to the restricted payment availability as of the Issue Date under the provisions corresponding to the foregoing in the indenture governing the Company’s |
As of May 24, 2020, the Company would have had approximately $950 million of capacity to make Restricted Payments pursuant to the preceding clause (c).
Notwithstanding the foregoing limitation, the Company may:
| (a) | pay dividends on its Capital Stock within 60 days of the declaration thereof if, on said declaration date, the dividends could have been paid in compliance with the indenture;provided, |
| (b) | purchase, repurchase, redeem, legally defease, acquire or retire for value Capital Stock of the Company or Subordinated Obligations in exchange for, or out of the proceeds of the substantially concurrent sale of, Capital Stock of the Company (other than Disqualified Stock and other than Capital Stock issued or sold to a Subsidiary of the Company or an employee stock ownership plan or trust established by the Company or any Subsidiary for the benefit of their employees);provided, |
| (1) | the purchase, repurchase, redemption, legal defeasance, acquisition or retirement shall be excluded in the calculation of the amount of Restricted Payments, and |
| (2) | the Capital Stock Sale Proceeds from the exchange or sale shall be excluded from the calculation pursuant to clause (c)(2) above; |
| (c) | purchase, repurchase, redeem, legally defease, acquire or retire for value any Subordinated Obligations in exchange for, or out of the proceeds of the substantially concurrent sale of, Permitted Refinancing Debt;provided, |
| (d) | pay scheduled dividends (not constituting a return on capital) on Disqualified Stock of the Company issued pursuant to and in compliance with the covenant described under “—Limitation on Debt”; |
| (e) | permit a Restricted Subsidiary that is not a Wholly Owned Subsidiary to pay dividends to shareholders of that Restricted Subsidiary that are not the parent of that Restricted Subsidiary, so long as the Company or a Restricted Subsidiary that is the parent of that Restricted Subsidiary receives dividends on a pro rata basis or on a basis that results in the receipt by the Company or a Restricted Subsidiary that is the parent of that Restricted Subsidiary of dividends or distributions of greater value than it would receive on a pro rata basis; |
| (f) | make cash payments in lieu of fractional shares in connection with the exercise of warrants, options or other securities convertible into Capital Stock of the Company;provided, |
| (g) | make repurchases of shares of common stock of the Company deemed to occur upon the exercise of options to purchase shares of common stock of the Company if such shares of common stock of the Company represent a portion of the exercise price of such options;provided, |
| (h) | pay dividends on the common stock of the Company following the first Equity Offering of the Company after the Issue Date in an annual amount not to exceed 6% of the net cash proceeds received by the Company in such Equity Offering;provided, |
| (i) | repurchase shares of, or options to purchase shares of, common stock of the Company from current or former officers, directors or employees of the Company or any of its Subsidiaries (or permitted |
| transferees of such current or former officers, directors or employees), pursuant to the terms of agreements (including employment agreements) or plans approved by the Board of Directors under which such individuals acquire shares of such common stock;provided, |
| (j) | purchase, defease or otherwise acquire or retire for value any Subordinated Obligations upon a Change of Control of the Company or an Asset Sale by the Company, to the extent required by any agreement pursuant to which such Subordinated Obligations were issued, but only if the Company has previously made the offer to purchase |
| (k) | make other Restricted Payments not to exceed $150.0 million in the aggregate;provided, |
| (l) | make other Restricted Payments,providedthat after giving pro forma effect to such Restricted Payment the Consolidated Total Leverage Ratio will be less than or equal to 2.50 to 1.00;provided, |
Limitation on Liens
The Company shall not, and shall not permit any Restricted Subsidiary to, directly or indirectly, Incur or suffer to exist, any Lien (other than Permitted Liens) upon any of its Property (including Capital Stock of a Restricted Subsidiary), whether owned at the Issue Date or thereafter acquired, or any interest therein or any income or profits therefrom, unless it has made or will make effective provision whereby the notesSenior Notes will be secured by that Lien equally and ratably with (or prior to) all other Debt of the Company or any Restricted Subsidiary secured by that Lien.
Limitation on Asset Sales
The Company shall not, and shall not permit any Restricted Subsidiary to, directly or indirectly, consummate any Asset Sale unless:
| (a) | the Company or the Restricted Subsidiary receives consideration at the time of the Asset Sale at least equal to the Fair Market Value of the Property subject to that Asset Sale; |
| (b) | at least 75% of the consideration paid to the Company or the Restricted Subsidiary in connection with the Asset Sale is in the form of cash or cash equivalents or the assumption by the purchaser of liabilities of the Company or any Restricted Subsidiary (other than liabilities that are by their terms subordinated to the |
| (c) | the Company delivers an Officers’ Certificate to the trustee certifying that the Asset Sale complies with the foregoing clauses (a) and (b). |
For the purposes of this covenant:
| (1) | in the case of a transaction involving a sale of any distribution center by the Company or a Restricted Subsidiary and the establishment of an outsourcing arrangement in which the purchaser assumes distribution responsibilities on behalf of the Company or the Restricted Subsidiary, any credits or other consideration the purchaser grants to the Company or the Restricted Subsidiary as part of the purchase |
| price of the distribution center, which credits or other consideration effectively offset future payments due from the Company or the Restricted Subsidiary to the purchaser as part of the outsourcing arrangement, will be considered to be cash equivalents; |
| (2) | securities or other assets received by the Company or any Restricted Subsidiary from the transferee that are converted by the Company or such Restricted Subsidiary into cash within 180 days shall be considered to be cash to the extent of the cash received in that conversion; |
| (3) | any cash consideration paid to the Company or the Restricted Subsidiary in connection with the Asset Sale that is held in escrow or on deposit to support indemnification, adjustment of purchase price or similar obligations in respect of such Asset Sale shall be considered to be cash; |
| (4) | Productive Assets received by the Company or any Restricted Subsidiary in connection with the Asset Sale shall be considered to be cash; and |
| (5) | the requirement that at least 75% of the consideration paid to the Company or the Restricted Subsidiary in connection with the Asset Sale be in the form of cash or cash equivalents shall also be considered |
| satisfied if the cash received constitutes at least 75% of the consideration received by the Company or the Restricted Subsidiary in connection with such Asset Sale, determined on anafter-tax basis. |
The Net Available Cash (or any portion thereof) from Asset Sales may be applied by the Company or a Restricted Subsidiary, to the extent the Company or the Restricted Subsidiary elects (or is required by the terms of any Debt):
| (a) | to Repay Debt of the Company (excluding, in any such case, any Debt that (i) constitutes a Subordinated Obligation or (ii) is owed to the Company or an Affiliate of the Company); or |
| (b) | to reinvest in Additional Assets (including by means of an Investment in Additional Assets by a Restricted Subsidiary with Net Available Cash received by the Company or another Restricted Subsidiary); |
provided,,however, that the Net Available Cash (or any portion thereof) from Asset Sales from the Company to any Subsidiary must be reinvested in Additional Assets of the Company.
Any Net Available Cash from an Asset Sale not applied in accordance with the preceding paragraph within 360 days from the date of the receipt of that Net Available Cash or that the Company earlier elects to so designate shall constitute “Excess Proceeds.”
When the aggregate amount of Excess Proceeds not previously subject to a Prepayment Offer (as defined below) exceeds $100.0 million (taking into account income earned on those Excess Proceeds, if any), the Company will be required to make an offer to purchase (the “Prepayment Offer”) the notes,Senior Notes, which offer shall be in the amount of the Allocable Excess Proceeds, on a pro rata basis according to principal amount, at a purchase price equal to 100% of the principal amount thereof, plus accrued and unpaid interest, if any, to the purchase date (subject to the right of holders of record on the relevant record date to receive interest due on the relevant interest payment date), in accordance with the procedures (including prorating in the event of oversubscription) set forth in the indenture. To the extent that any portion of the amount of Net Available Cash remains after compliance with the preceding sentence and provided that all holders of notesSenior Notes have been given the opportunity to tender their notesSenior Notes for purchase in accordance with the indenture, the Company or such Restricted Subsidiary may use the remaining amount for any purpose permitted by the indenture and the amount of Excess Proceeds will be reset to zero.
The term “Allocable Excess Proceeds” will mean the product of:
| (a) | the Excess Proceeds, and |
| (b) | a fraction, |
| (1) | the numerator of which is the aggregate principal amount of the |
| (2) | the denominator of which is the sum of the aggregate principal amount of the |
Not later than five business days after the Company is obligated to make a Prepayment Offer as described in the preceding paragraph, the Company shall send a written notice, by first-class mail (or electronic transmission in the case of notesSenior Notes held in book entry form), to the holders of notes,Senior Notes, accompanied by information regarding the Company and its Subsidiaries as the Company in good faith believes will enable the holders to make an informed decision with respect to that Prepayment Offer. The notice shall state, among other things, the purchase price and the purchase date, which shall be, subject to any contrary requirements of applicable law, a business day no earlier than 30 days nor later than 60 days from the date the notice is mailed.
The Company will comply, to the extent applicable, with the requirements of Section 14(e) of the Exchange Act and any other securities laws or regulations in connection with the repurchase of notesSenior Notes pursuant to the covenant described hereunder. To the extent that the provisions of any securities laws or regulations conflict with provisions of the covenant described hereunder, the Company will comply with the applicable securities laws and regulations and will not be deemed to have breached its obligations under the covenant described hereunder by virtue thereof.
Limitation on Restrictions on Distributions from Restricted Subsidiaries
The Company shall not, and shall not permit any Restricted Subsidiary to, directly or indirectly, create or otherwise cause or suffer to exist any consensual restriction on the right of any Restricted Subsidiary to:
| (a) | pay dividends, in cash or otherwise, or make any other distributions on or in respect of its Capital Stock, or pay any Debt or other obligation owed, to the Company or any other Restricted Subsidiary, |
| (b) | make any loans or advances to the Company or any other Restricted Subsidiary, or |
| (c) | transfer any of its Property to the Company or any other Restricted Subsidiary. |
The foregoing limitations will not apply:
| (1) | with respect to clauses (a), (b) and (c), to restrictions: |
| (A) | in effect on the Issue Date, |
| (B) | relating to Debt of a Restricted Subsidiary and existing at the time it became a Restricted Subsidiary if such restriction was not created in connection with or in anticipation of the transaction or series of transactions pursuant to which that Restricted Subsidiary became a Restricted Subsidiary or was acquired by the Company, |
| (C) | that result from the Refinancing of Debt Incurred pursuant to an agreement referred to in clause (1)(A) or (B) above or in clause (2)(A) or (B) below, provided that restriction is no less favorable to the holders of |
| (D) | resulting from the Incurrence of any Permitted Debt described in clause (b) of the second paragraph of the covenant described under “—Limitation on Debt,” provided that the restriction is no less favorable to the holders of |
| (E) | constituting Standard Securitization Undertakings relating solely to, and restricting only the rights of, a Receivables Entity in connection with a Qualified Receivables Transaction, and |
| (2) | with respect to clause (c) only, to restrictions: |
| (A) | relating to Debt that is permitted to be Incurred and secured without also securing the |
| (B) | encumbering Property at the time the Property was acquired by the Company or any Restricted Subsidiary, so long as the restriction relates solely to the Property so acquired and was not created in connection with or in anticipation of the acquisition, |
| (C) | resulting from customary provisions restricting subletting or assignment of leases or customary provisions in other agreements (including, without limitation, intellectual property licenses entered into in the ordinary course of business) that restrict assignment of the agreements or rights thereunder, or |
| (D) | which are customary restrictions contained in asset sale agreements limiting the transfer of Property pending the closing of the sale. |
Limitation on Transactions with Affiliates
The Company shall not, and shall not permit any Restricted Subsidiary to, directly or indirectly, conduct any business or enter into or suffer to exist any transaction or series of transactions (including the purchase, sale, transfer, assignment, lease, conveyance or exchange of any Property or the rendering of any service) with, or for the benefit of, any Affiliate of the Company (an “Affiliate Transaction”), unless:
| (a) | the terms of such Affiliate Transaction are: |
| (1) | set forth in writing, and |
| (2) | no less favorable to the Company or that Restricted Subsidiary, as the case may be, than those that could be obtained in a comparablearm’s-length transaction with a Person that is not an Affiliate of the Company, and |
| (b) | if the Affiliate Transaction involves aggregate payments or value in excess of $25.0 million, the Board of Directors (including a majority of the disinterested members of the Board of Directors) approves the Affiliate Transaction and, in its good faith judgment, believes that the Affiliate Transaction complies with clauses (a)(1) and (2) of this paragraph as evidenced by a Board Resolution promptly delivered to the trustee. |
Notwithstanding the foregoing limitation, the Company or any Restricted Subsidiary may enter into or suffer to exist the following:
| (a) | any transaction or series of transactions between the Company and one or more Restricted Subsidiaries or between two or more Restricted Subsidiaries in the ordinary course of business, provided that no more than 5% of the total voting power of the Voting Stock (on a fully diluted basis) of any such Restricted Subsidiary is owned by an Affiliate of the Company (other than a Restricted Subsidiary); |
| (b) | any Restricted Payment permitted to be made pursuant to the covenant described under “—Limitation on Restricted Payments”; |
| (c) | the payment of compensation (including amounts paid pursuant to employee benefit plans) for the personal services of officers, directors and employees of the Company or any of the Restricted Subsidiaries, so long as, in the case of executive officers and directors, the Board of Directors in good faith shall have approved the terms thereof and deemed the services theretofore or thereafter to be performed for the compensation to be fair consideration therefor; |
| (d) | loans and advances to employees made in the ordinary course of business in compliance with applicable laws and consistent with the past practices of the Company or that Restricted Subsidiary, as the case may be, provided that those loans and advances do not exceed $20.0 million in the aggregate at any one time outstanding; |
| (e) | any transaction effected as part of a Qualified Receivables Transaction or any transaction involving the transfer of accounts receivable of the type specified in the definition of “Credit Facility” and permitted under clause (b) of the second paragraph of the covenant described under “—Limitation on Debt”; |
| (f) | the Existing Policies or any transaction contemplated thereby; and |
| (g) | any sale of shares of Capital Stock (other than Disqualified Stock) of the Company. |
Designation of Restricted and Unrestricted Subsidiaries
The Board of Directors may designate any Subsidiary of the Company to be an Unrestricted Subsidiary if:
| (a) | the Subsidiary to be so designated does not own any Capital Stock or Debt of, or own or hold any Lien on any Property of, the Company or any other Restricted Subsidiary, and |
| (b) | any of the following: |
| (1) | the Subsidiary to be so designated has total assets of $1,000 or less, |
| (2) | if the Subsidiary has consolidated assets greater than $1,000, then the designation would be permitted under the covenant entitled “Limitation on Restricted Payments,” or |
| (3) | the designation is effective immediately upon the entity becoming a Subsidiary of the Company. |
Unless so designated as an Unrestricted Subsidiary, any Person that becomes a Subsidiary of the Company will be classified as a Restricted Subsidiary;provided,,however,, that the Subsidiary shall not be designated a Restricted Subsidiary and shall be automatically classified as an Unrestricted Subsidiary if either of the requirements set forth in clauses (x) and (y) of the second immediately following paragraph will not be satisfied after giving pro forma effect to the classification or if the Person is a Subsidiary of an Unrestricted Subsidiary.
Except as provided in the first sentence of the preceding paragraph, no Restricted Subsidiary may be redesignated as an Unrestricted Subsidiary. In addition, neither the Company nor any Restricted Subsidiary shall at any time be directly or indirectly liable for any Debt that provides that the holder thereof may (with the passage of time or notice or both) declare a default thereon or cause the payment thereof to be accelerated or payable prior to its Stated Maturity upon the occurrence of a default with respect to any Debt, Lien or other obligation of any Unrestricted Subsidiary in existence and classified as an Unrestricted Subsidiary at the time the Company or the Restricted Subsidiary is liable for that Debt (including any right to take enforcement action against that Unrestricted Subsidiary).
The Board of Directors may designate any Unrestricted Subsidiary to be a Restricted Subsidiary if, immediately after giving pro forma effect to the designation,
| (x) | the Company could Incur at least $1.00 of additional Debt pursuant to clause (1) of the first paragraph of the covenant described under “—Limitation on Debt,” and |
| (y) | no Default or Event of Default shall have occurred and be continuing or would result therefrom. |
Any designation or redesignation of this kind by the Board of Directors will be evidenced to the trustee by filing with the trustee a Board Resolution giving effect to the designation or redesignation and an Officers’ Certificate that:
| (a) | certifies that the designation or redesignation complies with the foregoing provisions, and |
| (b) | gives the effective date of the designation or redesignation, and the filing with the trustee to occur within 45 days after the end of the fiscal quarter of the Company in which the designation or redesignation is made (or, in the case of a designation or redesignation made during the last fiscal quarter of the Company’s fiscal year, within 90 days after the end of that fiscal year). |
Future Subsidiary Guarantors
The Company may, at any time after the Issue Date, cause one or more of its Restricted Subsidiaries to Guarantee the notes.Senior Notes. Upon any Guarantee of the notesSenior Notes by a Future Guarantor, such Future Guarantor will execute and deliver to the trustee a supplemental indenture pursuant to which such Future Guarantor shall Guarantee payment of the notes.Senior Notes.
Merger, Consolidation and Sale of Property
The Company shall not merge, consolidate or amalgamate with or into (other than a merger of a Wholly Owned Restricted Subsidiary into the Company), or sell, transfer, assign, lease, convey or otherwise dispose of all or substantially all its Property in any one transaction or series of transactions to, any Person unless:
| (a) | the Company shall be the surviving Person (the “Surviving Person”) or the Surviving Person (if other than the Company) formed by that merger, consolidation or amalgamation or to which that sale, |
| transfer, assignment, lease, conveyance or disposition is made shall be a corporation organized and existing under the laws of the United States of America, any State thereof or the District of Columbia; |
| (b) | the Surviving Person (if other than the Company) expressly assumes, by supplemental indenture in form satisfactory to the trustee, executed and delivered to the trustee by that Surviving Person, the due and punctual payment of the principal of, and premium, if any, and interest on, all the |
| (c) | immediately after giving effect to such transaction or series of transactions on a pro forma basis, no Default or Event of Default shall have occurred and be continuing; |
| (d) | immediately after giving effect to that transaction or series of transactions on a pro forma basis, the Company or the Surviving Person, as the case may be, (i) would be able to Incur at least $1.00 of additional Debt under clause (1) of the first paragraph of the covenant described under “—Certain Covenants—Limitation on Debt” or (ii) the Consolidated Fixed Charges Coverage Ratio would be greater than such ratio immediately prior to such transaction,provided, |
| (e) | the Company shall deliver, or cause to be delivered, to the trustee, in form and substance reasonably satisfactory to the trustee, an Officers’ Certificate and an Opinion of Counsel, each stating that the transaction and the supplemental indenture, if any, in respect thereto comply with this covenant and that all conditions precedent herein provided for relating to the transaction have been satisfied. |
The Surviving Person shall succeed to, and be substituted for, and may exercise every right and power of the Company under the indenture, but the predecessor Company in the case of:
| (a) | a sale, transfer, assignment, conveyance or other disposition (unless that sale, transfer, assignment, conveyance or other disposition is of all the assets of the Company as an entirety or virtually as an entirety), or |
| (b) | a lease, shall not be released from any obligation to pay the principal of, premium, if any, and interest on, the |
If and for so long as any notes are listed on the Official List of the Luxembourg Stock Exchange and the rules of the Luxembourg Stock Exchange so require, the Company will publish a notice of any merger, consolidation or amalgamation described above, or any sale, transfer, assignment, lease, conveyance or other disposition of all or substantially all of the Property of the Company described above, in a leading newspaper of general circulation in Luxembourg (which is expected to be theLuxemburger Wort) or, to the extent and in the manner permitted by such rules, post such notice on the official website of the Luxembourg Stock Exchange (www.bourse.lu) and, for so long as the rules of the Luxembourg Stock Exchange so require, notify the Luxembourg Stock Exchange of any such transaction.
Maintenance of Listing
The Company will (i) use its commercially reasonable efforts to cause the notes to be listed, subject to notice of issuance, on the Official List of the Luxembourg Stock Exchange and admitted to trading on the Euro MTF Market as promptly as practicable after the Issue Date, and (ii) use its commercially reasonable efforts to maintain such listing for as long as any of the notes are outstanding. If the notes fail to be, or at any time cease to be, listed on the Official List of the Luxembourg Stock Exchange and admitted to trading on the Euro MTF Market, the Company will use its commercially reasonable efforts to list the notes on another recognized stock exchange in western Europe as promptly as practicable after the date on which the notes are not so listed or admitted.
SEC Reports
Notwithstanding that the Company may not be subject to the reporting requirements of Section 13 or 15(d) of the Exchange Act, the Company shall file with the SEC and provide the trustee and holders of notesSenior Notes with annual reports and information, documents and other reports as are specified in Sections 13 and 15(d) of the Exchange Act and applicable to a U.S. corporation subject to those Sections, and the information, documents and reports to be so filed and provided at the times specified for the filing of the information, documents and reports under those Sections;provided,,however,, that (i) the Company shall not be so obligated to file the information, documents and reports with the SEC if the SEC does not permit those filings and (ii) the electronic filing with the SEC through the SEC’s Electronic Data Gathering, Analysis, and Retrieval System (or any successor system providing for free public access to such filings) shall satisfy the Company’s obligation to provide such reports, information and documents to the trustee and the holders of notes,Senior Notes, it being understood that the trustee shall have no responsibility to determine whether or not such information has been filed.
Delivery of such reports, information and documents to the trustee is for informational purposes only and the trustee’s receipt of such shall not constitute constructive notice of any information contained therein or determinable from information contained therein, including the Company’s compliance with any of its covenants under the indenture (as to which the trustee is entitled to rely exclusively on an Officers’ Certificate).
If and so long as the notes are listed on the Official List of the Luxembourg Stock Exchange and admitted for trading on the Euro MTF Market and the rules of the Luxembourg Stock Exchange so require, copies of the reports, information and documents required under the paragraph above shall be made available at the offices of the paying agent or, to the extent and in the manner permitted by such rules, or such reports, information and documents shall be posted on the official website of the Luxembourg Stock Exchange (www.bourse.lu).
Events of Default
Events of Default in respect of the notesSenior Notes include:
| (1) | failure to make the payment of any interest on the |
| (2) | failure to make the payment of any principal of, or premium, if any, on, any of the |
| (3) | failure to comply with the covenant described under “—Merger, Consolidation and Sale of Property”; |
| (4) | failure to comply with any other covenant or agreement in the |
| (5) | a default under any Debt by the Company or any Restricted Subsidiary that results in acceleration of the maturity of that Debt, or failure to pay any Debt at maturity, in an aggregate amount greater than $50.0 million or its foreign currency equivalent at the time (the “cross acceleration provisions”); |
| (6) | any judgment or judgments for the payment of money in an aggregate amount in excess of $50.0 million (or its foreign currency equivalent at the time) that shall be rendered against the Company or any Restricted Subsidiary and that shall |
| (7) | specified events involving bankruptcy, insolvency or reorganization of the Company or any Significant Subsidiary (the “bankruptcy provisions”). |
A Default under clause (4) is not an Event of Default until the trustee or the holders of not less than 25% in aggregate principal amount of the notesSenior Notes then outstanding notify the Company of the Default and the Company does not cure that Default within the time specified after receipt of the notice. The notice must specify the Default, demand that it be remedied and state that the notice is a “Notice of Default.”
The Company shall deliver to the trustee, within 30 days after the occurrence thereof, written notice in the form of an Officers’ Certificate of any event that with the giving of notice and the lapse of time would become an Event of Default, its status and what action the Company is taking or proposes to take with respect thereto.
If an Event of Default with respect to the notesSenior Notes (other than an Event of Default resulting from particular events involving bankruptcy, insolvency or reorganization with respect to the Company) shall have occurred and be continuing, the trustee or the registered holders of not less than 25% in aggregate principal amount of notesSenior Notes then outstanding may declare to be immediately due and payable the principal amount of all the notesSenior Notes then outstanding, plus accrued but unpaid interest to the date of acceleration. In case an Event of Default resulting from events of bankruptcy, insolvency or reorganization with respect to the Company shall occur, the amount with respect to all the notesSenior Notes shall be due and payable immediately without any declaration or other act on the part of the trustee or the holders of the notes.Senior Notes. After any such acceleration, but before a judgment or decree based on acceleration is obtained by the trustee, the registered holders of a majority in aggregate principal amount of the notesSenior Notes then outstanding may, under some circumstances, rescind and annul the acceleration if all Events of Default, other than the nonpayment of accelerated principal, premium or interest, have been cured or waived as provided in the indenture.
Subject to the provisions of the indenture relating to the duties of the trustee, in case an Event of Default shall occur and be continuing, the trustee will be under no obligation to exercise any of its rights or powers under the indenture at the request or direction of any of the holders of the notes,Senior Notes, unless the holders shall have offered to the trustee indemnity reasonably satisfactory to it against loss, liability or expense. Subject to the provisions for the indemnification of the trustee, the holders of a majority in aggregate principal amount of the notesSenior Notes then outstanding will have the right to direct the time, method and place of conducting any proceeding for any remedy available to the trustee or exercising any trust or power conferred on the trustee with respect to the notes.Senior Notes.
No holder of notesSenior Notes will have any right to institute any proceeding with respect to the indenture, or for the appointment of a receiver or trustee, or for any remedy thereunder, unless:
| (a) | that holder has previously given to the trustee written notice of a continuing Event of Default, |
| (b) | the registered holders of at least 25% in aggregate principal amount of the |
| (c) | the trustee shall not have received from the registered holders of a majority in aggregate principal amount of the |
However, these limitations do not apply to a suit instituted by a holder of any note for enforcement of payment of the principal of, premium, if any, or interest on, that note on or after the respective due dates expressed in that note.
Amendments and Waivers
Subject to some exceptions, the indenture may be amended with the consent of the registered holders of a majority in aggregate principal amount of the notesSenior Notes then outstanding (including consents obtained in connection with a tender offer or exchange offer for the notes)Senior Notes) and any past default or compliance with any provisions may also be waived (except a default in the payment of principal, premium or interest and particular covenants and provisions of the indenture which cannot be amended without the consent of each holder of an outstanding note)
with the consent of the registered holders of at least a majority in aggregate principal amount of the notesSenior Notes then outstanding;outstanding. However, without the consent of each holder of an outstanding note affected thereby, no amendment may, among other things,
| (1) | reduce the amount of |
| (2) | reduce the rate of or extend the time for payment of interest on any note, |
| (3) | reduce the principal of or extend the Stated Maturity of any note, |
| (4) | make any note payable in money other than |
| (5) | impair the right of any holder of the |
| (6) | subordinate the |
| (7) | release any security interest that may have been granted in favor of the holders of the |
| (8) | reduce the premium payable upon the redemption of any note nor change the time at which any note may be redeemed, as described under “—Optional Redemption,” |
| (9) | reduce the premium payable upon a Change of Control or, at any time after a Change of Control has occurred, change the time at which the Change of Control Offer relating thereto must be made or at which the |
| (10) | at any time after the Company is obligated to make a Prepayment Offer with the Excess Proceeds from Asset Sales, change the time at which the Prepayment Offer must be made or at which the |
Without the consent of any holder of the notes,Senior Notes, the Company and the trustee may amend the indenture to:
| (1) | cure any ambiguity, omission, defect or inconsistency, as evidenced in an Officers’ Certificate, |
| (2) | provide for the assumption by a successor corporation of the obligations of the Company under the indenture, |
| (3) | provide for uncertificated |
| (4) | add Guarantees with respect to the |
| (5) | secure the |
| (6) | make any change that does not adversely affect the rights of any holder of the |
| (7) | comply with any requirement of the SEC in connection with the qualification of the indenture under the Trust Indenture Act, or |
| (8) | provide for the issuance of additional |
The consent of the holders of the notesSenior Notes is not necessary to approve the particular form of any proposed amendment. It is sufficient if such consent approves the substance of the proposed amendment. After an amendment becomes effective, the Company is required to mail to each registered holder of the notesSenior Notes at the holder’s address appearing in the security register a notice briefly describing the amendment. However, the failure to give this notice to all holders of the notes,Senior Notes, or any defect therein, will not impair or affect the validity of the amendment.
If and for so long as any notes are listed on the Official List of the Luxembourg Stock Exchange and the rules of the Luxembourg Stock Exchange so require, the Company will publish notice of any amendment, supplement and waiver in a leading newspaper of general circulation in Luxembourg (which is expected to be theLuxemburger Wort) or, to the extent and in the manner permitted by such rules, post such notice on the official website of the Luxembourg Stock Exchange (www.bourse.lu).
Defeasance
The Company at any time may terminate all its obligations under the notesSenior Notes and the indenture (“legal defeasance”), except for particular obligations, including those respecting the defeasance trust and obligations to
register the transfer or exchange of the notes,Senior Notes, to replace mutilated, destroyed, lost or stolen notesSenior Notes and to maintain a registrar and paying agent in respect of the notes.Senior Notes. The Company at any time may terminate:
| (1) | its obligations under the covenants described under “—Repurchase at the Option of Holders Upon a Change of Control” and “—Certain Covenants,” |
| (2) | the operation of the cross acceleration provisions, the judgment default provisions and the bankruptcy provisions with respect to Significant Subsidiaries, described under “—Events of Default” above, and |
| (3) | the limitations contained in clause (d) under the first paragraph of “—Merger, Consolidation and Sale of Property” above (“covenant defeasance”). |
The Company may exercise its legal defeasance option notwithstanding its prior exercise of its covenant defeasance option.
If the Company exercises its legal defeasance option, payment of the notesSenior Notes may not be accelerated because of an Event of Default with respect thereto. If the Company exercises its covenant defeasance option, payment of the notesSenior Notes may not be accelerated because of an Event of Default specified in clause (4) (with respect to the covenants described under “—Certain Covenants”), (5), (6) or (7) (with respect only to Significant Subsidiaries) under “—Events of Default” above or because of the failure of the Company to comply with clause (d) under the first paragraph of “—Merger, Consolidation and Sale of Property” above. The legal defeasance option or the covenant defeasance option may be exercised only if:
| (a) | the Company irrevocably deposits in trust with the |
| (b) | the Company delivers to the trustee a certificate of a nationally recognized accounting firm expressing their opinion that the payments of principal and interest when due and without reinvestment on the deposited Government Obligations plus any deposited money without investment will provide cash at the times and in amounts as will be sufficient to pay principal and interest (including premium, if any) when due on all the |
| (c) | 123 days pass after the deposit is made and during the123-day period no Default described in clause (7) under “—Events of Default” occurs with respect to the Company or any other Person making the deposit which is continuing at the end of the period; |
| (d) | no Default or Event of Default has occurred and is continuing on the date of the deposit and after giving effect thereto; |
| (e) | the deposit does not constitute a default under any other agreement or instrument binding on the Company; |
| (f) | the Company delivers to the trustee an Opinion of Counsel to the effect that the trust resulting from the deposit does not constitute, or is qualified as, a regulated investment company under the Investment Company Act of 1940; |
| (g) | in the case of the legal defeasance option, the Company delivers to the trustee an Opinion of Counsel stating that: |
| (1) | the Company has received from the Internal Revenue Service a ruling, or |
| (2) | since the date of the indenture there has been a change in the applicable Federal income tax law, to the effect, in either case, that, and based thereon the Opinion of Counsel shall confirm that, the holders of the |
| (h) | in the case of the covenant defeasance option, the Company delivers to the trustee an Opinion of Counsel to the effect that the holders of the |
| (i) | the Company delivers to the trustee an Officers’ Certificate and an Opinion of Counsel, each stating that all conditions precedent to the defeasance and discharge of the |
Judgment Currency
Any payment on account of an amount that is payable in euro which is made to or for the account of any holder of notes or the trustee in lawful currency of any other jurisdiction (the “Judgment Currency”), whether as a result of any judgment or order or the enforcement thereof or the liquidation of the Company or a Future Guarantor, shall constitute a discharge of the Company’s or the Future Guarantor’s obligation under the Indenture and the notes or the Guarantee of the notes, as the case may be, only to the extent of the amount of euros which such holder or the trustee, as the case may be, could purchase in the London foreign exchange markets with the amount of the Judgment Currency in accordance with normal banking procedures at the rate of exchange prevailing on the first business day following receipt of the payment in the Judgment Currency. If the amount of euros that could be so purchased is less than the amount of euros originally due to such holder or the trustee, as the case may be, the Company and any Future Guarantors shall indemnify and hold harmless the holder or the trustee, as the case may be, from and against all loss or damage arising out of, or as a result of, such deficiency. This indemnity shall constitute an obligation separate and independent from the other obligations contained in the Indenture or the notes, shall give rise to a separate and independent cause of action, shall apply irrespective of any indulgence granted by any holder or the trustee from time to time and shall continue in full force and effect notwithstanding any judgment or order for a liquidated sum in respect of an amount due hereunder or under any judgment or order.
Governing Law
The indenture is governed by and the notesSenior Notes will be governed by the internal laws of the State of New York.York without reference to principles of conflicts of law.
The Trustee
Wells Fargo Bank, National Association is the trustee, registrar and paying agent with regard to the notes. HSBC Bank plc is designated as the registrar, paying agent and transfer agent under a paying, registrar and transfer agency agreement (the “Paying Agency Agreement”).Senior Notes.
Except during the continuance of an Event of Default, the trustee will perform only the duties as are specifically set forth in the indenture. During the existence of an Event of Default, the trustee will exercise the rights and powers vested in it under the indenture and use the same degree of care and skill in its exercise as a prudent person would exercise under the circumstances in the conduct of that person’s own affairs.
Notices
Notices regarding the notes will be (a) if and so long as notes are listed on the Luxembourg Stock Exchange and the rules of such exchange shall so require, published by the Company in a newspaper having a general circulation in Luxembourg (which is expected to be theLuxemburgerWort) or, to the extent and in the manner permitted by such rules, posted on the website at the Luxembourg Stock Exchange (www.bourse.lu)) and (b) sent to the trustee. If and so long as such notes are listed on any other securities exchange, notices will also be given in accordance with any applicable requirements of such securities exchange.
Definitions
Set forth below is a summary of defined terms from the indenture that are used in this “Description of Notes.” Reference is made to the indenture for the full definition of all such terms as well as any other capitalized terms used herein for which no definition is provided. Unless the context otherwise requires, an accounting term not otherwise defined has the meaning assigned to it in accordance with GAAP.
“Additional Assets” means:
| (a) | any Property (other than cash, cash equivalents, securities and inventory) to be owned by the Company or any Restricted Subsidiary and used in a Related Business; or |
| (b) | Capital Stock of a Person that becomes a Restricted Subsidiary as a result of the acquisition of that Capital Stock by the Company or another Restricted Subsidiary from any Person other than the Company or an Affiliate of the Company;provided, |
“Affiliate” of any specified Person means:
| (a) | any other Person directly or indirectly controlling or controlled by or under direct or indirect common control with that specified Person, or |
| (b) | any other Person who is a director or officer of that specified Person. |
For the purposes of this definition, “control” when used with respect to any Person means the power to direct the management and policies of that Person, directly or indirectly, whether through the ownership of voting securities, by contract or otherwise; and the terms “controlling” and “controlled” have meanings correlative to the foregoing. For purposes of the covenants described under “—Certain Covenants—Limitation on Transactions with Affiliates” and “—Limitation on Asset Sales” and the definition of “Additional Assets”
only, “Affiliate” shall also mean any Beneficial Owner of shares representing 10% or more of the total voting power of the Voting Stock (on a fully diluted basis) of the Company or of rights or warrants to purchase that Voting Stock (whether or not currently exercisable) and any Person who would be an Affiliate of any Beneficial Owner pursuant to the first sentence hereof.
“Applicable Premium” means, with respect to any note on any redemption date, the excess of (i) the present value on such redemption date of (A) the redemption price of such notesSenior Notes on March 15, 2022May 1, 2020 (such redemption price being that described in “Optional Redemption” above), plus (B) all required remaining scheduled interest payments due on such note through March 15, 2022May 1, 2020 computed using a discount rate equal to the BundTreasury Rate plus 50 basis points, over (ii) the principal amount of such note.
“Asset Sale” means any sale, lease, transfer, issuance or other disposition (or series of related sales, leases, transfers, issuances or dispositions) by the Company or any Restricted Subsidiary, including any disposition by means of a merger, consolidation or similar transaction (each referred to for the purposes of this definition as a “disposition”), of
| (a) | any shares of Capital Stock of a Restricted Subsidiary (other than directors’ qualifying shares), |
| (b) | all or substantially all the assets of any division or line of business of the Company or any Restricted Subsidiary, or |
| (c) | any other assets of the Company or any Restricted Subsidiary outside of the ordinary course of business of the Company or such Restricted Subsidiary, |
other than, in the case of clause (a), (b) or (c) above,
| (1) | any disposition by a Restricted Subsidiary to the Company or by the Company or a Restricted Subsidiary to a Restricted Subsidiary, |
| (2) | any disposition that constitutes a Restricted Payment permitted by the covenant described under “—Certain Covenants—Limitation on Restricted Payments,” |
| (3) | any disposition effected in compliance with the first paragraph of the covenant described under “—Merger, Consolidation and Sale of Property,” |
| (4) | a sale of accounts receivables and related assets of the type specified in the definition of “Qualified Receivables Transaction” to a Receivables Entity, |
| (5) | a transfer of accounts receivables and related assets of the type specified in the definition of “Qualified Receivables Transaction” (or a fractional undivided interest therein) by a Receivables Entity in connection with a Qualified Receivables Transaction, |
| (6) | a transfer of accounts receivable of the type specified in the definition of “Credit Facilities” that is permitted under clause (b) of the second paragraph of “—Certain Covenants—Limitation on Debt,” |
| (7) | any disposition that does not (together with all related dispositions) involve assets having a Fair Market Value or consideration in excess of $100.0 million, and |
| (8) | any disposition that, but for this clause (8), would be an Asset Sale, if consummated at a time when, after giving pro forma effect thereto, (x) the Consolidated Total Leverage Ratio is less than or equal to 3.25 to 1.00 and (y) no Default shall have occurred and be continuing or occur as a consequence thereof. |
“Attributable Debt” in respect of a Sale and Leaseback Transaction means, at any date of determination,
| (a) | if the Sale and Leaseback Transaction is a Capital Lease Obligation, the amount of Debt represented thereby according to the definition of “Capital Lease Obligation,” and |
| (b) | in all other instances, the greater of: |
| (1) | the Fair Market Value of the Property subject to the Sale and Leaseback Transaction, and |
| (2) | the present value (discounted at the interest rate borne by the |
“Average Life” means, as of any date of determination, with respect to any Debt or Preferred Stock, the quotient obtained by dividing:
| (a) | the sum of the product of the numbers of years (rounded to the nearestone-twelfth of one year) from the date of determination to the dates of each successive scheduled principal payment of that Debt or redemption or similar payment with respect to that Preferred Stock multiplied by the amount of the payment by |
| (b) | the sum of all payments of this kind. |
“Bund Rate” means, as of any redemption date, the rate per annum equal to the equivalent yield to maturity as of such redemption date of the Comparable German Bund Issue, assuming a price for the Comparable German Bund Issue (expressed as a percentage of its principal amount) equal to the Comparable German Bund Price for such relevant date, where:
“Beneficial Owner” means a beneficial owner as defined in Rule13d-3 under the Exchange Act, except thatthat:
| (a) | a Person will be deemed to be the Beneficial Owner of all shares that the Person has the right to acquire, whether that right is exercisable immediately or only after the passage of time, |
| (b) | for purposes of clause (a) of the definition of “Change of Control,” Permitted Holders will be deemed to be the Beneficial Owners of any Voting Stock of a corporation or other legal entity held by any other corporation or other legal entity so long as the Permitted Holders Beneficially Own, directly or indirectly, in the aggregate a majority of the total voting power of the Voting Stock of that corporation or other legal entity, and |
| (c) | for purposes of clause (b) of the definition of “Change of Control,” any “person” or “group” (as those terms are defined in Sections 13(d) and 14(d) of the Exchange Act or any successor provisions to either of the foregoing), including any group acting for the purpose of acquiring, holding, voting or disposing of securities within the meaning of Rule13d-5(b)(1) under the Exchange Act, other than any one or more of the Permitted Holders, shall be deemed to be the Beneficial Owners of any Voting Stock of a corporation or other legal entity held by any other corporation or legal entity (the “parent corporation”), so long as that person or group Beneficially Owns, directly or indirectly, in the aggregate a majority of the total voting power of the Voting Stock of that parent corporation. |
The term “Beneficially Own” shall have a corresponding meaning.
“Capital Lease Obligation” means any obligation under a lease that is required to be capitalized for financial reporting purposes in accordance with GAAP; and the amount of Debt represented by that obligation shall be the capitalized amount of the obligations determined in accordance with GAAP; and the Stated Maturity thereof shall be the date of the last payment of rent or any other amount due under that lease prior to the first date
upon which that lease may be terminated by the lessee without payment of a penalty. For purposes of “—Certain Covenants—Limitation on Liens,” a Capital Lease Obligation shall be deemed secured by a Lien on the Property being leased.
“Capital Stock” means, with respect to any Person, any shares or other equivalents (however designated) of any class of corporate stock or partnership interests or any other participations, rights, warrants, options or other interests in the nature of an equity interest in that Person, including Preferred Stock, but excluding any debt security convertible or exchangeable into that equity interest.
“Capital Stock Sale Proceeds” means the aggregate net proceeds (including the Fair Market Value of property other than cash) received by the Company from the issuance or sale (other than to a Subsidiary of the
Company or an employee stock ownership plan or trust established by the Company or the Subsidiary for the benefit of their employees) by the Company of its Capital Stock (other than Disqualified Stock) after the Issue Date, net of attorneys’ fees, accountants’ fees, initial purchasers’ or placement agents’ fees, discounts or commissions and brokerage, consultant and other fees actually incurred in connection with the issuance or sale and net of taxes paid or payable as a result thereof.
“Change of Control” means the occurrence of any of the following events:
| (a) | if any “person” or “group” (as such terms are used in Sections 13(d) and 14(d) of the Exchange Act or any successor provisions to either of the foregoing), including any group acting for the purpose of acquiring, holding, voting or disposing of securities within the meaning of Rule13d-5(b)(1) under the Exchange Act, other than any one or more of the Permitted Holders, becomes the Beneficial Owner, directly or indirectly, of 50% or more of the total voting power of the Voting Stock of the Company; or |
| (b) | the sale, transfer, assignment, lease, conveyance or other disposition, directly or indirectly, of all or substantially all the assets of the Company and the Restricted Subsidiaries, considered as a whole (other than a disposition of assets as an entirety or virtually as an entirety to a Wholly Owned Restricted Subsidiary or one or more Permitted Holders) shall have occurred, or the Company merges, consolidates or amalgamates with or into any other Person (other than one or more Permitted Holders) or any other Person (other than one or more Permitted Holders) merges, consolidates or amalgamates with or into the Company, in any event pursuant to a transaction in which the outstanding Voting Stock of the Company is reclassified into or exchanged for cash, securities or other Property, other than a transaction where: |
| (1) | the outstanding Voting Stock of the Company is reclassified into or exchanged for other Voting Stock of the Company or for Voting Stock of the surviving corporation or transferee, and |
| (2) | (i) the holders of the Voting Stock of the Company immediately prior to the transaction own, directly or indirectly, not less than a majority of the voting power of the Voting Stock of the Company or the surviving corporation or transferee immediately after the transaction and in substantially the same proportion as before the transaction or (ii) immediately after the transaction no holder of the Voting Stock of the Company or the surviving corporation or transferee owns, directly or indirectly, more than 50% of the voting power of the Voting Stock of the Company or the surviving corporation or transferee; or |
| (c) | the shareholders of the Company shall have approved any plan of liquidation or dissolution of the Company. |
“Code” means the Internal Revenue Code of 1986, as amended.
“Commodity Price Protection Agreement” means, in respect of a Person, any forward contract, commodity swap agreement, commodity option agreement or other similar agreement or arrangement designed to protect that Person against fluctuations in commodity prices.
“Comparable Treasury Issue” means the United States Treasury security selected by an Independent Investment Banker as having a maturity most nearly equal to the period from the redemption date to May 1, 2020, at the time of selection and in accordance with customary financial practice, in pricing new issues of corporate debt securities of comparable maturity. “Independent Investment Banker” means one of the Reference Treasury Dealers appointed by the trustee after consultation with the Company.
| (a) | the average of the bid and asked prices for the Comparable Treasury Issue (expressed in each case as a percentage of its principal amount) on the third business day preceding such redemption date, as set forth in the most recently published statistical release designated “H.15 (519)” (or any successor |
| release) published by the Board of Governors of the Federal Reserve System and which establishes yields on actively traded United States treasury securities adjusted to constant maturity under the caption “Treasury Constant Maturities,” or |
| (b) | if such release (or any successor release) is not published or does not contain such prices on such business day, the average of the Reference Treasury Dealer Quotations for such redemption date. |
“Consolidated Current Liabilities” means, as of any date of determination, the aggregate amount of liabilities of the Company and its consolidated Restricted Subsidiaries which may properly be classified as current liabilities (including taxes accrued as estimated), after eliminating:
| (a) | all intercompany items between the Company and any Restricted Subsidiary or between Restricted Subsidiaries, and |
| (b) | all current maturities of long-term Debt. |
“Consolidated Fixed Charges” means, for any period, the total interest expense (net of interest income) of the Company and its consolidated Restricted Subsidiaries, plus, to the extent not included in such total interest expense, and to the extent Incurred by the Company or its Restricted Subsidiaries,
| (a) | interest expense recorded for such period attributable to leases constituting part of a Sale and Leaseback Transaction and to Capital Lease Obligations, |
| (b) | amortization of debt discount, |
| (c) | capitalized interest, |
| (d) | non-cash interest expense, |
| (e) | commissions, discounts and other fees and charges owed with respect to letters of credit and bankers’ acceptance financing, |
| (f) | net costs associated with Interest Rate Agreements (including amortization of fees) (it being understood that any net benefits associated with Interest Rate Agreements shall be included in interest income), |
| (g) | Disqualified Stock Dividends, excluding dividends paid in Qualified Capital Stock, |
| (h) | Preferred Stock Dividends, |
| (i) | interest Incurred in connection with Investments in discontinued operations, |
| (j) | interest accruing on any Debt of any other Person to the extent that Debt is Guaranteed by the Company or any Restricted Subsidiary, and |
| (k) | the cash contributions to any employee stock ownership plan or similar trust to the extent those contributions are used by the plan or trust to pay interest or fees to any Person (other than the Company) in connection with Debt Incurred by the plan or trust. |
Notwithstanding anything to the contrary contained herein, (i) amortization orwrite-off of debt issuance costs, deferred financing or liquidity fees, commissions, fees and expenses, call premiums, (ii) any expensing of bridge, commitment and other financing fees and (iii) commissions, discounts, yield and other fees and charges Incurred in connection with any transaction (including, without limitation, any Qualified Receivables Transaction) pursuant to which the Company or any Subsidiary of the Company may sell, convey or otherwise transfer or grant a security interest in any accounts receivable or related assets of the type specified in the definition of “Qualified Receivables Transaction” shall not be included in Consolidated Fixed Charges.
“Consolidated Fixed Charges Coverage Ratio” means, as of any date of determination, the ratio of:
| (a) | the aggregate amount of EBITDA for the most recent four consecutive fiscal quarters ending at least 45 days prior to such determination date to |
| (b) | Consolidated Fixed Charges for those four fiscal quarters; |
provided, however, that:
| (1) | if |
since the beginning of that period the Company or any Restricted Subsidiary has Incurred any Debt that remains outstanding or Repaid any Debt, or |
the transaction giving rise to the need to calculate the Consolidated Fixed Charges Coverage Ratio involves an Incurrence or Repayment of Debt, Consolidated Fixed Charges for that period shall be calculated after giving effect on a pro forma basis to that Incurrence or Repayment as if the Debt was Incurred or Repaid on the first day of that period, provided that, in the event of any Repayment of Debt, EBITDA for that period shall be calculated as if the Company or such Restricted Subsidiary had not earned any interest income actually earned during such period in respect of the funds used to Repay such Debt, and |
| (2) | if |
since the beginning of that period the Company or any Restricted Subsidiary shall have made any Asset Sale or an Investment (by merger or otherwise) in any Restricted Subsidiary (or any Person which becomes a Restricted Subsidiary) or an acquisition of Property which constitutes all or substantially all of an operating unit of a business, |
the transaction giving rise to the need to calculate the Consolidated Fixed Charges Coverage Ratio involves an Asset Sale, Investment or acquisition, or |
since the beginning of that period any Person (that subsequently became a Restricted Subsidiary or was merged with or into the Company or any Restricted Subsidiary since the beginning of that period) shall have made such an Asset Sale, Investment or acquisition, |
EBITDA for that period shall be calculated after giving pro forma effect to the Asset Sale, Investment or acquisition as if the Asset Sale, Investment or acquisition occurred on the first day of that period.
If any Debt bears a floating rate of interest and is being given pro forma effect, the interest expense on that Debt shall be calculated as if the base interest rate in effect for the floating rate of interest on the date of determination had been the applicable base interest rate for the entire period (taking into account any Interest Rate Agreement applicable to that Debt if the applicable Interest Rate Agreement has a remaining term in excess of 12 months). In the event the Capital Stock of any Restricted Subsidiary is sold during the period, the Company shall be deemed, for purposes of clause (1) above, to have Repaid during that period the Debt of that Restricted Subsidiary to the extent the Company and its continuing Restricted Subsidiaries are no longer liable for that Debt after the sale.
“Consolidated Net Income” means, for any period, the net income (loss) of the Company and its consolidated Subsidiaries (excluding any net income (loss) attributable to noncontrolling interests), determined in accordance with GAAP;provided,,however,, that there shall not be included in such Consolidated Net Income:
| (a) | any net income (loss) of any Person (other than the Company) if that Person is not a Restricted Subsidiary, except that the Company’s equity in the net income of any such Person for that period shall be included in such Consolidated Net Income up to the aggregate amount of cash distributed by that Person during that period to the Company or a Restricted Subsidiary as a dividend or other distribution, |
| (b) | any gain (or loss) realized upon the sale or other disposition of any Property of the Company or any of its consolidated Subsidiaries (including pursuant to any Sale and Leaseback Transaction) that is not sold or otherwise disposed of in the ordinary course of business, |
| (c) | any gain or loss attributable to the early extinguishment of Debt, |
| (d) | any extraordinary gain or loss or cumulative effect of a change in accounting principles to the extent disclosed separately on the consolidated statement of income, |
| (e) | any unrealized gains or losses of the Company or its consolidated Subsidiaries on any Hedging Obligations, and |
| (f) | anynon-cash compensation expense realized for grants of performance shares, stock options or other rights to officers, directors and employees of the Company or any Restricted Subsidiary,provided, |
| than Capital Stock of the Company that is not Disqualified Stock then the Fair Market Value of such Property shall be treated as a reduction in Consolidated Net Income during the period of such redemption. |
Notwithstanding the foregoing, for purposes of the covenant described under “—Certain Covenants—Limitation on Restricted Payments” only, there shall be excluded from Consolidated Net Income any dividends, repayments of loans or advances or other transfers of assets from Unrestricted Subsidiaries to the Company or a Restricted Subsidiary to the extent the dividends, repayments or transfers increase the amount of Restricted Payments permitted under that covenant pursuant to clause (c)(4) thereof.
“Consolidated Net Tangible Assets” means, as of any date of determination, the sum of the amounts that would appear on a consolidated balance sheet of the Company and its consolidated Restricted Subsidiaries as the total assets (less accumulated depreciation, amortization, allowances for doubtful receivables, other applicable allowances and other properly deductible items) of the Company and its Restricted Subsidiaries, after giving effect to purchase accounting and after deducting therefrom Consolidated Current Liabilities and, to the extent otherwise included, the amounts of (without duplication):
| (a) | the excess of cost over fair market value of assets or businesses acquired; |
| (b) | any revaluation or otherwrite-up in book value of assets subsequent to the last day of the fiscal quarter of the Company immediately preceding the Issue Date as a result of a change in the method of valuation in accordance with GAAP; |
| (c) | unamortized debt discount and expenses and other unamortized deferred charges, goodwill, patents, trademarks, service marks, trade names, copyrights, licenses, organization or developmental expenses and other intangible items; |
| (d) | noncontrolling interests in consolidated Subsidiaries held by Persons other than the Company or any Restricted Subsidiary; |
| (e) | treasury stock; |
| (f) | cash or securities set aside and held in a sinking or other analogous fund established for the purpose of redemption or other retirement of Capital Stock to the extent such obligation is not reflected in Consolidated Current Liabilities; and |
| (g) | Investments in and assets of Unrestricted Subsidiaries. |
For the avoidance of doubt any deferred tax assets that would appear on a consolidated balance sheet of the Company and its Restricted Subsidiaries shall be included in the calculation of Consolidated Net Tangible Assets.
“Consolidated Secured Leverage Ratio” means, as of any date of determination, the ratio of the aggregate amount of all Debt secured by Liens of the Company and its Restricted Subsidiaries at the end of the most recent fiscal period, for which financial information in respect thereof is available immediately preceding the date of the transaction (the “Transaction Date”) giving rise to the need to calculate the Consolidated Secured Leverage Ratio to the aggregate amount of EBITDA for the Company for the four full fiscal quarters, treated as one period, for which financial information in respect thereof is available immediately preceding the Transaction Date (such four full fiscal quarter period being referred to herein as the “Four Quarter Period”). In addition, for purposes of calculating the ratio, the entire commitment of any revolving credit facility of the Company or any Restricted
Subsidiary shall be deemed to be fully drawn as of the date such agreement is executed, and thereafter the amount of such commitment shall be deemed to fully borrowed at all times for purposes of determining the ratio. In addition to and without limitation of the foregoing, for purposes of this definition, this ratio shall be calculated after giving effect to the following:
| (a) | if since the beginning of that period the Company or any Restricted Subsidiary shall have made any Asset Sale or an Investment (by merger or otherwise) in any Restricted Subsidiary (or any Person |
| which becomes a Restricted Subsidiary) or an acquisition of Property which constitutes all or substantially all of an operating unit of a business, |
| (b) | if the transaction giving rise to the need to calculate the Consolidated Secured Leverage Ratio involves an Asset Sale, Investment or acquisition, or |
| (c) | since the beginning of the Four Quarter Period any Person (that subsequently became a Restricted Subsidiary or was merged with or into the Company or any Restricted Subsidiary since the beginning of the Four Quarter Period) shall have made such an Asset Sale, Investment or acquisition, |
EBITDA for that period shall be calculated after giving pro forma effect to the Asset Sale, Investment or acquisition as if the Asset Sale, Investment or acquisition occurred on the first day of the Four Quarter Period.
“Consolidated Tangible Assets” means, as of any date of determination, the sum of the amounts of Consolidated Net Tangible Assets and Consolidated Current Liabilities as of such date.
“Consolidated Total Leverage Ratio” means, as of any date of determination, the ratio of the aggregate amount of all Debt at the end of the most recent fiscal period, for which financial information in respect thereof is available immediately preceding the Transaction Date giving rise to the need to calculate the Consolidated Total Leverage Ratio to the aggregate amount of EBITDA for the Company for the Four Quarter Period immediately preceding the Transaction Date. In addition, for purposes of calculating the ratio, the amount of any revolving credit facility of the Company or any Restricted Subsidiary outstanding on the Transaction Date shall be deemed to be the average daily balance outstanding under such revolving credit facility during the immediately preceding Four Quarter Period. In addition to and without limitation of the foregoing, for purposes of this definition, this ratio shall be calculated after giving effect to the following:
| (a) | if since the beginning of that period the Company or any Restricted Subsidiary shall have made any Asset Sale or an Investment (by merger or otherwise) in any Restricted Subsidiary (or any Person which becomes a Restricted Subsidiary) or an acquisition of Property which constitutes all or substantially all of an operating unit of a business, |
| (b) | if the transaction giving rise to the need to calculate the Consolidated Total Leverage Ratio involves an Asset Sale, Investment or acquisition, or |
| (c) | since the beginning of the Four Quarter Period any Person (that subsequently became a Restricted Subsidiary or was merged with or into the Company or any Restricted Subsidiary since the beginning of the Four Quarter Period) shall have made such an Asset Sale, Investment or acquisition, |
EBITDA for that period shall be calculated after giving pro forma effect to the Asset Sale, Investment or acquisition as if the Asset Sale, Investment or acquisition occurred on the first day of the Four Quarter Period.
“Credit Facilities” means, with respect to the Company or any Restricted Subsidiary, one or more debt or commercial paper facilities (including related Guarantees) with banks, investment banks, insurance companies, mutual funds or other institutional lenders, (including the Existing Bank Credit Facility), providing for revolving credit loans, term loans, receivables or inventory financing (including through the sale of receivables or inventory to institutional lenders or to special purpose, bankruptcy remote entities formed to borrow from institutional lenders against those receivables or inventory) or trade or standby letters of credit, in each case together with any Refinancing thereof on any basis so long as such Refinancing constitutes Debt;providedthat, in the case of a transaction in which any accounts
receivable are sold, conveyed or otherwise transferred by the Company or any of its subsidiaries to another Person other than a Receivables Entity, then that transaction must satisfy the following three conditions:
| (a) | if the transaction involves a transfer of accounts receivable with Fair Market Value equal to or greater than $25.0 million, the Board of Directors shall have determined in good faith that the transaction is economically fair and reasonable to the Company or the Subsidiary that sold, conveyed or transferred the accounts receivable, |
| (b) | the sale, conveyance or transfer of accounts receivable by the Company or the Subsidiary is made at Fair Market Value, and |
| (c) | the financing terms, covenants, termination events and other provisions of the transaction shall be market terms (as determined in good faith by the Board of Directors). |
“Currency Exchange Protection Agreement” means, in respect of a Person, any foreign exchange contract, currency swap agreement, currency option or other similar agreement or arrangement designed to protect that Person against fluctuations in currency exchange rates.
“Debt” means, with respect to any Person on any date of determination (without duplication):
| (a) | the principal of and premium (if any) in respect of: |
| (1) | debt of the Person for money borrowed, and |
| (2) | debt evidenced by notes, debentures, bonds or other similar instruments for the payment of which the Person is responsible or liable; |
| (b) | all Capital Lease Obligations of the Person and all Attributable Debt in respect of Sale and Leaseback Transactions entered into by the Person; |
| (c) | all obligations of the Person issued or assumed as the deferred purchase price of Property, all conditional sale obligations of the Person and all obligations of the Person under any title retention agreement (but excluding trade accounts payable arising in the ordinary course of business); |
| (d) | all obligations of the Person for the reimbursement of any obligor on any letter of credit, banker’s acceptance or similar credit transaction (other than obligations with respect to letters of credit securing obligations (other than obligations described in clauses (a) through (c) above) entered into in the ordinary course of business of the Person to the extent those letters of credit are not drawn upon or, if and to the extent drawn upon, the drawing is reimbursed no later than the third Business Day following receipt by the Person of a demand for reimbursement following payment on the letter of credit); |
| (e) | the amount of all obligations of the Person with respect to the Repayment of any Disqualified Stock or, with respect to any Subsidiary of the Person, any Preferred Stock (but excluding, in each case, any accrued dividends); |
| (f) | all obligations of the type referred to in clauses (a) through (e) of other Persons and all dividends of other Persons for the payment of which, in either case, the Person is responsible or liable, directly or indirectly, as obligor, guarantor or otherwise, including by means of any Guarantee; |
| (g) | all obligations of the type referred to in clauses (a) through (f) of other Persons secured by any Lien on any Property of the Person (whether or not such obligation is assumed by the Person), the amount of such obligation being deemed to be the lesser of the value of that Property or the amount of the obligation so secured; and |
| (h) | to the extent not otherwise included in this definition, Hedging Obligations of such Person. |
The amount of Debt of any Person at any date shall be the outstanding balance at that date of all unconditional obligations as described above and the maximum liability, upon the occurrence of the contingency
giving rise to the obligation, of any contingent obligations at that date. The amount of Debt represented by a Hedging Obligation shall be equal to:
| (1) | zero if the Hedging Obligation has been Incurred pursuant to clause (f), (g) or (h) of the second paragraph of the covenant described under “—Certain Covenants—Limitation on Debt,” or |
| (2) | if the Hedging Obligation is not Incurred pursuant to clause (f), (g) or (h) of the second paragraph of the covenant described under “—Certain Covenants—Limitation on Debt,” then 105% of the aggregate |
| net amount, if any, that would then be payable by the Company and any Restricted Subsidiary on a per counter-party basis pursuant to Section 6(e) of the ISDA Master Agreement (Multicurrency-Cross Border) in the form published by the International Swaps and Derivatives Association in 1992 (the “ISDA Form”), as if the date of determination were a date that constitutes or is substantially equivalent to an Early Termination Date, as defined in the ISDA Form, with respect to all transactions governed by the ISDA Form, plus the equivalent amount under the terms of any other Hedging Obligations that are not Incurred pursuant to clause (f), (g) or (h) of the second paragraph of the covenant described under “—Certain Covenants—Limitation on Debt,” each such amount to be estimated in good faith by the Company. |
“Debt Issuances” means, with respect to the Company or any Restricted Subsidiary, one or more issuances after the Issue Date of Debt evidenced by notes, debentures, bonds or other similar securities or instruments.
“Default” means any event which is, or after notice or passage of time or both would be, an Event of Default.
“Disqualified Stock”Stock” means, with respect to any Person, any Capital Stock that by its terms (or by the terms of any security into which it is convertible or for which it is exchangeable, in either case at the option of the holder thereof) or otherwise:
| (a) | matures or is mandatorily redeemable pursuant to a sinking fund obligation or otherwise, |
| (b) | is or may become redeemable or repurchaseable at the option of the holder thereof, in whole or in part, or |
| (c) | is convertible or exchangeable at the option of the holder thereof for Debt or Disqualified Stock, on or prior to, in the case of clause (a), (b) or (c), the first anniversary of the Stated Maturity of the |
“Disqualified Stock Dividends” means all dividends with respect to Disqualified Stock of the Company held by Persons other than a Wholly Owned Restricted Subsidiary. The amount of any dividend of this kind shall be equal to the quotient of the dividend divided by the difference between one and the maximum statutory federal income tax rate (expressed as a decimal number between 1 and 0) then applicable to the Company.
“Dollar Equivalent” means, with respect to any monetary amount in a currency other than U.S. dollars, at any time for the determination thereof, the amount of U.S. dollars obtained by converting such foreign currency involved in such computation into U.S. dollars at the spot rate for the purchase of U.S. dollars with the applicable foreign currency as published by the Federal Reserve Board on the date of such determination.
“EBITDA” means, for any period, an amount equal to, for the Company and its consolidated Restricted Subsidiaries:
| (a) | the sum of Consolidated Net Income for that period, plus the following to the extent reducing Consolidated Net Income for that period: |
| (1) | the provision for taxes based on income or profits or utilized in computing net loss, |
| (2) | Consolidated Fixed Charges, |
| (3) | depreciation, |
| (4) | amortization of intangibles, |
| (5) | anynon-recurring expenses relating to, or arising from, any closures of facilities, |
| (6) | restructuring costs, facilities relocation costs and acquisition integration costs and fees (including cash severance payments) made in connection with acquisitions, |
| (7) | anynon-cash impairment charge or assetwrite-off and the amortization of intangibles, |
| (8) | inventory purchase accounting adjustments and amortization and impairment charges resulting from other purchase accounting adjustments in connection with acquisitions, |
| (9) | any expenses or charges related to any offering of securities, acquisition, incurrence of Debt permitted to be incurred by the indenture (whether or not successful), and |
| (10) | any othernon-cash items (other than anynon-cash item to the extent that it represents an accrual of or reserve for cash expenditures in any future period), minus |
| (b) | allnon-cash items increasing Consolidated Net Income for that period (other than any such |
“Equipment Financing Transaction” means any arrangement (together with any Refinancings thereof) with any Person pursuant to which the Company or any Restricted Subsidiary Incurs Debt secured by a Lien on equipment or equipment related property of the Company or any Restricted Subsidiary.
“Equity Offering” means (i) an underwritten public equity offering of Qualified Capital Stock of the Company pursuant to an effective registration statement under the Securities Act, or any direct or indirect parent company of the Company but only to the extent contributed to the Company in the form of Qualified Capital Stock of the Company or (ii) a private equity offering of Qualified Capital Stock of the Company, or any direct or indirect parent company of the Company but only to the extent contributed to the Company in the form of Qualified Capital Stock of the Company, other than any public offerings registered on FormS-8.
“Event of Default” has the meaning set forth under “—Events of Default.”
“Exchange Act” means the Securities Exchange Act of 1934.
“Existing Bank Credit Facility” means, the Amended and Restated Credit Agreement dated as of March 21, 2014, among the Company, Levi Strauss & Co. (Canada), Inc., JPMorgan Chase Bank, N.A., as administrative agent, and the other agents and lenders from time to time party thereto, as amended as of the Issue Date.
“Existing Notes” means, the Company’s 6 7⁄8% Senior Notes due 2022 and 5.00% Senior Notes due 2025, in each case as outstanding on the Issue Date.
“Existing Policies” means (1) the Company’s estate tax repurchase policy under which the Company repurchases a portion of a deceased stockholder’s shares to generate funds for payment of estate taxes and (2) the Company’s valuation policy under which the Company obtains an annual valuation of the Company’s common stock, as both policies exist at the Issue Date or as they may exist from time to time, provided that if either of these policies is materially amended after the Issue Date in a manner less favorable to the Company than the policy as existing on the Issue Date, then that amended policy shall be deemed not to be an Existing Policy.
“Fair Market Value” means, with respect to any Property, the price that could be negotiated in an arm’s length free market transaction, for cash, between a willing seller and a willing buyer, neither of whom is under undue pressure or compulsion to complete the transaction. For purposes of the covenants described under “—Certain Covenants—Limitation on Restricted Payments” and “—Certain Covenants—Limitation on Asset Sales” and the definitions of “Qualified Receivables Transaction” and “Credit Facilities,” Fair Market Value shall be determined, except as otherwise provided,
| (a) | if the Property has a Fair Market Value equal to or less than $25.0 million, by any Officer of the Company, or |
| (b) | if the Property has a Fair Market Value in excess of $25.0 million, by a majority of the Board of Directors and evidenced by a Board Resolution, dated within 12 months of the relevant transaction, delivered to the trustee. |
“Foreign Restricted Subsidiary” means any Restricted Subsidiary which is not organized under the laws of the United States of America or any State thereof or the District of Columbia.
“Future Guarantor” means any Subsidiary of the Company that provides a Guarantee of the notesSenior Notes at any time after the Issue Date pursuant to the covenant described above under “—Certain Covenants—Future Subsidiary Guarantors.”
“GAAP” means United States generally accepted accounting principles as in effect on the Issue Date, including those set forth in the Accounting Standards Codification of the Financial Accounting Standards Board and in the rules and regulations of the SEC governing the inclusion of financial statements (including pro forma financial statements) in periodic reports required to be filed pursuant to Section 13 of the Exchange Act.
“Government Obligations” means direct obligations (or certificates representing an ownership interest in such obligations) of the United States of America or any country that is a member of the European Union on the Issue Date (including any agency or instrumentality thereof) for the payment of which the full faith and credit of the United States of America or such European Union country is pledged and which are not callable or redeemable at the issuer’s option.
“Guarantee” means any obligation, contingent or otherwise, of any Person directly or indirectly guaranteeing any Debt of any other Person and any obligation, direct or indirect, contingent or otherwise, of that Person:
| (a) | to purchase or pay (or advance or supply funds for the purchase or payment of) the Debt of such other Person (whether arising by virtue of partnership arrangements, or by agreements to keep- well, to purchase assets, goods, securities or services, totake-or-pay or to maintain financial statement conditions or otherwise), or |
| (b) | entered into for the purpose of assuring in any other manner the obligee against loss in respect thereof (in whole or in |
provided, however, that the term “Guarantee” shall not include endorsements for collection or deposit in the ordinary course of business.
The term “Guarantee” used as a verb has a corresponding meaning. The term “Guarantor” shall mean any Person Guaranteeing any obligation.
“Hedging Obligation” of any Person means any obligation of that Person pursuant to any Interest Rate Agreement, Currency Exchange Protection Agreement, Commodity Price Protection Agreement or any other similar agreement or arrangement.
“Incur” means, with respect to any Debt or other obligation of any Person, to create, issue, incur (by merger, conversion, exchange or otherwise), extend, assume, Guarantee or become liable in respect of that Debt or other obligation or the recording, as required pursuant to GAAP or otherwise, of any Debt or obligation on the balance sheet of that Person (and “Incurrence” and “Incurred” shall have meanings correlative to the foregoing);provided,,however,, that a change in GAAP that results in an obligation of that Person that exists at such time, and is not theretofore classified as Debt, becoming Debt shall not be deemed an Incurrence of that Debt;provided
further,,however,, that any Debt or other obligations of a Person existing at the time the Person becomes a Subsidiary (whether by merger, consolidation, acquisition or otherwise) shall be deemed to be Incurred by that Subsidiary at the time it becomes a Subsidiary; andprovided further,,however,, that solely for purposes of determining compliance with “—Certain Covenants—Limitation on Debt,” amortization of debt discount or premium shall not be deemed to be the Incurrence of Debt,providedthat in the case of Debt sold at a discount or at a premium, the amount of the Debt Incurred shall at all times be the aggregate principal amount at Stated Maturity.
“Independent Financial Advisor” means an investment banking firm of national standing or any third party appraiser of national standing, provided that the firm or appraiser is not an Affiliate of the Company.
“Interest Rate Agreement” means, for any Person, any interest rate swap agreement, interest rate option agreement or other similar agreement or arrangement designed to protect against fluctuations in interest rates.
“Investment” by any Person means any direct or indirect loan (other than advances to customers and suppliers in the ordinary course of business that are recorded as accounts receivable on the balance sheet of that Person), advance or other extension of credit or capital contribution (by means of transfers of cash or other Property to others or payments for Property or services for the account or use of others, or otherwise) to, or Incurrence of a Guarantee of any obligation of, or purchase or acquisition of Capital Stock, bonds, notes, debentures or other securities or evidence of Debt issued by, any other Person. For purposes of the covenant described under “—Certain Covenants—Limitation on Restricted Payments,” “—Certain Covenants—Designation of Restricted and Unrestricted Subsidiaries” and the definition of “Restricted Payment,” “Investment” shall include the portion (proportionate to the Company’s equity interest in the Subsidiary) of the Fair Market Value of the net assets of any Subsidiary of the Company at the time that the Subsidiary is designated an Unrestricted Subsidiary; provided, however, that upon a redesignation of that Subsidiary as a Restricted Subsidiary, the Company shall be deemed to continue to have a permanent “Investment” in an Unrestricted Subsidiary of an amount (if positive) equal to:
| (a) | the Company’s “Investment” in that Subsidiary at the time of such redesignation, less |
| (b) | the portion (proportionate to the Company’s equity interest in such Subsidiary) of the Fair Market Value of the net assets of that Subsidiary at the time of such redesignation. |
In determining the amount of any Investment made by transfer of any Property other than cash, the Property shall be valued at its Fair Market Value at the time of the Investment.
“Investment Grade Rating” means a rating equal to or higher than Baa3 (or the equivalent) by Moody’s andBBB- (or the equivalent) by S&P.
“Issue Date” means February 28, 2017.April 27, 2015.
“Lien” means, with respect to any Property of any Person, any mortgage or deed of trust, pledge, hypothecation, assignment, deposit arrangement, security interest, lien, charge, easement (other than any easement not materially impairing usefulness or marketability), encumbrance, preference, priority or other security agreement or preferential arrangement of any kind or nature whatsoever on or with respect to that Property (including any Capital Lease Obligation, conditional sale or other title retention agreement having substantially the same economic effect as any of the foregoing or any Sale and Leaseback Transaction).
“Moody’s” means Moody’s Investors Service, Inc. or any successor to the rating agency business thereof.
“Net Available Cash” from any Asset Sale means cash payments received therefrom (including any cash payments received by way of deferred payment of principal pursuant to a note or installment receivable or otherwise, but only as and when received, but excluding any other consideration received in the form of
assumption by the acquiring Person of Debt or other obligations relating to the Property that is the subject of that Asset Sale or received in any othernon-cash form), in each case net of:
| (a) | all legal, title and recording tax expenses, commissions and other fees (including, without limitation, brokers’ or investment bankers’ commissions or fees) and expenses incurred, and all Federal, state, provincial, foreign and local taxes required to be accrued as a liability under GAAP, as a consequence of the Asset Sale, |
| (b) | all payments made on any Debt that is secured by any Property subject to the Asset Sale, in accordance with the terms of any Lien upon or other security agreement of any kind with respect to that Property, |
| or which must by its terms, or in order to obtain a necessary consent to the Asset Sale, or by applicable law, be repaid out of the proceeds from the Asset Sale, |
| (c) | all distributions and other payments required to be made to noncontrolling interest holders in Subsidiaries or joint ventures as a result of the Asset Sale, and |
| (d) | the deduction of appropriate amounts provided by the seller as a reserve, in accordance with GAAP, against any liabilities associated with the Property disposed in the Asset Sale and retained by the Company or any Restricted Subsidiary after the Asset Sale. |
“Officer” means the Chief Executive Officer, the President, the Chief Financial Officer, the Vice President and Global Treasurer, the Treasurer or the Assistant Treasurer of the Company.
“Officers’ Certificate” means a certificate signed by two Officers of the Company, at least one of whom shall be the principal executive officer, principal financial officer or the principal accounting officer of the Company, and delivered to the trustee.
“Opinion of Counsel” means a written opinion from legal counsel which is acceptable to the trustee. The counsel may be an employee of or counsel to the Company.
“Permitted Business” means any business that is reasonably similar, ancillary or related to, or a reasonable extension, development or expansion of, the businesses in which the Company and its Restricted Subsidiaries are engaged in on the Issue Date.
“Permitted Holders” means the holders of Voting Stock as of the Issue Date, together with any Person who is a “Permitted Transferee” of the holders, as that term is defined in the Stockholders Agreement dated as of April 15, 1996 between the Company and the stockholders of the Company party thereto, as amended, as that Stockholders Agreement was in effect on the Issue Date, except that transferees pursuant to Section 2.2(a)(x) of that Stockholders Agreement shall not be deemed to be Permitted Transferees for purposes of the indenture.
“Permitted Liens” means:
| (a) | Liens (including, without limitation and to the extent constituting a Lien, negative pledges) to secure Debt in an aggregate principal amount not to exceed the greater of (x) the amount permitted to be Incurred under clause (b) of the second paragraph of the covenant described under “—Certain Covenants—Limitation on Debt,” regardless of whether the Company and the Restricted Subsidiaries are actually subject to that covenant at the time the Lien is Incurred and (y) an amount that does not cause the Consolidated Secured Leverage Ratio to exceed 3.50 to 1.0; |
| (b) | Liens for taxes, assessments or governmental charges or levies on the Property of the Company or any Restricted Subsidiary if the same shall not at the time be delinquent or thereafter can be paid without penalty, or are being contested in good faith and by appropriate proceedings promptly instituted and diligently concluded,providedthat any reserve or other appropriate provision that shall be required in conformity with GAAP shall have been made therefor; |
| (c) | Liens imposed by law, such as carriers’, warehousemen’s and mechanics’ Liens and other similar Liens, on the Property of the Company or any Restricted Subsidiary arising in the ordinary course of business and securing payment of obligations that are not more than 60 days past due or are being contested in good faith and by appropriate proceedings; |
| (d) | Liens on the Property of the Company or any Restricted Subsidiary Incurred in the ordinary course of business to secure performance of obligations with respect to statutory or regulatory requirements, performance orreturn-of-money bonds, surety bonds or other obligations of a like nature and Incurred in a manner consistent with industry practice, including banker’s liens and rights ofset-off, in each case which are not Incurred in connection with the borrowing of money, the obtaining of advances or |
| credit or the payment of the deferred purchase price of Property and which do not in the aggregate impair in any material respect the use of Property in the operation of the business of the Company and the Restricted Subsidiaries taken as a whole; |
| (e) | Liens on Property at the time the Company or any Restricted Subsidiary acquired the Property, including any acquisition by means of a merger or consolidation with or into the Company or any Restricted Subsidiary;provided, |
| (f) | Liens on the Property of a Person at the time that Person becomes a Restricted Subsidiary;provided, |
| (g) | pledges or deposits by the Company or any Restricted Subsidiary under worker’s compensation laws, unemployment insurance laws or similar legislation, or good faith deposits in connection with bids, tenders, contracts (other than for the payment of Debt) or leases to which the Company or any Restricted Subsidiary is party, or deposits to secure public or statutory obligations of the Company or any Restricted Subsidiary, or deposits for the payment of rent, in each case Incurred in the ordinary course of business; |
| (h) | Liens (including, without limitation and to the extent constituting Liens, negative pledges), assignments and pledges of rights to receive premiums, interest or loss payments or otherwise arising in connection with worker’s compensation loss portfolio transfer insurance transactions or any insurance or reinsurance agreements pertaining to losses covered by insurance, and Liens (including, without limitation and to the extent constituting Liens, negative pledges) in favor of insurers or reinsurers on pledges or deposits by the Company or any Restricted Subsidiary under workmen’s compensation laws, unemployment insurance laws or similar legislation; |
| (i) | utility easements, building restrictions and such other encumbrances or charges against real Property as are of a nature generally existing with respect to properties of a similar character; |
| (j) | Liens arising out of judgments or awards against the Company or a Restricted Subsidiary with respect to which the Company or the Restricted Subsidiary shall then be proceeding with an appeal or other proceeding for review; |
| (k) | Liens in favor of surety bonds or letters of credit issued pursuant to the request of and for the account of the Company or a Restricted Subsidiary in the ordinary course of its business, provided that these letters of credit do not constitute Debt; |
| (l) | leases or subleases of real property granted by the Company or a Restricted Subsidiary to any other Person in the ordinary course of business and not materially impairing the use of the real property in the operation of the business of the Company or the Restricted Subsidiary; |
| (m) | Liens (including, without limitation and to the extent constituting Liens, negative pledges) on intellectual property arising from intellectual property licenses entered into in the ordinary course of business; |
| (n) | Liens or negative pledges attaching to or related to joint ventures engaged in a Related Business, restricting Liens on interests in those joint ventures; |
| (o) | Liens existing on the Issue Date not otherwise described in clauses (a) through (n) above; |
| (p) | Liens not otherwise described in clauses (a) through (o) above on (x) the Property of any Foreign Subsidiary to secure any Debt permitted to be Incurred by the Foreign Subsidiary pursuant to the |
| covenant described under “—Certain Covenants—Limitation on Debt” and (y) the Property of the Company or any Restricted Subsidiary to secure any Debt permitted to be incurred under clause (l) of such covenant; |
| (q) | Liens on the Property of the Company or any Restricted Subsidiary to secure any Refinancing, in whole or in part, of any Debt secured by Liens referred to in clause (d), (e), (f), (j) or (k) above;provided, |
| (1) | the outstanding principal amount, or, if greater, the committed amount, of the Debt secured by Liens described under clause (d), (e), (f), (j) or (k) above, as the case may be, at the time the original Lien became a Permitted Lien under the indenture, and |
| (2) | an amount necessary to pay any fees and expenses, including premiums and defeasance costs, incurred by the Company or the Restricted Subsidiary in connection with the Refinancing; |
| (r) | Liens not otherwise permitted by clauses (a) through (q) above that are Liens permitted by the Existing Bank Credit Facility as they exist on the Issue Date; |
| (s) | Liens on cash or Temporary Cash Investments held as proceeds of Permitted Refinancing Debt pending the payment, purchase, defeasance or other retirement of the Debt being Refinanced; and |
| (t) | Liens not otherwise permitted by clauses (a) through (s) above encumbering assets having an aggregate Fair Market Value not in excess of the greater of (i) $250.0 million and (ii) 15% of Consolidated Net Tangible Assets, as determined based on the consolidated balance sheet of the Company as of the end of the most recent fiscal quarter ending at least 45 days prior to the date the Lien shall be Incurred. |
“Permitted Refinancing Debt” means any Debt that Refinances any other Debt, including any successive Refinancings, so long as:
| (a) | the new Debt is in an aggregate principal amount (or if Incurred with original issue discount, an aggregate issue price) not in excess of the sum of: |
| (1) | the aggregate principal amount (or if Incurred with original issue discount, the aggregate accreted value) then outstanding of the Debt being Refinanced, and |
| (2) | an amount necessary to pay any fees and expenses, including premiums and defeasance costs, related to the Refinancing, |
| (b) | the Average Life of the new Debt is equal to or greater than the Average Life of the Debt being Refinanced, |
| (c) | the Stated Maturity of the new Debt is no earlier than the Stated Maturity of the Debt being Refinanced, and |
| (d) | the new Debt shall not be senior in right of payment to the Debt that is being Refinanced;provided, |
Debt of a Subsidiary that Refinances Debt of the Company, or |
Debt of the Company or a Restricted Subsidiary that Refinances Debt of an Unrestricted Subsidiary. |
“Person” means any individual, corporation, company (including any limited liability company), association, partnership, joint venture, trust, unincorporated organization, government or any agency or political subdivision thereof or any other entity.
“Preferred Stock” means any Capital Stock of a Person, however designated, which entitles the holder thereof to a preference with respect to the payment of dividends, or as to the distribution of assets upon any voluntary or involuntary liquidation or dissolution of that Person, over shares of any other class of Capital Stock issued by that Person.
“Preferred Stock Dividends” means all dividends with respect to Preferred Stock of Restricted Subsidiaries held by Persons other than the Company or a Wholly Owned Restricted Subsidiary. The amount of any dividend of this kind shall be equal to the quotient of the dividend divided by the difference between one and the maximum statutory federal income rate (expressed as a decimal number between 1 and 0) then applicable to the issuer of the Preferred Stock.
“Productive Assets” means assets (other than securities and inventory) that are used or usable by the Company and its Restricted Subsidiaries in Permitted Businesses.
“pro forma” means, with respect to any calculation made or required to be made pursuant to the terms hereof, a calculation performed in accordance with Article 11 of RegulationS-X promulgated under the Securities Act, as interpreted in good faith by the Board of Directors of the Company, or otherwise a calculation made in good faith by the Board of Directors of the Company, as the case may be.
“Property” means, with respect to any Person, any interest of that Person in any kind of property or asset, whether real, personal or mixed, or tangible or intangible, including Capital Stock in, and other securities of, any other Person. For purposes of any calculation required pursuant to the indenture, the value of any Property shall be its Fair Market Value.
“Purchase Money Debt” means Debt:
| (a) | consisting of the deferred purchase price of property, conditional sale obligations, obligations under any title retention agreement, other purchase money obligations and obligations in respect of industrial revenue bonds, in each case where the maturity of the Debt does not exceed the anticipated useful life of the Property being financed, and |
| (b) | Incurred to finance the acquisition, construction or lease by the Company or a Restricted Subsidiary of the Property, including additions and improvements thereto; |
provided,,however, that the Debt is Incurred within 180 days after the acquisition, construction or lease of the Property by the Company or Restricted Subsidiary.
“Qualified Capital Stock” means any Capital Stock that is not Disqualified Stock.
“Qualified Receivables Transaction” means any transaction or series of transactions that may be entered into by the Company or any of its Subsidiaries pursuant to which the Company or any of its Subsidiaries may sell, convey or otherwise transfer to:
| (a) | a Receivables Entity (in the case of a transfer by the Company or any of its Subsidiaries), and |
| (b) | any other Person (in the case of a transfer by a Receivables Entity), |
or may grant a security interest in, any accounts receivable (whether now existing or arising in the future) of the Company or any of its Subsidiaries, and any assets related thereto including, without limitation, all collateral
securing those accounts receivable, all contracts and all Guarantees or other obligations in respect of those accounts receivable, proceeds of those accounts receivable and other assets which are customarily transferred or in respect of which security interests are customarily granted in connection with asset securitization transactions involving accounts receivable; provided that:
| (1) | if the transaction involves a transfer of accounts receivable with Fair Market Value equal to or greater than $25.0 million, the Board of Directors shall have determined in good faith that the Qualified Receivables Transaction is economically fair and reasonable to the Company and the Receivables Entity, |
| (2) | all sales of accounts receivable and related assets to or by the Receivables Entity are made at Fair Market Value, and |
| (3) | the financing terms, covenants, termination events and other provisions thereof shall be market terms (as determined in good faith by the Board of Directors). |
The grant of a security interest in any accounts receivable of the Company or any of its Restricted Subsidiaries to secure the Credit Facilities shall not be deemed a Qualified Receivables Transaction.
“Rating Agencies” mean Moody’s and S&P.
“Real Estate Financing Transaction” means any arrangement with any Person pursuant to which the Company or any Restricted Subsidiary Incurs Debt secured by a Lien on real property of the Company or any Restricted Subsidiary and related personal property together with any Refinancings thereof.
“Receivables Entity” means a Wholly Owned Subsidiary of the Company (or another Person formed for the purposes of engaging in a Qualified Receivables Transaction with the Company in which the Company or any Subsidiary of the Company makes an Investment and to which the Company or any Subsidiary of the Company transfers accounts receivable and related assets) which engages in no activities other than in connection with the financing of accounts receivable of the Company and its Subsidiaries, all proceeds thereof and all rights (contractual or other), collateral and other assets relating thereto, and any business or activities incidental or related to that business, and (with respect to any Receivables Entity formed after the Issue Date) which is designated by the Board of Directors (as provided below) as a Receivables Entity and
| (a) | no portion of the Debt or any other obligations (contingent or otherwise) of which |
| (1) | is Guaranteed by the Company or any Subsidiary of the Company (excluding Guarantees of obligations (other than the principal of, and interest on, Debt) pursuant to Standard Securitization Undertakings), |
| (2) | is recourse to or obligates the Company or any Subsidiary of the Company in any way other than pursuant to Standard Securitization Undertakings, or |
| (3) | subjects any property or asset of the Company or any Subsidiary of the Company, directly or indirectly, contingently or otherwise, to the satisfaction thereof, other than pursuant to Standard Securitization Undertakings; |
| (b) | with which neither the Company nor any Subsidiary of the Company has any material contract, agreement, arrangement or understanding other than on terms which the Company reasonably believes to be no less favorable to the Company or the Subsidiary than those that might be obtained at the time from Persons that are not Affiliates of the Company; and |
| (c) | to which neither the Company nor any Subsidiary of the Company has any obligation to maintain or preserve the entity’s financial condition or cause the entity to achieve certain levels of operating results other than pursuant to Standard Securitization Undertakings. |
Any designation of this kind by the Board of Directors shall be evidenced to the trustee by filing with the trustee a certified copy of the resolution of the Board of Directors giving effect to the designation and an Officers’ Certificate certifying that the designation complied with the foregoing conditions.
“Reference Treasury Dealer” means Merrill Lynch, Pierce, Fenner & Smith Incorporated, J.P. Morgan Securities LLC and one other financial institution chosen by the Company and their respective successors; provided, however, that if any of the foregoing shall cease to be a primary U.S. Government securities dealer in New York City (a “Primary Treasury Dealer”), the Company shall substitute therefor another Primary Treasury Dealer.
“Reference Treasury Dealer Quotations” means, with respect to each Reference Treasury Dealer and any redemption date, the average, as determined by the Company or Reference Treasury Dealer, of the bid and asked prices for the Comparable Treasury Issue (expressed in each case as a percentage of its principal amount) quoted in writing to the Company by such Reference Treasury Dealer at 5:00 p.m. on the third business day preceding such redemption date.
“Refinance” means, in respect of any Debt, to refinance, extend, renew, refund, repay, prepay, repurchase, redeem, defease or retire, or to issue other Debt, in exchange or replacement for, that Debt. “Refinanced” and “Refinancing” shall have correlative meanings.
“Related Business” means any business that is related, ancillary or complementary to the businesses of the Company and the Restricted Subsidiaries on the Issue Date.
“Repay” means, in respect of any Debt, to repay, prepay, repurchase, redeem, legally defease or otherwise retire that Debt. “Repayment” and “Repaid” shall have correlative meanings. For purposes of the covenants described under “—Certain Covenants—Limitation on Asset Sales” and “—Certain Covenants—Limitation on Debt” and the definition of “Consolidated Fixed Charges Coverage Ratio,” Debt shall be considered to have been Repaid only to the extent the related loan commitment, if any, shall have been permanently reduced in connection therewith.
“Restricted Payment” means:
| (a) | any dividend or distribution (whether made in cash, securities or other Property) declared or paid on or with respect to any shares of Capital Stock of the Company or any Restricted Subsidiary (including any payment in connection with any merger or consolidation with or into the Company or any Restricted Subsidiary), except for any dividend or distribution that is made to the Company or the parent of the Restricted Subsidiary or any dividend or distribution payable solely in shares of Capital Stock (other than Disqualified Stock) of the Company; |
| (b) | the purchase, repurchase, redemption, acquisition or retirement for value of any Capital Stock of the Company or any Restricted Subsidiary (other than from the Company or a Restricted Subsidiary) or any securities exchangeable for or convertible into Capital Stock of the Company or any Restricted Subsidiary, including the exercise of any option to exchange any Capital Stock (other than for or into Capital Stock of the Company that is not Disqualified Stock); |
| (c) | the purchase, repurchase, redemption, acquisition or retirement for value, prior to the date for any scheduled maturity, sinking fund or amortization or other installment payment, of any Subordinated Obligation (other than the purchase, repurchase or other acquisition of any Subordinated Obligation purchased in anticipation of satisfying a scheduled maturity, sinking fund or amortization or other installment obligation, in each case due within one year of the date of acquisition); or |
| (d) | the issuance, sale or other disposition of Capital Stock of any Restricted Subsidiary to a Person other than the Company or another Restricted Subsidiary if the result thereof is that the Restricted Subsidiary shall cease to be a Restricted Subsidiary, in which event the amount of the “Restricted Payment” shall |
| be the Fair Market Value of the remaining interest, if any, in the former Restricted Subsidiary held by the Company and the other Restricted Subsidiaries. |
“Restricted Subsidiary” means any Subsidiary of the Company other than an Unrestricted Subsidiary. thereof.
“S&P” means S&P GlobalStandard & Poor’s Ratings (a division of S&P Global Inc.)Service or any successor to the rating agency business thereof.
“Sale and Leaseback Transaction” means any direct or indirect arrangement relating to Property now owned or hereafter acquired whereby the Company or a Restricted Subsidiary transfers that Property to another Person and the Company or a Restricted Subsidiary leases it from that other Person together with any Refinancings thereof.
“Securities Act” means the Securities Act of 1933.
“Significant Subsidiary” means any Subsidiary that would be a “Significant Subsidiary” of the Company within the meaning of Rule1-02 under RegulationS-X promulgated by the SEC.
“Standard Securitization Undertakings” means representations, warranties, covenants and indemnities entered into by the Company or any Subsidiary of the Company which are customary in an accounts receivable securitization transaction involving a comparable company.
“Stated Maturity” means, with respect to any security, the date specified in the security as the fixed date on which the payment of principal of the security is due and payable, including pursuant to any mandatory
redemption provision (but excluding any provision providing for the repurchase of the security at the option of the holder thereof upon the happening of any contingency beyond the control of the issuer unless that contingency has occurred).
“Subordinated Obligation” means any Debt of the Company (whether outstanding on the Issue Date or thereafter Incurred) that is subordinate or junior in right of payment to the notesSenior Notes pursuant to a written agreement to that effect.
“Subsidiary” means, in respect of any Person, any corporation, company (including any limited liability company), association, partnership, joint venture or other business entity of which a majority of the total voting power of the Voting Stock is at the time owned or controlled, directly or indirectly, by:
| (a) | that Person, |
| (b) | that Person and one or more Subsidiaries of that Person, or |
| (c) | one or more Subsidiaries of that Person. |
“Temporary Cash Investments” means any of the following:
| (a) | Investments in U.S. Government Obligations maturing within 365 days of the date of acquisition thereof; |
| (b) | Investments in time deposit accounts, banker’s acceptances, certificates of deposit and money market deposits maturing within 180 days of the date of acquisition thereof issued by a bank or trust company organized under the laws of the United States of America or any state thereof having capital, surplus and undivided profits aggregating in excess of $500.0 million or issued by a commercial bank organized under the laws of any other country that is a member of the Organization for Economic Cooperation and Development having total assets in excess of $500.0 million (or its foreign currency equivalent at the time), and in any case whose long-term debt is rated“A-3” or“A-” or higher according to Moody’s or S&P (or a similar equivalent rating by at least one “nationally recognized statistical rating organization” (as defined in Rule 436 under the Securities Act)); |
| (c) | repurchase obligations with a term of not more than 30 days for underlying securities of the types described in clause (a) entered into with: |
| (1) | a bank meeting the qualifications described in clause (b) above, or |
| (2) | any primary government securities dealer reporting to the Market Reports Division of the Federal Reserve Bank of New York; |
| (d) | Investments in commercial paper, maturing not more than 270 days after the date of acquisition, issued by a corporation (other than an Affiliate of the Company) organized and in existence under the laws of the United States of America or any other country that is a member of the Organization for Economic Cooperation and Development, and in any case with a rating at the time as of which any Investment therein is made of“P-1” (or higher) according to Moody’s or “A1” (or higher) according to S&P (or a similar equivalent rating by at least one “nationally recognized statistical rating organization” (as defined in Rule 436 under the Securities Act)); and |
| (e) | direct obligations (or certificates representing an ownership interest in such obligations) of any state of the United States of America (including any agency or instrumentality thereof) for the payment of which the full faith and credit of such state is pledged and which are not callable or redeemable at the issuer’s option,providedthat: |
| (1) | the long-term debt of the state is rated“A-3” or“A-” or higher according to Moody’s or S&P (or a similar equivalent rating by at least one “nationally recognized statistical rating organization” (as defined in Rule 436 under the Securities Act)), and |
| (2) | the obligations mature within 180 days of the date of acquisition thereof. |
“Unrestricted Subsidiary” means:
| (a) | any Subsidiary of the Company that is designated after the Issue Date as an Unrestricted Subsidiary as permitted or required pursuant to the covenant described under “—Certain Covenants—Designation of Restricted and Unrestricted Subsidiaries” and is not thereafter redesignated as a Restricted Subsidiary as permitted pursuant thereto; and |
| (b) | any Subsidiary of an Unrestricted Subsidiary. |
“Voting Stock” of any Person means all classes of Capital Stock or other interests (including partnership interests) of that Person then outstanding and normally entitled (without regard to the occurrence of any contingency) to vote in the election of directors, managers or trustees thereof.
“Wholly Owned Restricted Subsidiary” means, at any time, a Restricted Subsidiary all the Voting Stock of which (except directors’ qualifying shares) is at that time owned, directly or indirectly, by the Company and its other Wholly Owned Subsidiaries.
EXCHANGE OFFER; REGISTRATION RIGHTS
In this section, the words “Company,” “we,” “us” and “our” refer only to Levi Strauss & Co. and not to any of its subsidiaries. We have agreed, pursuant to a registration rights agreement with the initial purchasers for the benefit of the holders of the notes (the “Registration Rights Agreement”), that we will, at our cost: (a) not later than 90 days after the date of original issuance of the old notes, file a registration statement (the “Exchange Offer Registration Statement”) with the SEC with respect to a registered offer to exchange the old notes for the exchange notes having terms substantially identical in all material respects to the old notes (except that the exchange notes will not contain terms with respect to transfer restrictions) and (b) cause the Exchange Offer Registration Statement to be declared effective under the Securities Act not later than 180 days after the date of original issuance of the old notes. Upon the effectiveness of the Exchange Offer Registration Statement, we will offer the exchange notes in exchange for surrender of the old notes (the “Registered Exchange Offer”). We will keep the Registered Exchange Offer open for not less than 30 days (or longer if required by applicable law) and not more than 45 days after the date notice of the Registered Exchange Offer is mailed to the holders of the old notes. For each old note surrendered to us pursuant to the Registered Exchange Offer, the holder of such old note will receive an exchange note having a principal amount equal to that of the surrendered note. Interest on each exchange note will accrue from the last interest payment date on which interest was paid on the old note surrendered in exchange therefor or, if no interest has been paid on the old note surrendered, from the date of its original issue. Under existing SEC interpretations, the exchange notes would be freely transferable by holders of the old notes (other than affiliates of the Company) after the Registered Exchange Offer without further registration under the Securities Act if such holder represents that (a) it is acquiring the exchange notes in the ordinary course of its business, (b) it has no arrangement or understanding with any person to participate in the distribution of the exchange notes and (c) it is not an affiliate of the Company, as those terms are interpreted by the SEC; provided that broker-dealers (“Participating Broker-Dealers”) receiving exchange notes in the Registered Exchange Offer will have a prospectus delivery requirement with respect to resales of such exchange notes. The SEC has taken the position that Participating Broker-Dealers may fulfill their prospectus delivery requirements with respect to exchange notes (other than a resale of an unsold allotment from the original sale of the old notes) with the prospectus contained in the Exchange Offer Registration Statement. Under the Registration Rights Agreement, we are required to allow Participating Broker-Dealers and other persons, if any, with similar prospectus delivery requirements to use the prospectus contained in the Exchange Offer Registration Statement in connection with the resale of exchange notes.
A holder of old notes (other than certain specified holders) who wishes to exchange old notes for exchange notes in the Registered Exchange Offer will be required to represent that (a) any exchange notes to be received by it will be acquired in the ordinary course of its business, (b) at the time of the commencement of the Registered Exchange Offer, it has no arrangement or understanding with any person to participate in the distribution (within the meaning of the Securities Act) of the exchange notes and (c) it is not an “affiliate” of the Company, as defined in Rule 405 of the Securities Act, or if it is an affiliate, that it will comply with the registration and prospectus delivery requirements of the Securities Act to the extent applicable.
In the event that (a) applicable interpretations of the staff of the SEC do not permit us to effect such a Registered Exchange Offer, (b) for any other reason the Exchange Offer Registration Statement is not declared effective within 180 days after the date of the original issuance of the old notes or the Registered Exchange Offer is not consummated within 210 days after the original issuance of the old notes, (c) the initial purchasers so request within 45 days of consummation of the Registered Exchange Offer with respect to old notes not eligible to be exchanged for exchange notes in the Registered Exchange Offer, or (d) any holder of old notes (other than an initial purchaser) is not eligible to participate in the Registered Exchange Offer or does not receive freely tradeable exchange notes in the Registered Exchange Offer other than by reason of the holder being an affiliate of the Company (it being understood that the requirement that a Participating Broker-Dealer deliver the prospectus contained in the Exchange Offer Registration Statement in connection with sales of exchange notes shall not result in such exchange notes being not “freely tradeable”), we will, at our cost, (1) as promptly as practicable, file a registration statement under the Securities Act covering continuous resales of the old notes (the
“Shelf Registration Statement”), (2) cause the Shelf Registration Statement to be declared effective under the Securities Act, and (3) use our best efforts to keep the Shelf Registration Statement effective until two years after the closing date of the offering of the old notes. We will, in the event a Shelf Registration Statement is filed, among other things, provide to each holder for whom the Shelf Registration Statement was filed copies of the prospectus which is a part of the Shelf Registration Statement, notify each such holder when the Shelf Registration Statement has become effective and take other actions as are required to permit unrestricted resales of the old notes or the exchange notes. A holder selling the old notes or the exchange notes, in each case pursuant to the Shelf Registration Statement, generally would be required to be named as a selling security holder in the related prospectus and to deliver a prospectus to purchasers, will be subject to applicable civil liability provisions under the Securities Act in connection with sales of that kind and will be bound by the provisions of the Registration Rights Agreement which are applicable to that holder (including certain indemnification obligations).
If (a) on or prior to the 90th day following the date of original issuance of the old notes, neither the Exchange Offer Registration Statement nor the Shelf Registration Statement has been filed with the SEC, (b) on or prior to the 180th day following the date of original issuance of the old notes, neither the Exchange Offer Registration Statement nor the Shelf Registration Statement has been declared effective, (c) on or prior to the 210th day following the date of original issuance of the old notes, neither the Registered Exchange Offer has been consummated nor the Shelf Registration Statement has been declared effective, or (d) after either the Exchange Offer Registration Statement or the Shelf Registration Statement has been declared effective, the registration statement thereafter ceases to be effective or usable (subject to particular exceptions) in connection with resales of the old notes or the exchange notes, in each case in accordance with and during the periods specified in the Registration Rights Agreement (each event referred to in clauses (a) through (d), a “Registration Default”), interest (“Special Interest”) will accrue on the principal amount of the old notes and the exchange notes (in addition to the stated interest on the old notes and the exchange notes) from and including the date on which the Registration Default shall occur to but excluding the date on which all Registration Defaults have been cured. Special Interest will accrue at a rate of 0.25% per annum during the90-day period immediately following the occurrence of the Registration Default and shall increase by 0.25% per annum at the end of each subsequent90-day period, but in no event shall the rate exceed 1.00% per annum. The summary herein of provisions of the Registration Rights Agreement does not purport to be complete and is subject to, and is qualified in its entirety by reference to, all the provisions of the Registration Rights Agreement, copies of which are available upon request to the Company.
Application will be made to have the exchange notes listed on the Official List of the Luxembourg Stock Exchange. If the rules of the Luxembourg Stock Exchange so require, (a) notice will be given to the Luxembourg Stock Exchange and published on its official website (www.bourse.lu) announcing the beginning of the registered exchange offer and, following completion of the offer, the results of the offer, (b) a Luxembourg exchange agent, through which all relevant documents with respect to the registered exchange offer will be made available, will be appointed, (c) the Luxembourg exchange agent will be able to perform all agency functions to be performed by any exchange agent, including providing other relevant documents to a noteholder, accepting such documents on our behalf, accepting the old notes for exchange, and delivering exchange notes to noteholders entitled thereto, and (d) in the event that the period of the registered exchange offer is extended after its commencement, notice of such extension will be given to the Luxembourg Stock Exchange and published on its official website. Holders of the old notes will be able to hold their notes through Euroclear and Clearstream, Luxembourg. The exchange notes will be accepted for clearance through Euroclear and Clearstream, Luxembourg, a supplement to this offering memorandum, if necessary, will be prepared and notice will be given to the Luxembourg Stock Exchange and published on its official website announcing the results of the registered exchange offer, the principal amount of the notes exchanged, the principal amount of the notes remaining outstanding, the principal amount of the exchange notes and the relevant Common Codes and International Securities Identification Numbers.
General
The exchange notes offered hereby are denominated in euro. We will initially issue the exchange notes in the form ofbe represented by one or more global notes (thein registered form without interest coupons attached (collectively, the “Global Notes”). The Global Notes representing the notes will be deposited with HSBC Bank plc. as common depositarya custodian for DTC, and registered in the name of theCede & Co., as nominee of the common depositary for the accounts of Euroclear and Clearstream, Luxembourg.DTC.
Ownership of interests in the Global Notes (“Book-Entry Interests”) will be limited to persons that have accounts with DTC, or persons that hold interests through such participants.
Book-Entry Interests will be shown on, and transfers thereof will be effecteddone only through, records maintained in book-entry form by EuroclearDTC and Clearstream, Luxembourg and their respectiveits participants. The laws of some jurisdictions, including certain states of the United States,U.S., may require that certain purchasers of securities take physical delivery of thosesuch securities in definitive form. The foregoing limitations may impair your ability to own, transfer or pledge Book-Entry Interests. In addition, while the notes are in global form, holders of Book-Entry Interests willare not be considered the registered owners or “holders” of notes for any purpose.
So long as the notes are held in global form, the common depositary for Euroclear and/or Clearstream, LuxembourgDTC (or its nominee), as applicable,nominees) will be considered the sole holders of the Global Notes for all purposes under the indenture.indenture governing the notes. In addition, participants in DTC must rely on the procedures of Euroclear and Clearstream, Luxembourg,DTC and indirect participants must rely on the procedures of Euroclear and Clearstream, LuxembourgDTC and the participants through which they own Book-Entry Interests, to transfer their interests or to exercise any rights of holders of notes under the indenture.
Neither the Company nor the trustee or any agent named herein or any of their respective affiliates will haveTrustee has any responsibility or be liable,liability for any aspect of the records relating to the Book-Entry Interests.
Redemption of the Global Notes
In the event that any Global Note (or any portion thereof) is redeemed, Euroclear and/or Clearstream, Luxembourg, as applicable,DTC (or its nominees) will redeem an equal amount of the Book-Entry Interests in such Global Note from the amount received by it in respect of the redemption of such Global Note. The redemption price payable in connection with the redemption of such Book-Entry Interests will be equal to the amount received by Euroclear and/or Clearstream, Luxembourg, as applicable,DTC in connection with the redemption of such Global Note (or any portion thereof). The Company understands that, under the existing practices of Euroclear and Clearstream, Luxembourg,DTC, if fewer than all of the notes are to be redeemed at any time, Euroclear and Clearstream, LuxembourgDTC will credit their respectiveits participants’ accounts on a proportionate basis (with adjustments to prevent fractions) or by using a pool factorlot or on such other basis as they deem fair and appropriate unless otherwise required by lawappropriate; provided, however, that no Book-Entry Interest of $2,000 principal amount or applicable stock exchange or depositary requirements.less may be redeemed in part.
Payments on Global Notes
The Company will make payments of any amounts owing in respect of the relevant Global Notes (including principal, premium, if any, interest, and additional amounts,Additional Amounts, if any) to the relevant paying agent. The relevant paying agent will, in turn, make such payments to the order of the common depositaryDTC or its nominee, for payment to Euroclear and Clearstream, Luxembourg, which will distribute such payments to participants in accordance with their respective customaryits procedures. AllThe Company will make payments required to be made by the Company with respect to the notes, will be made free and clear of andall such amounts without deduction or withholding for or on account of any present or future taxes, duties, assessments or governmental charges of whatever nature except as may be required by law and except as described under “Description of the Notes—Payment of Additional Amounts.” If any such deduction or withholding is required to be made, then, to the extent described under “Description of the Notes—Payment of Additional Amounts,” the Company will pay additional amounts as may be necessary in
order for the net amounts received by any holder of the relevant Global Notes or owner of the relevant Book- Entry Interests after such deduction or withholding to equal the net amounts that such holder or owner would have otherwise received in respect of such Global Note or Book-Entry Interest, as the case may be, absent such withholding or deduction.law. The Company expects that standing customer instructions and customary practices will govern payments by participants to owners of Book-Entry Interests held through such participants.
Under the terms of the indenture, the Company and the Paying Agency Agreement, as applicable, the Company, the trustee, the registrar and the paying agent(s), respectively,Trustee will treat the registered holders of the relevant Global Notes (i.e.(e.g., the common depositary for Euroclear or Clearstream, LuxembourgDTC (or its nominees)) as the ownerowners thereof for the purpose of receiving payments and for all other purposes. Consequently, none of the Company, the trustee, the registrarTrustee or any of the paying agent(s)their respective agents has or will have any responsibility or liability for:
any aspect of the records of Euroclear, Clearstream, LuxembourgDTC or any participant or indirect participant relating to or payments made on account of a Book-Entry Interest or for maintaining, supervising or reviewing the records of Euroclear or Clearstream, LuxembourgDTC,
or any participant or indirect participant relating to or payments made on account of a Book-Entry Interest; or |
DTC or any participant or indirect participant relating to, or payments made on account of, a Book-Entry Interest;
participant.
Payments by participants to owners of Book-Entry Interests held through participants are the responsibility of such participants.
Currency of Payment for the Global Notes
TheExcept as may otherwise be agreed between DTC and any holder, the principal of, premium, if any, and interest on, and all other amounts payable in respect of, the Global Notes will be paid to holders of interests in such Notesnotes (the “DTC Holders”) through Euroclear and/or Clearstream, LuxembourgDTC in euro.U.S. dollars.
Payments will be subject in all cases to any fiscal or other laws and regulations (including any regulations of the applicable clearing system) applicable thereto. None of the Company, the trustee, any agents named herein, the initial purchasersTrustee or any of their respective agents or affiliates will be liable to any holder of a Global NotesNote or any other person for any commissions, costs, losses or expenses in relation to or resulting from any currency conversion or rounding effected in connection with any such payment.
Action by Owners of Book-Entry Interests
Euroclear and Clearstream, Luxembourg haveDTC has advised usthe Company that theyit will take any action permitted to be taken by a holder of a notenotes (including the presentation of notes for exchange as described above)below) only at the direction of one or more participants to whose account the Book-Entry Interests in the Global Notes are credited and only in respect of such portion of the aggregate principal amount of notes as to which such participant or participants has or have given such direction. Euroclear and Clearstream, LuxembourgDTC will not exercise any discretion in the granting of consents, waivers or the taking of any other action in respect of the Global Notes. However, if there is an “Eventevent of Default” (as defined in the indenture)default under a note, each of Euroclear and Clearstream, Luxembourg, at the request of the holders of the notes, reserveDTC reserves the right to exchange the Global Notes for definitive registered notes in certificated form (together, the(the “Definitive Registered Notes”), and to distribute such Definitive Registered Notes to their respectiveits participants.
Transfers
Transfers between participants in Euroclear and Clearstream, Luxembourg will be effected in accordance with Euroclear and Clearstream, Luxembourg’s rules and will be settled in immediately available funds.
The Global Notes will each bear a legend to the effect set forth under “Notice to Investors.” Book- Entry Interestsof beneficial interests in the Global Notes will be subject to the restrictions on transfersapplicable rules and certification requirements discussed under “Noticeprocedures of DTC and its direct or indirect participants, which rules and procedures may change from time to Investors.”
Transfers of Rule 144A Book-Entry Interests to persons wishing to take delivery of Rule 144A Book- Entry Interests will at all times be subject to such transfer restrictions.
Rule 144A Book-Entry Interests may be transferred to a person who takes delivery in the form of a Regulation S Book-Entry Interest only upon delivery by the transferor of a written certification (in the form to be provided in the indenture) to the effect that such transfer is being made in accordance with Regulation S or Rule 144 under the Securities Act or any other exemption (if available under the Securities Act).
Regulation S Book-Entry Interests may be transferred to a person who takes delivery in the form of a Rule 144A Book-Entry Interest only upon delivery by the transferor of a written certification (in the form provided in the indenture) to the effect that such transfer is being made to a person who the transferor reasonably believes is a “qualified institutional buyer” within the meaning of Rule 144A under the Securities Act in a transaction meeting the requirements of Rule 144A or otherwise in accordance with the transfer restrictions described under “Notice to Investors” and in accordance with any applicable securities laws of any other jurisdiction.
In connection with transfers involving an exchange of a Regulation S Book-Entry Interest for a Rule 144A Book-Entry Interest, appropriate adjustments will be made to reflect a decrease in the principal amount of the Regulation S Global Note and a corresponding increase in the principal amount of the Rule 144A Global Note.time.
Any Book-Entry Interest in one of the Global Notes that is transferred to a person who takes delivery in the form of a Book-Entry Interest in any other Global Note of the same series will, upon transfer, cease to be a Book-Entry Interest in the first-mentioned Global Note and become a Book-Entry Interest in such other Global Note, and accordingly will thereafter be subject to all transfer restrictions, if any, and other procedures applicable to Book-Entry Interests in such other Global Note for as long as it remains such a Book-Entry Interest.
Definitive Registered Notes
Under the terms of the Indenture,indenture, owners of the Book-Entry Interests will receive Definitive Registered Notes:
if Euroclear or Clearstream, LuxembourgDTC notifies the Company that it is unwilling or unable to continue to act as depositary for the Global Note, or DTC ceases to be a clearing agency registered under the U.S. Exchange Act of 1934, as amended (the “Exchange Act”) and, in either case, a qualified successor depositary is not appointed by the Company within 90120 days; or
if an event of default under the indenture occurred or is continuing and the owner of a Book-Entry Interest requests such exchange in writing delivered through Euroclear or Clearstream, Luxembourg.DTC.
In such an event, the Company will issuecase of the issuance of Definitive Registered Notes, registeredthe holder of a Definitive Registered Note may transfer such note by surrendering it to the registrar. In the event of a partial transfer or a partial redemption of a holding of Definitive Registered Notes represented by one Definitive Registered Note, a Definitive Registered Note shall be issued to the transferee in respect of the part transferred, and a new Definitive Registered Note in respect of the balance of the holding not transferred or redeemed shall be issued to the transferor or the holder, as applicable; provided that no Definitive Registered Note in a denomination less than $2,000 shall be issued. The Company will bear the cost of preparing, printing, packaging and delivering the Definitive Registered Notes.
The Company shall not be required to register the transfer or exchange of Definitive Registered Notes for a period of 15 calendar days preceding (a) the record date for any payment of interest on the notes, (b) any date fixed for redemption of the notes or (c) the date fixed for selection of the notes to be redeemed in part. Also, the Company is not required to register the transfer or exchange of any notes selected for redemption. In the event of the transfer of any Definitive Registered Note, the transfer agent may require a holder, among other things, to furnish appropriate endorsements and transfer documents as described in the name or namesindenture. The Company may require a holder to pay any taxes and fees required by law and permitted by the indenture and the notes.
If Definitive Registered Notes are issued in any approved denominations, requested by or on behalf of Euroclear and/or Clearstream, Luxembourg or the Company, as applicable (in accordance with their respective customary procedures and based upon directions received from participants reflecting the beneficial ownership of Book-Entry Interests), anda holder thereof claims that such Definitive Registered Notes will bearhave been lost, destroyed or wrongfully taken or if such Definitive Registered Notes are mutilated and are surrendered to the restrictive legend as providedregistrar or at the office of a transfer agent, the Company shall issue and the trustee shall authenticate a replacement Definitive Registered Note if the Trustee’s and the Company’s requirements are met. The Trustee or the Company may require a holder requesting replacement of a Definitive Registered Note to furnish an indemnity bond sufficient in the Indenture, unless that legend is not required byjudgment of both the Indenture or applicable law.
ToTrustee and the extent permitted by law,Company to protect the Company, the trustee,Trustee or the paying agent(s)agent appointed pursuant to the indenture from any loss which any of them may suffer if a Definitive Registered Note is replaced. The Company may charge for its expenses in replacing a Definitive Registered Note.
In case any such mutilated, destroyed, lost or stolen Definitive Registered Note has become or is about to become due and payable, or is about to be redeemed or purchased by the registrar shall be entitledCompany pursuant to treat the registered holderprovisions of any Globalthe indenture, the Company in its discretion may, instead of issuing a new Definitive Registered Note, pay, redeem or purchase such Definitive Registered Note, as the absolute owner thereofcase may be.
Definitive Registered Notes may be transferred and no person will be liableexchanged for treating the registered holder as such. Ownership of the Global Notes will be evidenced through registration from time to time at the registered office of the Company, and such registration is a means of evidencing title to the notes.
We will not impose any fees or other charges in respect of the notes; provided, however, owners of the Book-Entry Interests may incur fees normally payable in respect ofa Global Note only in accordance with the maintenance and operation of accounts in Euroclear and/or Clearstream, Luxembourg, as applicable.indenture.
Information Concerning Euroclear and Clearstream, LuxembourgDTC
All Book-Entry Interests will be subject toThe following description of the operations and procedures of Euroclear and Clearstream, Luxembourg,DTC is provided solely as applicable. We provide the following summariesa matter of thoseconvenience. These operations and procedures are solely within the control of DTC and are subject to changes by DTC We take no responsibility for the convenience of investors in the notes. Thethese operations and procedures of each settlement system are controlled by that settlement system and may be changed at any time. Neither the Company nor any of the initial purchasers are responsible for those operationsurge investors to contact DTC or procedures.its participants directly to discuss these matters.
The Company understands as follows with respect to EuroclearDTC:
DTC is:
a limited purpose trust company organized under the New York Banking Law;
a “banking organization” under New York Banking Law;
a member of the Federal Reserve System;
a “clearing corporation” within the meaning of the New York Uniform Commercial Code; and Clearstream, Luxembourg: Euroclear and Clearstream, Luxembourg
a “clearing agency” registered under Section 17A of the Exchange Act.
DTC was created to hold securities for participating organizations. Theyits participants and to facilitate the clearance and settlement of securities transactions between their respective participantsamong its participants. It does this through electronic book-entry changes in the accounts of such participants. Euroclear and Clearstream, Luxembourg provide various services to theirsecurities participants, includingeliminating the safekeeping, administration, clearance, settlement, lending and borrowingneed for physical movement of internationally traded securities. Euroclear and Clearstream, Luxembourg also interface with domestic securities markets in several countries. Euroclear and Clearstream, Luxembourgcertificates. DTC participants are financial institutions such as underwriters,include securities brokers and dealers, banks, trust companies, clearing corporations and certain other organizations. Indirect access to Euroclear or Clearstream, LuxembourgDTC is also available to othersa wholly-owned subsidiary of The Depository Trust & Clearing Corporation (“DTCC”). DTCC is the holding company for DTC, National Securities Clearing Corporation and Fixed Income Clearing Corporation, all of which are registered clearing agencies. DTCC is owned by the users of its regulated subsidiaries. Others, such as banks, brokers, dealers and trust companies that clear through or maintain a custodial relationship with a Eurocleardirect participant also have access to the DTC system and Clearstream, Luxembourg participant, either directly or indirectly.are known as indirect participants.
Euroclear and Clearstream, Luxembourg have no record of, or relationship with, persons holding through their account holders. Since Euroclear and Clearstream, LuxembourgBecause DTC can only act on behalf of participants, who in turn act on behalf of indirect participants and certain banks, the ability of an owner of a beneficial interest to pledge such interest to persons or entities that do not participate in the Euroclear and/or Clearstream, Luxembourg systems,DTC system, or otherwise take actions in respect of such interest, may be limited by the lack of a definitive certificate for that interest. The laws of some jurisdictionsstates require that certain persons take physical delivery of securities in definitive form. Consequently, the ability to transfer beneficial interests to such persons may be limited. In addition, owners of beneficial interests through the Euroclear or Clearstream, Luxembourg systemsDTC system will receive distributions attributable to the Rule 144A Global Notes only through Euroclear or Clearstream, LuxembourgDTC participants.
Global Clearance and Settlement Under the Book-Entry System
ApplicationThe notes are expected to trade in DTC’s Same-Day Funds Settlement System and any permitted secondary market trading activity in the notes will, therefore, be maderequired by DTC to listbe settled in immediately available funds. The Company expects that secondary trading in any certificated notes will also be settled in immediately available funds. Subject to compliance with the exchange notes represented bytransfer restrictions applicable to the Global Notes, oncross-market transfers of Book-Entry Interests in the Official List ofnotes between the Luxembourg Stock Exchange and to admit the Notes for trading on the Euro MTF Market.participants in DTC will be done through DTC in accordance with DTC’s rules.
Although Euroclear and Clearstream, Luxembourg currentlyDTC is expected to follow the foregoing procedures in order to facilitate transfers of interests in the Global Notes among participants in Euroclear or Clearstream, Luxembourg, as the case may be, they areDTC, it is under no obligation to perform or continue to perform such procedures, and such procedures may be discontinued or modified at any time. None of the Company, the initial purchasers, the trustee, orTrustee, the registrar, any transfer agent or theany paying agent(s) in respect of the notesagent will have any responsibility for the performance by EuroclearDTC or Clearstream, Luxembourg or theirits participants or indirect participants, of their respective obligations under the rules and procedures governing their operations.
Initial Settlement
Initial settlement for the notes will be made in Euro. Book-Entry Interests owned through Euroclear or Clearstream, Luxembourg accounts will follow the settlement procedures applicable to conventional bonds in
registered form. Book-Entry Interests will be credited to the securities custody accounts of Euroclear and Clearstream, Luxembourg holders on the business day following the settlement date against payment for value of the settlement date.
Secondary Market Trading
The Book-Entry Interests will trade through participants of Euroclear or Clearstream, LuxembourgDTC and will settle insame-day same day funds. Since the purchase determines the place of delivery, it is important to establish at the time of trading of any Book-Entry Interests where both the purchaser’s and the seller’s accounts are located to ensure that settlement can be made on the desired value date.
Special Timing Considerations
You should be aware that investors will only be able to make and receive deliveries, payments and other communications involving the notes through Euroclear or Clearstream, Luxembourg on days when those systems are open for business.
In addition, because of time zone differences, there may be complications with completing transactions involving Euroclear and/or Clearstream, Luxembourg on the same business day as in the United States. U.S. investors who wish to transfer their interests in the notes, or to receive or make a payment or delivery of notes, on a particular day, may find that the transactions will not be performed until the next business day in Luxembourg if Clearstream, Luxembourg, is used, or Brussels if Euroclear is used.
Clearing Information
The Company expects that the notes will be accepted for clearance through the facilities of Euroclear and Clearstream, Luxembourg. The international securities identification numbers and common codes for the notes are set out under “General Information.”
CERTAIN U.S. FEDERAL INCOME TAX CONSIDERATIONS
This general discussion of certain U.S. federal income tax consequences applies to you if you acquired the old notes for cash in the offering of the old notes for their initial offering price, exchange the old notes for exchange notes and hold the exchange notes as a “capital asset,” as defined in Section 1221 of the Internal Revenue Code of 1986, as amended (the “Code”). This discussion, however, does not address state, local or foreign tax laws or any U.S. federal tax laws other than income tax laws (such as estate or gift tax laws or the Medicare tax on certain investment income). In addition, it does not describe all of the rules which may affect the U.S. federal income tax treatment of your investment in the exchange notes. For example, special rules not discussed here may apply to you if you are:
a broker-dealer, a dealer in securities, a trader in securities who elects to apply amark-to-market method of accounting or a bank or other financial institution;
an S corporation, partnership or other pass-through entity (or an investor in such an entity);
an insurance company;
atax-exempt entity;
a person subject to the alternative minimum tax provisions of the Code;
a U.S. Holder (as defined below) who holds exchange notes through a non-U.S. broker or other non-U.S. intermediary;
a person holding the exchange notes as part of a hedge, straddle, conversion transaction or other risk reduction or constructive sale transaction;
an expatriate of the United States; or
a U.S. person whose functional currency is not the U.S. dollar.
If a partnership holds the exchange notes, the tax treatment of a partner will generally depend upon the status of the partner and upon the activities of the partnership. If you are a partnership or a partner of a partnership holding exchange notes, we suggest that you should consult your tax advisor.
This discussion is a summary of certain U.S. federal income tax consequences that may apply to you based on current U.S. federal income tax law. This discussion is based on current provisions of the Code, U.S. Treasury regulations, published rulings, and court decisions, all as of the date hereof and all of which are subject to change or differing interpretations, possibly with retroactive effect. There can be no assurances that the Internal Revenue Service (the “IRS”) or any court will agree with the statements and conclusions in this discussion.
This discussion may not cover your particular circumstances because it does not consider foreign, state or local tax rules or U.S. federal tax rules other than income tax rules, disregards certain special U.S. federal income tax rules, and does not describe future changes in U.S. federal income tax rules. Please consult your tax advisor rather than relying on this general discussion.
Exchange of Old Notes for Exchange Notes
The exchange of old notes for exchange notes pursuant to an exchange offer will not be a taxable event.event for U.S. federal income tax purposes. Your basis in the old notes will carry over to the exchange notes received (as will any election to amortize premium with respect to an old note, as discussed below) and the holding period of the exchange notes will include the holding period of old notes surrendered.
Effect of Certain Contingencies
In certain circumstances, we may be obligated to make payments on the exchange notes in excess of stated interest and principal payments, or to make payments on the notes in advance of their scheduled dates. These
obligations may implicate the provisions of Treasury regulations relating to “contingent payment debt instruments.” According to applicable Treasury regulations, such contingencies will not cause the exchange notes to be treated as contingent payment debt instruments, if, as of the date the exchange notes are issued, such contingencies, in the aggregate, are considered “remote” or “incidental.” We intend to take the position that the foregoing contingencies do not cause the exchange notes to be subject to the contingent payment debt instrument rules. Our determination is binding on a holder unless such holder discloses its contrary position in the manner required by applicable Treasury regulations. Our determination is not, however, binding on the IRS, and if the IRS were to successfully challenge this determination, a holder subject to U.S. federal income taxation might be required to accrue interest income at a higher rate than the stated interest rate, and to treat as ordinary income (rather than capital gain) any gain recognized on the taxable disposition of an exchange note. Prospective investors should consult their tax advisers about the possible application of the contingent payment debt instruments rules to the exchange notes. The remainder of this discussion assumes that the exchange notes will not be treated as contingent payment debt instruments.
U.S. Holders
If you are a “U.S. Holder,” as defined below, this section applies to you. Otherwise, the next section,“Non-U.S. Holders,” applies to you.
Definition of U.S. Holder
For purposes of this discussion, you are a “U.S. Holder” if you are a beneficial owner of exchange notes that, for U.S. federal income tax purposes, is:
an individual who is a citizen or resident of the United States, including an alien individual who is a lawful permanent resident of the United States or who meets the “substantial presence” test under Section 7701(b) of the Code;
a corporation created or organized under the laws of the United States, any state thereof or the District of Columbia;
an estate, the income of which is subject to U.S. federal income tax regardless of its source; or
a trust, if a U.S. court can exercise primary supervision over the administration of the trust and one or more U.S. persons can control all substantial decisions of the trust, or if the trust was in existence on August 20, 1996 and has elected to continue to be treated as a U.S. person.
Stated Interest
You must generally include the stated interest on the exchange notes in ordinary income:
when you receive it, if you use the cash method of accounting for U.S. federal income tax purposes; or
as it accrues, if you use the accrual method of accounting for U.S. federal income tax purposes.
Amortizable Bond Premium
If you acquired an old note for an amount (excluding any amount attributable to pre-issuance accrued interest) that is greater than the stated principal amount on the old note, you will be considered to have purchased such old note with bond premium equal to such excess. A U.S. Holder generally may elect to amortize such premium using a constant yield method over the remaining term of the old note (or the exchange note, as applicable) as an offset to stated interest when includible in income under the U.S. Holder’s regular method of accounting for tax purposes. However, because the old notes (or the exchange notes, as applicable) can be redeemed by us under certain circumstances for a price equal to or greater than the principal amount prior to their maturity date, special rules may affect the amount and timing of the deduction. Any such election shall apply to
all debt instruments (other than debt instruments the interest on which is excludable from gross income) held at the beginning of the first taxable year to which the election applies or thereafter acquired, and is irrevocable without the consent of the IRS. If you elect to amortize premium with respect to an old note (or the exchange note, as applicable), you will be required to reduce your adjusted tax basis in such old note by the amount of the premium amortized. A U.S. Holder that acquired an old note with amortizable bond premium should consult its tax advisor regarding the consequences of making the amortizable bond premium election and the availability of other elections for U.S. federal income tax purposes.
Sale or Other Taxable Disposition of Exchange Notes
You generally will generally recognize taxable gain or loss on the sale, exchange, redemption, retirement or other taxable disposition of an exchange note equal to the difference, if any, between the amount you receive for the exchange note (in cash or other property, valued at fair market value), other than amounts attributable to accrued and unpaid interest on the exchange note, and your tax basis in the exchange note. Your tax basis in an exchange note generally will equal your cost for the exchange note.(excluding any pre-issuance accrued interest).
Any gain or loss will generally be a long-term capital gain or loss if your holding period foryou have held the exchange note isfor more than one year. Otherwise, it will be a short-term capital gain or loss.Non-corporate U.S. Holders generally are eligible for a reduced rate of taxation on long-term capital gain. The deductibility of capital losses is subject to limitations. Payments attributable to accrued and unpaid interest which you have not yet included in income will be taxed as ordinary income.
Non-U.S. Holders
Definition ofNon-U.S. Holder
For purposes of this discussion, a“Non-U.S. Holder” is a beneficial owner of exchange notes that, for U.S. federal income tax purposes, is an individual, corporation, estate or trust that is not a U.S. Holder.
Interest
In general,Subject to the discussion of backup withholding and FATCA below, interest income of aNon-U.S. Holder that is not effectively connected with a United States trade or business generally will not be subject to U.S. federal income tax. In addition, under the “portfolio interest exemption,” aNon-U.S. Holderyou will not be subject to U.S. federal withholding tax on interest that is not effectively connected with a United States trade or business paid on the exchange notes if:
you represent that you are the beneficial owner of exchange notes and not a U.S. person for U.S. federal income tax purposes and you provide your name and address to us or our payingthe applicable withholding agent on an appropriate anda properly executed applicable IRS FormW-8 (or a suitable substitute form) signed under penaltypenalties of perjury; or
Special certification rules apply to foreign partnerships, estates, and trusts, and in certain circumstances, certifications as to the foreign status of partners, trust owners, or beneficiaries may have to be provided to our paying agent or to us.the applicable withholding agent. In addition, special certification rules apply to payments made through a qualified intermediary.
You will not, however, qualify for the portfolio interest exemption described above if:
you own, actually or constructively, stock possessing 10% or more of the total combined voting power of all classes of our capital stock which is entitled to vote;
you are a controlled foreign corporation with respect to which we are a “related person” within the meaning of Section 864(d)(4) of the Code; or
you are a bank receiving interest described in Section 881(c)(3)(A) of the Code.
If you do not claim, or do not qualify for, the benefit of the portfolio interest exemption, you will be subject to a 30% withholding tax on payments of interest made on the exchange notes that are not effectively connected with a United States trade or business unless you are able to claim the benefit of a reduced withholding tax rate under an applicable income tax treaty. The required information for claiming treaty benefits is generally submitted on an appropriateapplicable IRS FormW-8 (or a suitable substitute form).
Except to the extent that an applicable income tax treaty otherwise provides, (i) aNon-U.S. Holder generally will be taxed in the same manner as a U.S. Holder with respect to interest that is effectively connected with a United States trade or business of theNon-U.S. Holder. AHolder and (ii) in some circumstances, a corporateNon-U.S. Holder may also be subject to a “branch profits tax” at a 30% rate (or, if applicable, a lower treaty rate) on its effectively connected earnings and profits (subject to adjustments). Even though effectively connected interest is subject to income tax, and may be subject to the branch profits tax, it is not subject to withholding tax if the holder delivers a properly executed IRS FormW-8W-8ECI ECI or other applicable form (or a suitable substitute form) to us or ourthe applicable withholding agent.
Sale or Other Taxable Disposition of Exchange Notes
YouSubject to discussion of FATCA and backup withholding below, you generally will generally not be subject to U.S. federal income tax or withholding tax on any gain recognized on a sale, exchange, redemption, retirement, or other taxable disposition of an exchange note unless (i) the gain is effectively connected with a U.S. trade or business, (and in the case of certain income tax treaties, is attributable to a permanent establishment within the United States), in which case such gain generally will be taxed in the same manner as effectively connected interest (as described above) and a corporate Non-U.S. Holder may also be subject to a “branch profits tax” at a 30% rate (or, if applicable, a lower treaty rate) on its effectively connected earnings and profits (subject to adjustments) or (ii) you are an individual who was present in the United States for 183 days or more in the taxable year of the disposition and certain other conditions are met, in which case you generally will be subject to a U.S. federal income tax of 30% (or a reduced treaty rate) on such gain (net of certain U.S. source losses). In the event that a payment is attributable to accrued and unpaid interest, the rules applicable to payments of interest described above will apply.
Foreign Accounts Tax Compliance Act (“FATCA”)
Under the provisions of the Code referred to as FATCA, additional U.S. federal withholding tax may apply to certain types of payments made to “foreign financial institutions,” as specially defined under such rules, and certain other non-U.S. entities (including in circumstances where the foreign financial institution or other non-U.S. entity is acting as an intermediary). The legislation imposes a 30% withholding tax on interest on exchange notes paid to a foreign financial institution unless the foreign financial institution enters into an agreement with the U.S. Treasury to provide certain information regarding such institution’s account holders and owners of its equity or debt and meets certain other specified requirements or, in the case of a foreign financial institution in a jurisdiction that has entered into an intergovernmental agreement with the United States, complies with the requirements of such agreement. In addition, the legislation imposes a 30% withholding tax on the same types of payments to a non-financial foreign entity unless the entity certifies that it does not have any substantial U.S. owners or furnishes identifying information regarding each substantial U.S. owner and meets certain other specified requirements. In the future, proceeds from the sale or other taxable disposition (including a retirement
or redemption) of exchange notes may also become subject to a withholding tax of 30% under FATCA. Until final regulations are issued, however, withholding agents may rely on recently issued proposed regulations that eliminate FATCA withholding on such gross proceeds. Prospective investors should consult their tax advisors regarding this legislation and the proposed regulations.
Backup Withholding and Information Reporting; FATCAReporting
Backup withholding may apply in respect of interest payments made to a holder of exchange notes, and proceeds from a sale or other taxable disposition (including a retirement or redemption) of exchange notes, unless such holder provides proof of an applicable exemption or provides a correct taxpayer identification number and otherwise complies with applicable requirements of the backup withholding rules. TheAny amounts withheld under
the backup withholding rules are not an additional tax and may be refunded, or credited against the holder’s U.S. federal income tax liability, provided that the required information is timely furnished to the IRS. In addition, information returns generally will generally be filed with the IRS in connection with interest payments on the exchange notes and the proceeds from a sale or other taxable disposition (including a redemption or retirement) of the exchange notes, unless the holder provides proof of an applicable exemption from the information reporting rules.
The regulations governing information reporting and backup withholding are complex, and this summary does not completely describe them. Please consult your tax advisor to determine how the applicable regulations will affect your particular circumstances.
Under the Foreign Account Tax Compliance Act (“FATCA”) withholding tax at a 30% rate is required for certain payments made to certain foreign persons (in addition to any other withholding that may otherwise apply) unless specific information reporting or other compliance provisions are satisfied or an exemption applies. Each holder of exchange notes should consult with its own tax adviser regarding the application of FATCA in its particular situation.
The preceding discussion of certain U.S. federal income tax considerations is for general information only. It is not tax advice. Each holder of exchange notesprospective investor should consult its own tax advisor regarding the particular U.S. federal, state, local and foreign tax consequences of acquiring, holding, and disposing of exchange notes, including the consequences of any proposed change in applicable laws.
Each broker-dealer that receives exchange notes for its own account pursuant to the exchange offer must acknowledge that it will deliver a prospectus in connection with any resale of such exchange notes. This prospectus, as it may be amended or supplemented from time to time, may be used by a broker-dealer in connection with resales of exchange notes received in exchange for old notes where such old notes were acquired as a result of market-making activities or other trading activities. We have agreed that, starting on the expiration date and ending on the close of business 180 days after the expiration date, we will make this prospectus, as amended or supplemented, available to any broker-dealer for use in connection with any such resale. In addition, until, , 2017, all dealers effecting transactions in the exchange notes may be required to deliver a prospectus.
We will not receive any proceeds from any sale of exchange notes by brokers-dealers. Exchange notes received by broker-dealers for their own account pursuant to the exchange offer may be sold from time to time in one or more transactions in theover-the-counter market, in negotiated transactions, through the writing of options on the exchange notes or a combination of such methods of resale, at market prices prevailing at the time of resale, at prices related to such prevailing market prices or negotiated prices. Any such resale may be made directly to purchasers or to or through brokers or dealers who may receive compensation in the form of commissions or concessions from any such broker-dealer and/or the purchasers of any such exchange notes. Any broker-dealer that resells exchange notes that were received by it for its own account pursuant to the exchange offer and any broker or dealer that participates in a distribution of such exchange notes may be deemed to be an “underwriter” within the meaning of the Securities Act and any profit resulting from any such resale of exchange notes and any commissions or concessions received by any such persons may be deemed to be underwriting compensation under the Securities Act. ByThe letter of transmittal states that by acknowledging that it will deliver and by delivering a prospectus, a broker-dealer will not be deemed to admit that it is an “underwriter” within the meaning of the Securities Act.
For a period of 180 days after the expiration date, we will promptly send additional copies of this prospectus and any amendment or supplement to this prospectus to any broker-dealer that requests such documents.documents in the letter of transmittal. We have agreed to pay all expenses incident to the exchange offer (including the expenses of one counsel for the holders of the old notes) other than commissions or concessions of any brokers or dealers and will indemnify the holders of the old notes (including any broker-dealers) against certain liabilities, including liabilities under the Securities Act.
If a tendering holder is not a broker-dealer, the tendering holder, by tendering its old notes in the exchange offer, represents that it acquired the exchange notes in the ordinary course of its business, it is not engaged in, and does not intend to engage in, a distribution of exchange notes and it has no arrangements or understandings with any person to participate in a distribution of the exchange notes. If a tendering holder is a broker-dealer that will receive exchange notes for its own account in exchange for old notes, it represents that the old notes to be exchanged for exchange notes were acquired by it as a result of market-making activities or other trading activities and acknowledges that it will deliver a prospectus, as required by law, in connection with any resale of such exchange notes; however, by so acknowledging and by delivering a prospectus, the tendering holder will not be deemed to admit that it is an “underwriter” within the meaning of the Securities Act.
The consolidated financial statements as of November 27, 2016, and November 29, 2015, and for each of the three years in the period ended November 27, 2016, includedincorporated in this prospectus by reference to the Annual Report on Form 10-K for the year ended November 24, 2019 have been so includedincorporated in reliance on the report of PricewaterhouseCoopers LLP, an independent registered public accounting firm, given on the authority of said firm as experts in auditing and accounting.
The validity of the exchange notes will be passed upon for us by Orrick, Herrington & Sutcliffe LLP, San Francisco, California.
INDEX TO FINANCIAL STATEMENTSINCORPORATION BY REFERENCE
Levi Strauss & Co.The SEC allows us to incorporate by reference into this prospectus the information in other documents that we file with it, which means that we are disclosing important information to you by referring you to those documents. The information incorporated by reference is an important part of this prospectus, and Subsidiaries:
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LEVI STRAUSS & CO. AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEETS
| (Unaudited) February 26, 2017 | November 27, 2016 | |||||||
| (Dollars in thousands) | ||||||||
| ASSETS | ||||||||
Current Assets: | ||||||||
Cash and cash equivalents | $ | 368,623 | $ | 375,563 | ||||
Trade receivables, net of allowance for doubtful accounts of $12,402 and $11,974 | 406,689 | 479,018 | ||||||
Inventories: | ||||||||
Raw materials | 3,157 | 2,454 | ||||||
Work-in-process | 2,309 | 3,074 | ||||||
Finished goods | 761,761 | 710,653 | ||||||
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Total inventories | 767,227 | 716,181 | ||||||
Other current assets | 116,642 | 115,385 | ||||||
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Total current assets | 1,659,181 | 1,686,147 | ||||||
Property, plant and equipment, net of accumulated depreciation of $883,472 and $856,588 | 380,389 | 393,605 | ||||||
Goodwill | 234,518 | 234,280 | ||||||
Other intangible assets, net | 42,929 | 42,946 | ||||||
Deferred tax assets, net | 504,700 | 523,101 | ||||||
Othernon-current assets | 108,598 | 107,017 | ||||||
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Total assets | $ | 2,930,315 | $ | 2,987,096 | ||||
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| LIABILITIES, TEMPORARY EQUITY AND STOCKHOLDERS’ EQUITY | ||||||||
Current Liabilities: | ||||||||
Short-term debt | $ | 34,150 | $ | 38,922 | ||||
Accounts payable | 256,738 | 270,293 | ||||||
Accrued salaries, wages and employee benefits | 141,992 | 180,740 | ||||||
Restructuring liabilities | 2,243 | 4,878 | ||||||
Accrued interest payable | 20,397 | 5,098 | ||||||
Accrued income taxes | 13,260 | 9,652 | ||||||
Other accrued liabilities | 263,003 | 252,160 | ||||||
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Total current liabilities | 731,783 | 761,743 | ||||||
Long-term debt | 1,006,625 | 1,006,256 | ||||||
Long-term capital leases | 15,428 | 15,360 | ||||||
Postretirement medical benefits | 98,302 | 100,966 | ||||||
Pension liability | 337,487 | 354,461 | ||||||
Long-term employee related benefits | 67,924 | 73,243 | ||||||
Long-term income tax liabilities | 20,876 | 20,150 | ||||||
Other long-term liabilities | 58,724 | 63,796 | ||||||
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Total liabilities | 2,337,149 | 2,395,975 | ||||||
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Commitments and contingencies | ||||||||
Temporary equity | 86,197 | 79,346 | ||||||
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Stockholders’ Equity: | ||||||||
Levi Strauss & Co. stockholders’ equity | ||||||||
Common stock — $.01 par value; 270,000,000 shares authorized; 37,467,356 shares and 37,470,158 shares issued and outstanding | 375 | 375 | ||||||
Additionalpaid-in capital | — | 1,445 | ||||||
Retained earnings | 921,943 | 935,049 | ||||||
Accumulated other comprehensive loss | (417,558 | ) | (427,314 | ) | ||||
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Total Levi Strauss & Co. stockholders’ equity | 504,760 | 509,555 | ||||||
Noncontrolling interest | 2,209 | 2,220 | ||||||
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Total stockholders’ equity | 506,969 | 511,775 | ||||||
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Total liabilities, temporary equity and stockholders’ equity | $ | 2,930,315 | $ | 2,987,096 | ||||
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The accompanyingthe termination or completion of the offering of exchange notes, are an integral partbeing incorporated herein by reference (other than those portions of these consolidated financial statements.
LEVI STRAUSS & CO. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF INCOME
| Three Months Ended | ||||||||
| February 26, 2017 | February 28, 2016 | |||||||
(Dollars in thousands) (Unaudited) | ||||||||
Net revenues | $ | 1,101,991 | $ | 1,056,500 | ||||
Cost of goods sold | 537,438 | 496,902 | ||||||
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Gross profit | 564,553 | 559,598 | ||||||
Selling, general and administrative expenses | 456,213 | 441,163 | ||||||
Restructuring, net | — | 1,848 | ||||||
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Operating income | 108,340 | 116,587 | ||||||
Interest expense | (19,934 | ) | (14,902 | ) | ||||
Other income (expense), net | 408 | (2,219 | ) | |||||
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Income before income taxes | 88,814 | 99,466 | ||||||
Income tax expense | 28,693 | 33,175 | ||||||
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Net income | 60,121 | 66,291 | ||||||
Net loss (income) attributable to noncontrolling interest | 22 | (455 | ) | |||||
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Net income attributable to Levi Strauss & Co. | $ | 60,143 | $ | 65,836 | ||||
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The accompanying notesdocuments that are an integral partfurnished under Item 2.02 or Item 7.01 of these consolidated financial statements.
LEVI STRAUSS & CO. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF COMPREHENSIVE INCOME
| Three Months Ended | ||||||||
| February 26, 2017 | February 28, 2016 | |||||||
(Dollars in thousands) (Unaudited) | ||||||||
Net income | $ | 60,121 | $ | 66,291 | ||||
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Other comprehensive income (loss), before related income taxes: | ||||||||
Pension and postretirement benefits | 3,691 | 3,582 | ||||||
Net investment hedge losses | — | (664 | ) | |||||
Foreign currency translation gains (losses) | 7,684 | (7,575 | ) | |||||
Unrealized gains (losses) on marketable securities | 1,000 | (1,829 | ) | |||||
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Total other comprehensive income (loss), before related income taxes | 12,375 | (6,486 | ) | |||||
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Income taxes related to items of other comprehensive income | (2,811 | ) | (1,224 | ) | ||||
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Comprehensive income, net of income taxes | 69,685 | 58,581 | ||||||
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Comprehensive loss (income) attributable to noncontrolling interest | 214 | (674 | ) | |||||
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Comprehensive income attributable to Levi Strauss & Co. | $ | 69,899 | $ | 57,907 | ||||
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The accompanying notes are an integral part of these consolidated financial statements.
LEVI STRAUSS & CO. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS
| Three Months Ended | ||||||||
| February 26, 2017 | February 28, 2016 | |||||||
(Dollars in thousands) (Unaudited) | ||||||||
Cash Flows from Operating Activities: | ||||||||
Net income | $ | 60,121 | $ | 66,291 | ||||
Adjustments to reconcile net income to net cash provided by operating activities: | ||||||||
Depreciation and amortization | 27,386 | 25,111 | ||||||
Unrealized foreign exchange losses | 5,373 | 8,348 | ||||||
Realized gain on settlement of forward foreign exchange contracts not designated for hedge accounting | (9,076 | ) | (12,967 | ) | ||||
Employee benefit plans’ amortization from accumulated other comprehensive loss and settlement loss | 3,682 | 3,734 | ||||||
Stock-based compensation | 2,350 | (1,053 | ) | |||||
Other, net | 1,554 | 1,565 | ||||||
Change in operating assets and liabilities: | ||||||||
Trade receivables | 69,935 | 104,777 | ||||||
Inventories | (53,432 | ) | (134,923 | ) | ||||
Other current assets | (1,961 | ) | (2,758 | ) | ||||
Othernon-current assets | (2,928 | ) | (1,425 | ) | ||||
Accounts payable and other accrued liabilities | 4,611 | 49,462 | ||||||
Restructuring liabilities | (2,652 | ) | (5,614 | ) | ||||
Income tax liabilities | 17,732 | 23,654 | ||||||
Accrued salaries, wages and employee benefits and long-term employee related benefits | (72,555 | ) | (78,302 | ) | ||||
Other long-term liabilities | (1,091 | ) | 178 | |||||
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Net cash provided by operating activities | 49,049 | 46,078 | ||||||
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Cash Flows from Investing Activities: | ||||||||
Purchases of property, plant and equipment | (25,073 | ) | (30,725 | ) | ||||
Proceeds on settlement of forward foreign exchange contracts not designated for hedge accounting | 9,076 | 12,967 | ||||||
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Net cash used for investing activities | (15,997 | ) | (17,758 | ) | ||||
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Cash Flows from Financing Activities: | ||||||||
Proceeds from senior revolving credit facility | — | 75,000 | ||||||
Repayments of senior revolving credit facility | — | (154,000 | ) | |||||
Proceeds from short-term credit facilities | 9,911 | 9,208 | ||||||
Repayments of short-term credit facilities | (7,774 | ) | (6,763 | ) | ||||
Other short-term borrowings, net | (8,288 | ) | 3,102 | |||||
Repurchase of common stock | (193 | ) | — | |||||
Dividend to stockholders | (35,000 | ) | — | |||||
Other financing, net | (1,158 | ) | (118 | ) | ||||
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Net cash used for financing activities | (42,502 | ) | (73,571 | ) | ||||
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Effect of exchange rate changes on cash and cash equivalents | 2,510 | (2,219 | ) | |||||
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Net decrease in cash and cash equivalents | (6,940 | ) | (47,470 | ) | ||||
Beginning cash and cash equivalents | 375,563 | 318,571 | ||||||
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Ending cash and cash equivalents | $ | 368,623 | $ | 271,101 | ||||
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Noncash Investing Activity: | ||||||||
Purchases of property, plant and equipment not yet paid at end of period | $ | 7,103 | $ | 14,244 | ||||
Supplemental disclosure of cash flow information: | ||||||||
Cash paid for interest during the period | $ | 1,456 | $ | 1,176 | ||||
Cash paid for income taxes during the period, net of refunds | 11,677 | 11,164 | ||||||
The accompanying notes are an integral part of these consolidated financial statements.
LEVI STRAUSS & CO. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
FOR THE QUARTERLY PERIOD ENDED FEBRUARY 26, 2017
Nature of Operations
Levi Strauss & Co. (the “Company”) is one of the world’s largest brand-name apparel companies. The Company designs, markets and sells – directly or through third parties and licensees – products that include jeans, casual and dress pants, tops, shorts, skirts, jackets, footwear and related accessories for men, women and children around the world under the Levi’s®, Dockers®, Signature by Levi Strauss & Co.™ and Denizen® brands. The Company operates its business through three geographic regions: Americas, Europe and Asia.
Basis of Presentation and Principles of Consolidation
The unaudited consolidated financial statements of the Company and its wholly-owned and majority-owned foreign and domestic subsidiaries are prepared in conformity with generally accepted accounting principles in the United States (“U.S. GAAP”) for interim financial information. In the opinion of management, all adjustments necessary for a fair statement of the financial position and the results of operations for the periods presented have been included. These unaudited consolidated financial statements should be read in conjunction with the audited consolidated financial statements of the Company for the year ended November 27, 2016, included in the AnnualCurrent Report on Form10-K8-K): filed with the Securities and Exchange Commission (“SEC”) on February 9, 2017.
The unaudited consolidated financial statements include the accounts of the Company and its subsidiaries. All significant intercompany transactions have been eliminated. Management believes the disclosures are adequate to make the information presented herein not misleading. The results of operations for the three months ended February 26, 2017 may not be indicative of the results to be expected for any other interim period or the year ending November 26, 2017.
The Company’s fiscal year ends on the last Sunday of November in each year, although the fiscal years of certain foreign subsidiaries end on November 30. Each quarter of both fiscal years 2017 and 2016 consists of 13 weeks. All references to years relate to fiscal years rather than calendar years.
Subsequent events have been evaluated through the issuance date of these financial statements.
Reclassification
Certain amounts in Note 13 “Business Segment Information” have been conformed to the February 26, 2017 presentation. Effective as of the beginning of 2017, certain of our global expenses that support all of our regional segments, including globale-commerce infrastructure and global brand merchandising, marketing and design, previously recorded centrally in our Americas region segment and Corporate expenses, have now been allocated to our three regional business segments, and reported in their operating results. Business segment information for the prior-year period has been revised to reflect this change in presentation.
Certain insignificant amounts on the Statements of Cash Flows have been conformed to the February 26, 2017 presentation.
Use of Estimates
The preparation of financial statements in conformity with U.S. GAAP requires management to make estimates and assumptions that affect the amounts reported in the consolidated financial statements and the
LEVI STRAUSS & CO. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS — (continued)
FOR THE QUARTERLY PERIOD ENDED FEBRUARY 26, 2017
related notes to the consolidated financial statements. Estimates are based upon historical factors, current circumstances and the experience and judgment of the Company’s management. Management evaluates its estimates and assumptions on an ongoing basis and may employ outside experts to assist in its evaluations. Changes in such estimates, based on more accurate future information, or different assumptions or conditions, may affect amounts reported in future periods.
Changes in Accounting Principle
| • | Annual Report on |
Recently Issued Accounting Standards
There have been no developments to recently issued accounting standards, including the expected dates of adoption and estimated effects on the Company’s consolidated financial statements and footnote disclosures, from those disclosed in the Company’s 2016 Annual Report on Form10-K, except for the following, which have been grouped by their effective dates for the Company:
First Quarter of 2019
First Quarter of 2021
LEVI STRAUSS & CO. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS — (continued)
FOR THE QUARTERLY PERIOD ENDED FEBRUARY 26, 2017
The following table presents the Company’s financial instruments that are carried at fair value:
| February 26, 2017 | November 27, 2016 | |||||||||||||||||||||||
| Fair Value Estimated Using | Fair Value Estimated Using | |||||||||||||||||||||||
| Fair Value | Level 1 Inputs(1) | Level 2 Inputs(2) | Fair Value | Level 1 Inputs(1) | Level 2 Inputs(2) | |||||||||||||||||||
| (Dollars in thousands) | ||||||||||||||||||||||||
Financial assets carried at fair value | ||||||||||||||||||||||||
Rabbi trust assets | $ | 28,485 | $ | 28,485 | $ | — | $ | 27,131 | $ | 27,131 | $ | — | ||||||||||||
Forward foreign exchange contracts, net(3) | 9,446 | — | 9,446 | 23,267 | — | 23,267 | ||||||||||||||||||
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Total | $ | 37,931 | $ | 28,485 | $ | 9,446 | $ | 50,398 | $ | 27,131 | $ | 23,267 | ||||||||||||
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Financial liabilities carried at fair value | ||||||||||||||||||||||||
Forward foreign exchange contracts, net(3) | $ | 10,843 | $ | — | $ | 10,843 | $ | 5,533 | $ | — | $ | 5,533 | ||||||||||||
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The following table presents the carrying value, including related accrued interest, and estimated fair value of the Company’s financial instruments that are carried at adjusted historical cost:
| February 26, 2017 | November 27, 2016 | |||||||||||||||
| Carrying Value | Estimated Fair Value | Carrying Value | Estimated Fair Value | |||||||||||||
| (Dollars in thousands) | ||||||||||||||||
Financial liabilities carried at adjusted historical cost | ||||||||||||||||
6.875% senior notes due 2022(1) | 535,948 | 560,198 | 527,102 | 550,700 | ||||||||||||
5.00% senior notes due 2025(1) | 490,363 | 499,406 | 483,735 | 480,121 | ||||||||||||
Short-term borrowings | 34,393 | 34,393 | 39,009 | 39,009 | ||||||||||||
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Total | $ | 1,060,704 | $ | 1,093,997 | $ | 1,049,846 | $ | 1,069,830 | ||||||||
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LEVI STRAUSS & CO. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS — (continued)
FOR THE QUARTERLY PERIOD ENDED FEBRUARY 26, 2017
As of February 26, 2017, the Company had forward foreign exchange contracts to buy $1.2 billion and to sell $327.5 million against various foreign currencies. These contracts are at various exchange rates and expire at various dates through August 2018.
The table below provides data about the carrying values of derivative instruments andnon-derivative instruments:
| February 26, 2017 | November 27, 2016 | |||||||||||||||||||||||
| Assets | (Liabilities) | Derivative Net Carrying Value | Assets | (Liabilities) | Derivative Net Carrying Value | |||||||||||||||||||
| Carrying Value | Carrying Value | Carrying Value | Carrying Value | |||||||||||||||||||||
| (Dollars in thousands) | ||||||||||||||||||||||||
Derivatives not designated as hedging instruments | ||||||||||||||||||||||||
Forward foreign exchange contracts(1) | $ | 17,002 | $ | (7,556 | ) | $ | 9,446 | $ | 30,160 | $ | (6,893 | ) | $ | 23,267 | ||||||||||
Forward foreign exchange contracts(2) | 4,614 | (15,457 | ) | (10,843 | ) | 1,481 | (7,014 | ) | (5,533 | ) | ||||||||||||||
|
|
|
|
|
|
|
| |||||||||||||||||
Total | $ | 21,616 | $ | (23,013 | ) | $ | 31,641 | $ | (13,907 | ) | ||||||||||||||
|
|
|
|
|
|
|
| |||||||||||||||||
The Company’sover-the-counter forward foreign exchange contracts are subject to International Swaps and Derivatives Association, Inc. master agreements. These agreements permit the net settlement of these contracts on aper-institution basis and are offset accordingly. The table below presents the gross and net amounts of these contracts recognized on the Company’s consolidated balance sheets by type of financial instrument:
| February 26, 2017 | November 27, 2016 | |||||||||||||||||||||||
| Gross Amounts of Recognized Assets / (Liabilities) | Gross Amounts Offset in the Statement of Financial Position | Net Amounts of Assets / (Liabilities) Presented in the Statement of Financial Position | Gross Amounts of Recognized Assets / (Liabilities) | Gross Amounts Offset in the Statement of Financial Position | Net Amounts of Assets / (Liabilities) Presented in the Statement of Financial Position | |||||||||||||||||||
| (Dollars in thousands) | ||||||||||||||||||||||||
Over-the-counter forward foreign exchange contracts | ||||||||||||||||||||||||
Financial assets | $ | 16,847 | $ | (12,169 | ) | $ | 4,678 | $ | 29,240 | $ | (8,374 | ) | $ | 20,866 | ||||||||||
Financial liabilities | (19,679 | ) | 12,169 | (7,510 | ) | (10,365 | ) | 8,374 | (1,991 | ) | ||||||||||||||
|
|
|
| |||||||||||||||||||||
Total | $ | (2,832 | ) | $ | 18,875 | |||||||||||||||||||
|
|
|
| |||||||||||||||||||||
Embedded derivative contracts | ||||||||||||||||||||||||
Financial assets | $ | 4,768 | $ | — | $ | 4,768 | $ | 2,401 | $ | — | $ | 2,401 | ||||||||||||
Financial liabilities | (3,333 | ) | — | (3,333 | ) | (3,542 | ) | — | (3,542 | ) | ||||||||||||||
|
|
|
| |||||||||||||||||||||
Total | $ | 1,435 | $ | (1,141 | ) | |||||||||||||||||||
|
|
|
| |||||||||||||||||||||
LEVI STRAUSS & CO. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS — (continued)
FOR THE QUARTERLY PERIOD ENDED FEBRUARY 26, 2017
The table below provides data about the amount of gains and losses related to derivative instruments andnon-derivative instruments designated as net investment hedges included in “Accumulated other comprehensive loss” (“AOCI”) on the Company’s consolidated balance sheets, and in “Other income (expense), net” in the Company’s consolidated statements of income:
| Gain or (Loss) Recognized in AOCI (Effective Portion) | Gain or (Loss) Recognized in Other Income (Expense), net (Ineffective Portion and Amount Excluded from Effectiveness Testing) | |||||||||||||||
| As of | As of | Three Months Ended | ||||||||||||||
| February 26, 2017 | November 27, 2016 | February 26, 2017 | February 28, 2016 | |||||||||||||
| (Dollars in thousands) | ||||||||||||||||
Forward foreign exchange contracts | $ | 4,637 | $ | 4,637 | ||||||||||||
Yen-denominated Eurobonds | (19,811 | ) | (19,811 | ) | $ | — | $ | (2,103 | ) | |||||||
Euro senior notes | (15,751 | ) | (15,751 | ) | ||||||||||||
Cumulative income taxes | 12,168 | 12,168 | ||||||||||||||
|
|
|
| |||||||||||||
Total | $ | (18,757 | ) | $ | (18,757 | ) | ||||||||||
|
|
|
| |||||||||||||
The table below provides data about the amount of gains and losses related to derivatives not designated as hedging instruments included in “Other income (expense), net” in the Company’s consolidated statements of income:
| Three Months Ended | ||||||||
| February 26, 2017 | February 28, 2016 | |||||||
Forward foreign exchange contracts: | ||||||||
Realized gain | $ | 9,076 | $ | 12,967 | ||||
Unrealized loss | (19,320 | ) | (9,231 | ) | ||||
|
|
|
| |||||
Total | $ | (10,244 | ) | $ | 3,736 | |||
|
|
|
| |||||
LEVI STRAUSS & CO. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS — (continued)
FOR THE QUARTERLY PERIOD ENDED FEBRUARY 26, 2017
The following table presents the Company’s Debt:
| February 26, 2017 | November 27, 2016 | |||||||
| (Dollars in thousands) | ||||||||
Long-term debt | ||||||||
Unsecured: | ||||||||
6.875% senior notes due 2022 | $ | 524,318 | $ | 524,396 | ||||
5.00% senior notes due 2025 | 482,307 | 481,860 | ||||||
|
|
|
| |||||
Total unsecured long-term debt | 1,006,625 | 1,006,256 | ||||||
|
|
|
| |||||
Total long-term debt | $ | 1,006,625 | $ | 1,006,256 | ||||
|
|
|
| |||||
Short-term debt and current maturities of long-term debt | ||||||||
Unsecured: | ||||||||
Short-term borrowings | $ | 34,150 | $ | 38,922 | ||||
|
|
|
| |||||
Total short-term debt and current maturities of long-term debt | 34,150 | 38,922 | ||||||
|
|
|
| |||||
Total debt | $ | 1,040,775 | $ | 1,045,178 | ||||
|
|
|
| |||||
Senior Revolving Credit Facility
The Company’s unused availability under its senior secured revolving credit facility was $746.1 million at February 26, 2017, as the Company’s total availability of $799.1 million was reduced by $53.0 million of letters of credit and other credit usage allocated under the credit facility.
Interest Rates on Borrowings
The Company’s weighted-average interest rate on average borrowings outstanding during the three months ended February 26, 2017 was 6.67%, as compared to 6.26% in the same period of 2016.
Subsequent Event—Senior Notes due 2027
On February 28, 2017, the Company issued €475 million in aggregate principal amount of 3.375% senior notes due 2027. On March 3, 2017, the Company completed a tender offer for $370.3 million of the 6.875% senior notes due 2022 and the remaining $154.7 million was called on March 31, 2017 for redemption on May 1, 2017. Refer to Note 14 “Subsequent Events” for more information.
LEVI STRAUSS & CO. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS — (continued)
FOR THE QUARTERLY PERIOD ENDED FEBRUARY 26, 2017
The following tables summarize the components of net periodic benefit cost and the changes recognized in “Accumulated other comprehensive loss” for the Company’s defined benefit pension plans and postretirement benefit plans:
| Pension Benefits | Postretirement Benefits | |||||||||||||||
| Three Months Ended | Three Months Ended | |||||||||||||||
| February 26, 2017 | February 28, 2016 | February 26, 2017 | February 28, 2016 | |||||||||||||
| (Dollars in thousands) | ||||||||||||||||
Net periodic benefit cost: | ||||||||||||||||
Service cost | $ | 2,463 | $ | 2,058 | $ | 43 | $ | 50 | ||||||||
Interest cost | 9,180 | 9,472 | 787 | 806 | ||||||||||||
Expected return on plan assets | (12,115 | ) | (12,134 | ) | — | — | ||||||||||
Amortization of prior service benefit | (15 | ) | (15 | ) | — | — | ||||||||||
Amortization of actuarial loss | 3,379 | 3,007 | 318 | 742 | ||||||||||||
|
|
|
|
|
|
|
| |||||||||
Net periodic benefit cost | 2,892 | 2,388 | 1,148 | 1,598 | ||||||||||||
|
|
|
|
|
|
|
| |||||||||
Changes in accumulated other comprehensive loss: | ||||||||||||||||
Actuarial (gain) loss | (9 | ) | 152 | — | — | |||||||||||
Amortization of prior service benefit | 15 | 15 | — | — | ||||||||||||
Amortization of actuarial loss | (3,379 | ) | (3,007 | ) | (318 | ) | (742 | ) | ||||||||
|
|
|
|
|
|
|
| |||||||||
Total recognized in accumulated other comprehensive loss | (3,373 | ) | (2,840 | ) | (318 | ) | (742 | ) | ||||||||
|
|
|
|
|
|
|
| |||||||||
Total recognized in net periodic benefit cost and accumulated other comprehensive loss | $ | (481 | ) | $ | (452 | ) | $ | 830 | $ | 856 | ||||||
|
|
|
|
|
|
|
| |||||||||
In 2016, the Company completed a global productivity initiative designed to streamline operations and fuel long-term profitable growth. The Company does not anticipate any significant additional costs associated with the global productivity initiative.
For the three months ended February 28, 2016, the Company recognized net restructuring charges of $1.8 million and related charges of $1.5 million. The net restructuring charges were recorded in “Restructuring, net” in the Company’s consolidated statements of income. The related charges, which consist primarily of consulting fees for the Company’scentrally-led cost-savings, productivity projects and transition-related projects, represented costs incurred associated with ongoing operations and thus were recorded in “Selling, general and administrative expenses” in the Company’s consolidated statements of income.
LEVI STRAUSS & CO. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS — (continued)
FOR THE QUARTERLY PERIOD ENDED FEBRUARY 26, 2017
Forward Foreign Exchange Contracts
The Company usesover-the-counter derivative instruments to manage its exposure to foreign currencies. The Company is exposed to credit loss in the event of nonperformance by the counterparties to the forward foreign exchange contracts. However, the Company believes that its exposures are appropriately diversified across counterparties and that these counterparties are creditworthy financial institutions. Please see Note 3 for additional information.
Other Contingencies
Litigation.There have been no material developments with respect to the information previously reported in the Company’s 2016 Annual Report onForm 10-K related to legal proceedings.
In the ordinary course of business, the Company has various pending cases involving contractual matters, facility and employee-related matters, distribution matters, product liability claims, trademark infringement and other matters. The Company does not believe any of these pending legal proceedings will have a material impact on its financial condition, results of operations or cash flows.
In February 2017, the Company’s Board of Directors declared a cash dividend of $70 million, payable in two $35 million installments. The Company paid the first installment of the cash dividend of $35.0 million in the first quarter of 2017. The second installment of $35 million is expected to be paid in the fourth quarter of 2017, and thus was recorded in “Other accrued liabilities” in the Company’s consolidated balance sheets.
The Company does not have an established dividend policy. The Company will continue to review its ability to pay cash dividends at least annually, and dividends may be declared at the discretion of the Company’s Board of Directors depending upon, among other factors, the Company’s financial condition and compliance with the terms of the Company’s debt agreements.
The following is a summary of the components of “Accumulated other comprehensive loss,” net of related income taxes:
| February 26, 2017 | November 27, 2016 | |||||||
| (Dollars in thousands) | ||||||||
Pension and postretirement benefits | $ | (249,704 | ) | $ | (252,027 | ) | ||
Net investment hedge losses | (18,757 | ) | (18,757 | ) | ||||
Foreign currency translation losses | (142,439 | ) | (149,065 | ) | ||||
Unrealized gains on marketable securities | 2,583 | 1,968 | ||||||
|
|
|
| |||||
Accumulated other comprehensive loss | (408,317 | ) | (417,881 | ) | ||||
Accumulated other comprehensive income attributable to noncontrolling interest | 9,241 | 9,433 | ||||||
|
|
|
| |||||
Accumulated other comprehensive loss attributable to Levi Strauss & Co. | $ | (417,558 | ) | $ | (427,314 | ) | ||
|
|
|
| |||||
LEVI STRAUSS & CO. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS — (continued)
FOR THE QUARTERLY PERIOD ENDED FEBRUARY 26, 2017
No material amounts were reclassified out of “Accumulated other comprehensive loss” into net income other than those that pertain to the Company’s pension and postretirement benefit plans. Please see Note 5 for additional information. These amounts are included in “Selling, general and administrative expenses” in the Company’s consolidated statements of income.
The following table summarizes significant components of “Other income (expense), net”:
| Three Months Ended | ||||||||
| February 26, 2017 | February 28, 2016 | |||||||
| (Dollars in thousands) | ||||||||
Foreign exchange management (losses) gains(1) | $ | (10,244 | ) | $ | 3,736 | |||
Foreign currency transaction gains (losses)(2) | 9,676 | (8,203 | ) | |||||
Interest income | 617 | 209 | ||||||
Investment income | 353 | 708 | ||||||
Other | 6 | 1,331 | ||||||
|
|
|
| |||||
Total other income (expense), net | $ | 408 | $ | (2,219 | ) | |||
|
|
|
| |||||
November 24, 2019;
The effective income tax rate was 32.3% for the three months ended February 26, 2017, compared to 33.4% for the same period ended February 28, 2016. The decrease in the effective tax rate in 2017 as compared to 2016 was primarily due to lower tax rates on foreign earnings.
Charles V. Bergh, President and Chief Executive Officer, Peter E. Haas Jr., a director of the Company, and Kelly McGinnis, Senior Vice President of Corporate Affairs and Chief Communications Officer, are board members of the Levi Strauss Foundation, which is not a consolidated entity of the Company. Seth R. Jaffe, Senior Vice President and General Counsel, is Vice President of the Levi Strauss Foundation. During the three-month period ended February 26, 2017, the Company donated $6.3 million to the Levi Strauss Foundation as compared to $6.1 million for the same prior-year period.
LEVI STRAUSS & CO. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS — (continued)
FOR THE QUARTERLY PERIOD ENDED FEBRUARY 26, 2017
The Company manages its business according to three regional segments: the Americas, Europe and Asia. The Company considers its chief executive officer to be the Company’s chief operating decision maker. The Company’s chief operating decision maker manages business operations, evaluates performance and allocates resources based on the regional segments’ net revenues and operating income.
Effective as of the beginning of 2017, certain of the Company’s global expenses that support all regional segments, including globale-commerce infrastructure and global brand merchandising, marketing and design, previously recorded centrally in the Americas region segment and Corporate expenses, have now been allocated to the three regional business segments, and reported in operating results. Business segment information for the prior-year period has been revised to reflect the change in presentation.
Business segment information for the Company is as follows:
| Three Months Ended | ||||||||
| February 26, 2017 | February 28, 2016 | |||||||
| (Dollars in thousands) | ||||||||
Net revenues: | ||||||||
Americas | $ | 577,907 | $ | 571,185 | ||||
Europe | 310,317 | 276,486 | ||||||
Asia | 213,767 | 208,829 | ||||||
|
|
|
| |||||
Total net revenues | $ | 1,101,991 | $ | 1,056,500 | ||||
|
|
|
| |||||
Operating income: | ||||||||
Americas | $ | 90,342 | $ | 88,032 | ||||
Europe | 64,539 | 50,939 | ||||||
Asia | 35,941 | 40,893 | ||||||
|
|
|
| |||||
Regional operating income | 190,822 | 179,864 | ||||||
Corporate: | ||||||||
Restructuring, net | — | 1,848 | ||||||
Restructuring-related charges | — | 1,497 | ||||||
Other corporate staff costs and expenses | 82,482 | 59,932 | ||||||
|
|
|
| |||||
Corporate expenses | 82,482 | 63,277 | ||||||
|
|
|
| |||||
Total operating income | 108,340 | 116,587 | ||||||
Interest expense | (19,934 | ) | (14,902 | ) | ||||
Other income (expense), net | 408 | (2,219 | ) | |||||
|
|
|
| |||||
Income before income taxes | $ | 88,814 | $ | 99,466 | ||||
|
|
|
| |||||
On February 28, 2017, the Company issued €475 million in aggregate principal amount of 3.375% senior notes due 2027 (the “Senior Notes due 2027”). On March 3, 2017, a portion of the proceeds from the new debt were used to complete a tender offer for $370.3 million of the 6.875% senior notes due 2022 and the remaining $154.7 million was called on March 31, 2017 for redemption on May 1, 2017. The remaining proceeds from the
LEVI STRAUSS & CO. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS — (continued)
FOR THE QUARTERLY PERIOD ENDED FEBRUARY 26, 2017
issuances of Senior Notes due 2027 as well as cash on hand will be used to complete the redemption. The Company will record a net loss on the early extinguishment of debt of approximately $23 million. The estimated loss includes approximately $21 million of tender and call premiums on the retired debt. Debt issuance costs for the Senior Notes due 2027 are estimated at approximately $8 million and will be capitalized as deferred financing costs as a direct reduction to the debt.
Report of Independent Registered Public Accounting Firm
The Board of Directors and Stockholders of
Levi Strauss & Co.:
In our opinion, the accompanying consolidated balance sheets and the related consolidated statements of income, comprehensive income, stockholders’ equity, and of cash flows present fairly, in all material respects, the financial position of Levi Strauss & Co. and its subsidiaries as of November 27, 2016 and November 29, 2015, and the results of their operations and their cash flows for each of the three years in the period ended November 27, 2016, in conformity with accounting principles generally accepted in the United States of America. In addition, in our opinion, the related financial statement schedule listed in the index appearing under Item 15(2) presents fairly, in all material respects, the information set forth therein when read in conjunction with the related consolidated financial statements. These financial statements and the financial statement schedule are the responsibility of the Company’s management. Our responsibility is to express an opinion on these financial statements and financial statement schedule based on our audits. We conducted our audits of these statements in accordance with the standards of the Public Company Accounting Oversight Board (United States) and in accordance with auditing standards generally accepted in the United States of America. Those standards require that we plan and perform the audit to obtain reasonable assurance about whether the financial statements are free of material misstatement. An audit includes examining, on a test basis, evidence supporting the amounts and disclosures in the financial statements, assessing the accounting principles used and significant estimates made by management, and evaluating the overall financial statement presentation. We believe that our audits provide a reasonable basis for our opinion.
LEVI STRAUSS & CO. AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEETS
| November 27, 2016 | November 29, 2015 | |||||||
| (Dollars in thousands) | ||||||||
| ASSETS | ||||||||
Current Assets: | ||||||||
Cash and cash equivalents | $ | 375,563 | $ | 318,571 | ||||
Trade receivables, net of allowance for doubtful accounts of $11,974 and $11,025 | 479,018 | 498,196 | ||||||
Inventories: | ||||||||
Raw materials | 2,454 | 3,368 | ||||||
Work-in-process | 3,074 | 3,031 | ||||||
Finished goods | 710,653 | 600,460 | ||||||
|
|
|
| |||||
Total inventories | 716,181 | 606,859 | ||||||
Other current assets | 115,385 | 104,523 | ||||||
|
|
|
| |||||
Total current assets | 1,686,147 | 1,528,149 | ||||||
Property, plant and equipment, net of accumulated depreciation of $856,588 and $811,013 | 393,605 | 390,829 | ||||||
Goodwill | 234,280 | 235,041 | ||||||
Other intangible assets, net | 42,946 | 43,350 | ||||||
Deferred tax assets, net | 523,101 | 580,640 | ||||||
Othernon-current assets | 107,017 | 106,386 | ||||||
|
|
|
| |||||
Total assets | $ | 2,987,096 | $ | 2,884,395 | ||||
|
|
|
| |||||
| LIABILITIES, TEMPORARY EQUITY AND STOCKHOLDERS’ EQUITY | ||||||||
Current Liabilities: | ||||||||
Short-term debt | $ | 38,922 | $ | 114,978 | ||||
Current maturities of long-term debt | — | 32,625 | ||||||
Accounts payable | 270,293 | 238,309 | ||||||
Accrued salaries, wages and employee benefits | 180,740 | 182,430 | ||||||
Restructuring liabilities | 4,878 | 20,141 | ||||||
Accrued interest payable | 5,098 | 5,510 | ||||||
Accrued income taxes | 9,652 | 6,567 | ||||||
Other accrued liabilities | 252,160 | 245,607 | ||||||
|
|
|
| |||||
Total current liabilities | 761,743 | 846,167 | ||||||
Long-term debt | 1,006,256 | 1,004,938 | ||||||
Long-term capital leases | 15,360 | 12,320 | ||||||
Postretirement medical benefits | 100,966 | 105,240 | ||||||
Pension liability | 354,461 | 358,443 | ||||||
Long-term employee related benefits | 73,243 | 73,342 | ||||||
Long-term income tax liabilities | 20,150 | 26,312 | ||||||
Other long-term liabilities | 63,796 | 56,987 | ||||||
|
|
|
| |||||
Total liabilities | 2,395,975 | 2,483,749 | ||||||
|
|
|
| |||||
Commitments and contingencies | ||||||||
Temporary equity | 79,346 | 68,783 | ||||||
|
|
|
| |||||
Stockholders’ Equity: | ||||||||
Levi Strauss & Co. stockholders’ equity | ||||||||
Common stock — $.01 par value; 270,000,000 shares authorized; 37,470,158 shares and 37,460,145 shares issued and outstanding | 375 | 375 | ||||||
Additionalpaid-in capital | 1,445 | 3,291 | ||||||
Retained earnings | 935,049 | 705,668 | ||||||
Accumulated other comprehensive loss | (427,314 | ) | (379,066 | ) | ||||
|
|
|
| |||||
Total Levi Strauss & Co. stockholders’ equity | 509,555 | 330,268 | ||||||
Noncontrolling interest | 2,220 | 1,595 | ||||||
|
|
|
| |||||
Total stockholders’ equity | 511,775 | 331,863 | ||||||
|
|
|
| |||||
Total liabilities, temporary equity and stockholders’ equity | $ | 2,987,096 | $ | 2,884,395 | ||||
|
|
|
| |||||
The accompanying notes are an integral part of these consolidated financial statements.
LEVI STRAUSS & CO. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF INCOME
| Year Ended | ||||||||||||
| November 27, 2016 | November 29, 2015 | November 30, 2014 | ||||||||||
| (Dollars in thousands) | ||||||||||||
Net revenues | $ | 4,552,739 | $ | 4,494,493 | $ | 4,753,992 | ||||||
Cost of goods sold | 2,223,727 | 2,225,512 | 2,405,552 | |||||||||
|
|
|
|
|
| |||||||
Gross profit | 2,329,012 | 2,268,981 | 2,348,440 | |||||||||
Selling, general and administrative expenses | 1,866,493 | 1,823,863 | 1,906,164 | |||||||||
Restructuring, net | 312 | 14,071 | 128,425 | |||||||||
|
|
|
|
|
| |||||||
Operating income | 462,207 | 431,047 | 313,851 | |||||||||
Interest expense | (73,170 | ) | (81,214 | ) | (117,597 | ) | ||||||
Loss on early extinguishment of debt | — | (14,002 | ) | (20,343 | ) | |||||||
Other income (expense), net | 18,223 | (25,433 | ) | (22,057 | ) | |||||||
|
|
|
|
|
| |||||||
Income before income taxes | 407,260 | 310,398 | 153,854 | |||||||||
Income tax expense | 116,051 | 100,507 | 49,545 | |||||||||
|
|
|
|
|
| |||||||
Net income | 291,209 | 209,891 | 104,309 | |||||||||
Net (income) loss attributable to noncontrolling interest | (157 | ) | (455 | ) | 1,769 | |||||||
|
|
|
|
|
| |||||||
Net income attributable to Levi Strauss & Co. | $ | 291,052 | $ | 209,436 | $ | 106,078 | ||||||
|
|
|
|
|
| |||||||
The accompanying notes are an integral part of these consolidated financial statements.
LEVI STRAUSS & CO. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF COMPREHENSIVE INCOME
| Year Ended | ||||||||||||
| November 27, 2016 | November 29, 2015 | November 30, 2014 | ||||||||||
| (Dollars in thousands) | ||||||||||||
Net income | $ | 291,209 | $ | 209,891 | $ | 104,309 | ||||||
|
|
|
|
|
| |||||||
Other comprehensive (loss) income, before related income taxes: | ||||||||||||
Pension and postretirement benefits | (22,925 | ) | 38,785 | (53,323 | ) | |||||||
Net investment hedge (losses) gains | (829 | ) | 385 | 13,404 | ||||||||
Foreign currency translation (losses) gains | (30,380 | ) | (28,791 | ) | (36,201 | ) | ||||||
Unrealized gains (losses) on marketable securities | 143 | (575 | ) | 1,577 | ||||||||
|
|
|
|
|
| |||||||
Total other comprehensive (loss) income, before related income taxes | (53,991 | ) | 9,804 | (74,543 | ) | |||||||
|
|
|
|
|
| |||||||
Income tax benefit (expense) related to items of other comprehensive (loss) income | 6,211 | (13,602 | ) | 10,903 | ||||||||
|
|
|
|
|
| |||||||
Comprehensive income, net of income taxes | 243,429 | 206,093 | 40,669 | |||||||||
|
|
|
|
|
| |||||||
Comprehensive (income) loss attributable to noncontrolling interest | (625 | ) | (383 | ) | 2,098 | |||||||
|
|
|
|
|
| |||||||
Comprehensive income attributable to Levi Strauss & Co. | $ | 242,804 | $ | 205,710 | $ | 42,767 | ||||||
|
|
|
|
|
| |||||||
The accompanying notes are an integral part of these consolidated financial statements.
LEVI STRAUSS & CO. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF STOCKHOLDERS’ EQUITY
| Levi Strauss & Co. Stockholders | ||||||||||||||||||||||||
| Common Stock | Additional Paid-In Capital | Retained Earnings | Accumulated Other Comprehensive Loss | Noncontrolling Interest | Total Stockholders’ Equity | |||||||||||||||||||
| (Dollars in thousands) | ||||||||||||||||||||||||
Balance at November 24, 2013 | $ | 374 | $ | 7,361 | $ | 475,960 | $ | (312,029 | ) | $ | 3,310 | $ | 174,976 | |||||||||||
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Net income (loss) | — | — | 106,078 | — | (1,769 | ) | 104,309 | |||||||||||||||||
Other comprehensive loss, net of tax | — | — | — | (63,311 | ) | (329 | ) | (63,640 | ) | |||||||||||||||
Stock-based compensation and dividends, net | — | 13,290 | (23 | ) | — | — | 13,267 | |||||||||||||||||
Reclassification to temporary equity | — | (19,298 | ) | (19,842 | ) | — | — | (39,140 | ) | |||||||||||||||
Repurchase of common stock | — | (1,353 | ) | (3,961 | ) | — | — | (5,314 | ) | |||||||||||||||
Cash dividends paid | — | — | (30,003 | ) | — | — | (30,003 | ) | ||||||||||||||||
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Balance at November 30, 2014 | 374 | — | 528,209 | (375,340 | ) | 1,212 | 154,455 | |||||||||||||||||
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Net income | — | — | 209,436 | — | 455 | 209,891 | ||||||||||||||||||
Other comprehensive loss, net of tax | — | — | — | (3,726 | ) | (72 | ) | (3,798 | ) | |||||||||||||||
Stock-based compensation and dividends, net | 1 | 16,674 | (66 | ) | — | — | 16,609 | |||||||||||||||||
Reclassification to temporary equity | — | (10,961 | ) | 19,842 | — | — | 8,881 | |||||||||||||||||
Repurchase of common stock | — | (2,422 | ) | (1,753 | ) | — | — | (4,175 | ) | |||||||||||||||
Cash dividends paid | — | — | (50,000 | ) | — | — | (50,000 | ) | ||||||||||||||||
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Balance at November 29, 2015 | 375 | 3,291 | 705,668 | (379,066 | ) | 1,595 | 331,863 | |||||||||||||||||
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Net income | — | — | 291,052 | — | 157 | 291,209 | ||||||||||||||||||
Other comprehensive (loss) income, net of tax | — | — | — | (48,248 | ) | 468 | (47,780 | ) | ||||||||||||||||
Stock-based compensation and dividends, net | — | 9,649 | (40 | ) | — | — | 9,609 | |||||||||||||||||
Reclassification to temporary equity | — | (10,563 | ) | — | — | — | (10,563 | ) | ||||||||||||||||
Repurchase of common stock | — | (932 | ) | (1,631 | ) | — | — | (2,563 | ) | |||||||||||||||
Cash dividends paid | — | — | (60,000 | ) | — | — | (60,000 | ) | ||||||||||||||||
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Balance at November 27, 2016 | $ | 375 | $ | 1,445 | $ | 935,049 | $ | (427,314 | ) | $ | 2,220 | $ | 511,775 | |||||||||||
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The accompanying notes are an integral part of these consolidated financial statements.
LEVI STRAUSS & CO. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS
| Year Ended | ||||||||||||
| November 27, 2016 | November 29, 2015 | November 30, 2014 | ||||||||||
| (Dollars in thousands) | ||||||||||||
Cash Flows from Operating Activities: | ||||||||||||
Net income | $ | 291,209 | $ | 209,891 | $ | 104,309 | ||||||
Adjustments to reconcile net income to net cash provided by operating activities: | ||||||||||||
Depreciation and amortization | 103,878 | 102,044 | 109,474 | |||||||||
Asset impairments | 4,100 | 2,616 | 6,531 | |||||||||
Gain on disposal of assets | (6,058 | ) | (8,626 | ) | (197 | ) | ||||||
Unrealized foreign exchange (gains) losses | (5,853 | ) | (371 | ) | 5,392 | |||||||
Realized (gain) loss on settlement of forward foreign exchange contracts not designated for hedge accounting | (17,175 | ) | (14,720 | ) | 6,184 | |||||||
Employee benefit plans’ amortization from accumulated other comprehensive loss and settlement losses | 14,991 | 16,983 | 45,787 | |||||||||
Noncash loss on extinguishment of debt, net ofwrite-off of unamortized debt issuance costs | — | 3,448 | 5,103 | |||||||||
Noncash restructuring charges | — | 658 | 3,347 | |||||||||
Amortization of premium, discount and debt issuance costs | 2,576 | 2,150 | 2,331 | |||||||||
Stock-based compensation | 9,333 | 15,137 | 12,441 | |||||||||
Allowance for doubtful accounts | 2,195 | 1,875 | 662 | |||||||||
Deferred income taxes | 66,078 | 58,386 | (28,177 | ) | ||||||||
Change in operating assets and liabilities: | ||||||||||||
Trade receivables | 6,150 | 4,060 | (51,367 | ) | ||||||||
Inventories | (121,379 | ) | 28,566 | (6,184 | ) | |||||||
Other current assets | (22,944 | ) | (3,061 | ) | 5,377 | |||||||
Othernon-current assets | (9,103 | ) | (21,375 | ) | 1,509 | |||||||
Accounts payable and other accrued liabilities | 43,040 | (80,224 | ) | (28,871 | ) | |||||||
Restructuring liabilities | (17,290 | ) | (36,711 | ) | 66,574 | |||||||
Income tax liabilities | 7,653 | (9,680 | ) | 19,224 | ||||||||
Accrued salaries, wages and employee benefits and long-term employee related benefits | (49,880 | ) | (44,714 | ) | (42,878 | ) | ||||||
Other long-term liabilities | 5,029 | (10,902 | ) | (3,740 | ) | |||||||
Other, net | — | 2,902 | 78 | |||||||||
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Net cash provided by operating activities | 306,550 | 218,332 | 232,909 | |||||||||
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Cash Flows from Investing Activities: | ||||||||||||
Purchases of property, plant and equipment | (102,950 | ) | (102,308 | ) | (73,396 | ) | ||||||
Proceeds from sale of assets | 17,427 | 9,026 | 8,049 | |||||||||
Proceeds (payments) on settlement of forward foreign exchange contracts not designated for hedge accounting | 17,175 | 14,720 | (6,184 | ) | ||||||||
Acquisitions, net of cash acquired | — | (2,271 | ) | (318 | ) | |||||||
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Net cash used for investing activities | (68,348 | ) | (80,833 | ) | (71,849 | ) | ||||||
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Cash Flows from Financing Activities: | ||||||||||||
Proceeds from issuance of long-term debt | — | 500,000 | — | |||||||||
Repayments of long-term debt and capital leases | (39,641 | ) | (528,104 | ) | (395,853 | ) | ||||||
Proceeds from senior revolving credit facility | 180,000 | 345,000 | 265,000 | |||||||||
Repayments of senior revolving credit facility | (279,000 | ) | (346,000 | ) | (165,000 | ) | ||||||
Proceeds from short-term credit facilities | 29,154 | 23,936 | 24,372 | |||||||||
Repayments of short-term credit facilities | (18,219 | ) | (21,114 | ) | (24,000 | ) | ||||||
Other short-term borrowings, net | 13,475 | (12,919 | ) | (10,080 | ) | |||||||
Debt issuance costs | — | (4,605 | ) | (2,684 | ) | |||||||
Change in restricted cash, net | 2,967 | 1,615 | 1,060 | |||||||||
Repurchase of common stock | (2,563 | ) | (4,175 | ) | (5,314 | ) | ||||||
Excess tax benefits from stock-based compensation | 278 | 1,471 | 826 | |||||||||
Dividend to stockholders | (60,000 | ) | (50,000 | ) | (30,003 | ) | ||||||
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Net cash used for financing activities | (173,549 | ) | (94,895 | ) | (341,676 | ) | ||||||
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Effect of exchange rate changes on cash and cash equivalents | (7,661 | ) | (22,288 | ) | (10,387 | ) | ||||||
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Net increase (decrease) in cash and cash equivalents | 56,992 | 20,316 | (191,003 | ) | ||||||||
Beginning cash and cash equivalents | 318,571 | 298,255 | 489,258 | |||||||||
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Ending cash and cash equivalents | $ | 375,563 | $ | 318,571 | $ | 298,255 | ||||||
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Noncash Investing Activity: | ||||||||||||
Purchases of property, plant and equipment not yet paid at end of period | $ | 19,903 | $ | 23,958 | $ | 19,728 | ||||||
Supplemental disclosure of cash flow information: | ||||||||||||
Cash paid for interest during the period | $ | 67,052 | $ | 77,907 | $ | 110,029 | ||||||
Cash paid for income taxes during the period, net of refunds | 57,148 | 61,456 | 60,525 | |||||||||
The accompanying notes are an integral part of these consolidated financial statements.
LEVI STRAUSS & CO. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
FOR THE YEARS ENDED NOVEMBER 27, 2016, NOVEMBER 29, 2015, AND NOVEMBER 30, 2014
Nature of Operations
Levi Strauss & Co. (the “Company”) is one of the world’s largest brand-name apparel companies. The Company designs, markets and sells – directly or through third parties and licensees – products that include jeans, casual and dress pants, tops, shorts, skirts, jackets, footwear and related accessories, for men, women and children around the world under the Levi’s®, Dockers®, Signature by Levi Strauss & Co.™ and Denizen® brands. The Company operates its business through three geographic regions: Americas, Europe and Asia.
Basis of Presentation and Principles of Consolidation
The consolidated financial statements of the Company and its wholly-owned and majority-owned foreign and domestic subsidiaries are prepared in conformity with generally accepted accounting principles in the United States (“U.S. GAAP”). All significant intercompany balances and transactions have been eliminated. The Company is privately held primarily by descendants of the family of its founder, Levi Strauss, and their relatives.
The Company’s fiscal year ends on the last Sunday of November in each year, although the fiscal years of certain foreign subsidiaries end on November 30. Fiscal 2016 and 2015 were52-week years, ending on November 27, 2016, and November 29, 2015, respectively. Fiscal 2014 was a53-week year ending on November 30, 2014. Each quarter of fiscal years 2016, 2015 and 2014 consists of 13 weeks, with the exception of the fourth quarter of 2014, which consisted of 14 weeks. All references to years relate to fiscal years rather than calendar years.
Subsequent events have been evaluated through the issuance date of these financial statements.
Out-of-period Adjustments
The Company’s results for the year ended November 30, 2014, includeout-of-period adjustments which decreased income before income taxes and net income by $1.3 million and $6.9 million, respectively. These adjustments were comprised of $1.3 million ofpre-tax items, principally related to duty accruals, and $5.6 million of additional tax expense, all associated with prior years. Management has evaluated these items in relation to year ended November 30, 2014, as well as the periods in which they originated, and believes these items are immaterial to both the consolidated quarterly and annual financial statements.
Use of Estimates
The preparation of financial statements in conformity with U.S. GAAP requires management to make estimates and assumptions that affect the amounts reported in the consolidated financial statements and the related notes to the consolidated financial statements. Estimates are based upon historical factors, current circumstances and the experience and judgment of the Company’s management. Management evaluates its estimates and assumptions on an ongoing basis and may employ outside experts to assist in its evaluations. Changes in such estimates, based on more accurate future information, or different assumptions or conditions, may affect amounts reported in future periods.
Cash and Cash Equivalents
The Company considers all highly liquid investments with an original maturity of three months or less to be cash equivalents. Cash equivalents are stated at fair value.
LEVI STRAUSS & CO. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS — (continued)
FOR THE YEARS ENDED NOVEMBER 27, 2016, NOVEMBER 29, 2015, AND NOVEMBER 30, 2014
Restricted Cash
Restricted cash primarily relates to required cash deposits for customs and rental guarantees to support the Company’s international operations. As restricted cash is not material in any period presented, it is included in “Other current assets” and “Othernon-current assets” on the consolidated balance sheets.
Accounts Receivable, Net
The Company extends credit to its customers that satisfypre-defined credit criteria. Accounts receivable are recorded net of an allowance for doubtful accounts. The Company estimates the allowance for doubtful accounts based upon an analysis of the aging of accounts receivable at the date of the consolidated financial statements, assessments of collectability based on historic trends, customer-specific circumstances, and an evaluation of economic conditions. Actualwrite-off of receivables may differ from estimates due to changes in customer and economic circumstances.
Inventory Valuation
The Company values inventories at the lower of cost or market value. Inventory cost is determined using thefirst-infirst-out method. The Company includes product costs, labor and related overhead, inbound freight, internal transfers, and the cost of operating its remaining manufacturing facilities, including the related depreciation expense, in the cost of inventories. The Company estimates quantities of slow-moving and obsolete inventory, by reviewingon-hand quantities, outstanding purchase obligations and forecasted sales. The Company determines inventory market values by estimating expected selling prices based on the Company’s historical recovery rates for slow-moving and obsolete inventory and other factors, such as market conditions, expected channel of distribution and current consumer preferences.
Income Tax Assets and Liabilities
The future effective tax rate will ultimately depend on the mix of earnings between domestic and foreign operations, the impact of certain undistributed foreign earnings for which no U.S. taxes have been provided because such earnings are planned to be indefinitely reinvested outside of the United States, changes in tax laws and regulations and potential resolutions on tax examinations, refund claims and litigation. Remittances of foreign earnings to the United States are planned based on projected cash flow, working capital and investment needs of our foreign and domestic operations. Based on these assumptions, the Company estimates the amount that will be distributed to the United States and provides U.S. federal taxes on these amounts. Material changes in the Company’s estimates as to how much of the Company’s foreign earnings will be distributed to the United States or tax legislation that limits or restricts the amount of undistributed foreign earnings that the Company considers indefinitely reinvested outside the United States could materially impact the Company’s income tax provision and effective tax rate. Significant judgment is required in determining the Company’s 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 valuation allowance.
The Company is subject to income taxes in both the United States and numerous foreign jurisdictions. The Company computes its 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.
LEVI STRAUSS & CO. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS — (continued)
FOR THE YEARS ENDED NOVEMBER 27, 2016, NOVEMBER 29, 2015, AND NOVEMBER 30, 2014
All deferred income taxes are classified asnon-current on the Company’s consolidated balance sheets. 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, the Company’s management evaluates 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.
The Company continuously reviews issues raised in connection with all ongoing examinations and open tax years to evaluate the adequacy of its tax liabilities. The Company evaluates uncertain tax positions under atwo-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, for those positions that meet the recognition criteria, is to measure the tax benefit as the largest amount that is more than fifty percent likely to be realized. The Company believes that its recorded tax liabilities are adequate to cover all open tax years based on its assessment. This assessment relies on estimates and assumptions and involves significant judgments about future events. To the extent that the Company’s view as to the outcome of these matters change, the Company will adjust income tax expense in the period in which such determination is made. The Company classifies interest and penalties related to income taxes as income tax expense.
Property, Plant and Equipment
Property, plant and equipment are carried at cost, less accumulated depreciation. The cost is depreciated on a straight-line basis over the estimated useful lives of the related assets. Costs relating tointernal-use software development are capitalized when incurred during the application development phase. Buildings are depreciated over 20 to 40 years, and leasehold improvements are depreciated over the lesser of the life of the improvement or the initial lease term. Machinery and equipment includes furniture and fixtures, automobiles and trucks, and networking communication equipment, and is depreciated over a range from three to 20 years. Capitalizedinternal-use software is depreciated over periods ranging from three to seven years.
Goodwill and Other Intangible Assets
Goodwill resulted primarily from a 1985 acquisition of the Company by Levi Strauss Associates Inc., a former parent company that was subsequently merged into the Company in 1996, and the Company’s 2009 acquisitions. Goodwill is not amortized. Intangible assets are comprised of owned trademarks with indefinite useful lives which are not being amortized and acquired contractual rights. The amortization of these intangible assets is included in “Selling, general, and administrative expenses” in the Company’s consolidated statements of income.
Impairment
The Company reviews its goodwill and othernon-amortized intangible assets for impairment annually in the fourth quarter of its fiscal year, or more frequently as warranted by events or changes in circumstances which indicate that the carrying amount may not be recoverable. The Company qualitatively assesses goodwill andnon-amortized intangible assets to determine whether it is more likely than not that the fair value of a reporting unit or othernon-amortized intangible asset is less than its carrying amount. During fiscal 2016, the Company performed this analysis examining key events and circumstances affecting fair value and determined it is more
LEVI STRAUSS & CO. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS — (continued)
FOR THE YEARS ENDED NOVEMBER 27, 2016, NOVEMBER 29, 2015, AND NOVEMBER 30, 2014
likely than not that the reporting unit’s fair value is greater than its carrying amount. As such, no further analysis was required for purposes of testing of the Company’s goodwill or othernon-amortized intangible asset for impairment.
If goodwill is not qualitatively assessed or if goodwill is qualitatively assessed and it is determined it is not more likely than not that the reporting unit’s fair value is greater than its carrying amount, atwo-step quantitative approach is utilized. In the first step, the Company compares the carrying value of the reporting unit or applicable asset to its fair value, which the Company estimates using a discounted cash flow analysis or by comparison with the market values of similar assets. If the carrying amount of the reporting unit or asset exceeds its estimated fair value, the Company performs the second step, and determines the impairment loss, if any, as the excess of the carrying value of the goodwill or intangible asset over its fair value.
The Company reviews its 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 asset exceeds the expected future undiscounted cash flows, the Company measures and records 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, the Company utilizes 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.
Debt Issuance Costs
The Company capitalizes debt issuance costs on its senior revolving credit facility, which are included in “Othernon-current assets” on the Company’s consolidated balance sheets. Capitalized debt issuance costs on the Company’s unsecured long-term debt are presented as a reduction to the debt outstanding on the Company’s consolidated balance sheets. The unsecured long-term debt issuance costs are generally amortized utilizing the effective interest method whereas the senior revolving credit facility issuance costs are amortized utilizing the straight-line method. Amortization of debt issuance costs is included in “Interest expense” in the consolidated statements of income.
Restructuring Liabilities
Upon approval of a restructuring plan, the Company records restructuring liabilities for employee severance and related termination benefits when they become probable and estimable for formal andpre-existing severance arrangements. The Company records other costs associated with exit activities as they are incurred. The long-term portion of restructuring liabilities is included in “Other long-term liabilities” on the Company’s consolidated balance sheets.
Deferred Rent
The Company is obligated under operating leases of property for manufacturing, finishing and distribution facilities, office space, retail stores and equipment. Rental expense relating to operating leases are recognized on a straight-line basis over the lease term after consideration of lease incentives and scheduled rent escalations beginning as of the date the Company takes physical possession or control of the property. Differences between rental expense and actual rental payments are recorded as deferred rent liabilities included in “Other accrued liabilities” and “Other long-term liabilities” on the consolidated balance sheets.
LEVI STRAUSS & CO. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS — (continued)
FOR THE YEARS ENDED NOVEMBER 27, 2016, NOVEMBER 29, 2015, AND NOVEMBER 30, 2014
Fair Value of Financial Instruments
The fair values of the Company’s financial instruments reflect the amounts that would be received to sell an asset or paid to transfer a liability in an orderly transaction between market participants at the measurement date (exit price). The fair value estimates presented in this report are based on information available to the Company as of November 27, 2016 and November 29, 2015.
The carrying values of cash and cash equivalents, trade receivables and short-term borrowings approximate fair value since they are short term in nature. The Company has estimated the fair value of its other financial instruments using the market and income approaches. Rabbi trust assets and forward foreign exchange contracts are carried at their fair values. The Company’s debt instruments are carried at historical cost and adjusted for amortization of premiums, discounts, or deferred financing costs, foreign currency fluctuations and principal payments.
Pension and Postretirement Benefits
The Company has severalnon-contributory defined benefit retirement plans covering eligible employees. The Company also provides certain health care benefits for U.S. employees who meet age, participation and length of service requirements at retirement. In addition, the Company sponsors other retirement or post-employment plans for its foreign employees in accordance with local government programs and requirements. The Company retains the right to amend, curtail or discontinue any aspect of the plans, subject to local regulations.
The Company recognizes either an asset or a liability for any plan’s funded status in its consolidated balance sheets. The Company measures changes in funded status using actuarial models which utilize an attribution approach that generally spreads individual events over the estimated service lives of the remaining employees in the plan. For plans where participants will not earn additional benefits by rendering future service, which includes the Company’s U.S. plans, individual events are spread over the plan participants’ estimated remaining lives. The Company’s policy is to fund its retirement 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 and mortality trend rates. The Company considers several factors including historical rates, expected rates and external data to determine the assumptions used in the actuarial models.
At the end of 2015, the Company elected to adopt the spot-rate approach to determine the interest cost component of pension and postretirement expense. Under the spot-rate approach, the interest cost is calculated by applying interest to the discounted cash flow expected at each payment date. The interest is determined using the same spot rate along the yield curve that was used to determine the present value of the associated payment. This approach was used to recognize the 2016 expense. Prior to 2016, all plans with a yield curve available for discount rate setting purposes used a single weighted-average rate.
Employee Incentive Compensation
The Company maintains short-term and long-term employee incentive compensation plans. Provisions for employee incentive compensation are recorded in “Accrued salaries, wages and employee benefits” and “Long-term employee related benefits” on the Company’s consolidated balance sheets. The Company accrues the related compensation expense over the period of the plan and changes in the liabilities for these incentive plans generally correlate with the Company’s financial results and projected future financial performance.
LEVI STRAUSS & CO. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS — (continued)
FOR THE YEARS ENDED NOVEMBER 27, 2016, NOVEMBER 29, 2015, AND NOVEMBER 30, 2014
Stock-Based Compensation
The Company has stock-based incentive plans which reward certain employees and directors with cash or equity. Compensation cost for these awards is based on the fair value of the Company’s common stock and generally reflects the number of awards that vest or are expected to vest. Compensation cost is recognized over the period that an employee provides service for that award, which generally is the vesting period.
The Company’s common stock is not listed on any established stock exchange. Accordingly, the stock’s fair value is based upon a valuation performed by an independent third-party, Evercore Group LLC (“Evercore”) and approved by the Company’s board of directors (the “Board”). Determining the fair value of the Company’s stock requires complex judgments. The valuation process includes comparison of the Company’s historical and estimated future financial results with selected publicly-traded companies and application of a discount for the illiquidity of the stock to derive at the fair value of the stock. The Company uses this valuation for, among other things, making determinations under its stock-based compensation plans, such as the grant date fair value of awards.
The fair value of equity awards granted to directors is based on the fair value of the common stock at the date of grant. The fair value of equity awards granted to employees is estimated on the date of grant based on the Black-Scholes option pricing model, unless the awards are subject to market conditions, in which case the Company utilizes the Monte Carlo simulation model. The fair value of liability awards granted to employees is based on the fair value of the Company’s common stock at each quarter end.
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 the Company’s common stock is not publicly traded, the computation of expected volatility is based on the average of the historical and implied volatilities over the expected life of the awards, of a representative peer group of publicly-traded entities. Other assumptions include 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 coupon U.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, the Company has included stock-based compensation cost in “Selling, general and administrative expenses” in the consolidated statements of income.
Self-Insurance
Up to certain limits, the Company self-insures various loss exposures primarily relating to workers’ compensation risk and employee and eligible retiree medical health benefits. The Company carries insurance policies covering claim exposures which exceed predefined amounts, per occurrence and/or in the aggregate. Accruals for losses are made based on the Company’s claims experience and actuarial assumptions followed in the insurance industry, including provisions for incurred but not reported losses.
Derivative Financial Instruments and Hedging Activities
The Company recognizes all derivatives as assets and liabilities at their fair values, which are included in “Other current assets”, “Othernon-current assets” or “Other accrued liabilities” on the Company’s consolidated
LEVI STRAUSS & CO. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS — (continued)
FOR THE YEARS ENDED NOVEMBER 27, 2016, NOVEMBER 29, 2015, AND NOVEMBER 30, 2014
balance sheets. The Company uses derivatives to manage exposures that are sensitive to changes in market conditions, such as foreign currency risk. Additionally, some of the Company’s contracts contain provisions that are accounted for as embedded derivative instruments. The Company does not designate its derivative instruments for hedge accounting; changes in the fair values of these instruments are recorded in “Other income (expense), net” in the Company’s consolidated statements of income. Thenon-derivative instruments the Company designates and that qualify for hedge accounting treatment hedge the Company’s net investment position in certain of its foreign subsidiaries. For these instruments, the Company documents the hedge designation by identifying the hedging instrument, the nature of the risk being hedged and the approach for measuring hedge effectiveness. The ineffective portions of these hedges are recorded in “Other income (expense), net” in the Company’s consolidated statements of income. The effective portions of these hedges are recorded in “Accumulated other comprehensive loss” on the Company’s consolidated balance sheets and are not reclassified to earnings until the related net investment position has been liquidated.
Foreign Currency
The functional currency for most of the Company’s foreign operations is the applicable local currency. For those operations, assets and liabilities are translated into U.S. Dollars usingperiod-end exchange rates; income and expenses are translated at average monthly exchange rates; and equity accounts are translated at historical rates. Net changes resulting from such translations are recorded as a component of translation adjustments in “Accumulated other comprehensive loss” on the Company’s consolidated balance sheets.
Foreign currency transactions are transactions denominated in a currency other than the entity’s functional currency. At each balance sheet date, each entity remeasures the recorded balances related to foreign-currency transactions using theperiod-end exchange rate. Unrealized gains or losses arising from the remeasurement of these balances are recorded in “Other income (expense), net” in the Company’s consolidated statements of income. In addition, at the settlement date of foreign currency transactions, the realized foreign currency gains or losses are recorded in “Other income (expense), net” in the Company’s consolidated statements of income to reflect the difference between the rate effective at the settlement date and the historical rate at which the transaction was originally recorded.
Noncontrolling Interest
Noncontrolling interest includes a 16.4% minority interest of third parties in Levi Strauss Japan K.K., the Company’s Japanese subsidiary.
Revenue Recognition
Net sales is primarily comprised of sales of products to wholesale customers, including franchised stores, and direct sales to consumers at the Company’s company-operated and online stores and at the Company’s company-operatedshop-in-shops located within department stores. The Company recognizes revenue on sale of product when the goods are shipped or delivered and title to the goods passes to the customer provided that: there are no uncertainties regarding customer acceptance; persuasive evidence of an arrangement exists; the sales price is fixed or determinable; and collectability is reasonably assured. The revenue is recorded net of an allowance for estimated returns, discounts and retailer promotions and other similar incentives. Licensing revenues from the use of the Company’s 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 set forth in the licensing agreements.
LEVI STRAUSS & CO. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS — (continued)
FOR THE YEARS ENDED NOVEMBER 27, 2016, NOVEMBER 29, 2015, AND NOVEMBER 30, 2014
The Company recognizes allowances for estimated returns in the period in which the related sale is recorded. The Company recognizes 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. The Company estimatesnon-volume based allowances based on historical rates as well as 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 Company’s consolidated statements of income.
Net sales to the Company’s ten largest customers totaled approximately 30% of net revenues for 2016, and 31% of net revenues for both 2015 and 2014. No customer represented 10% or more of net revenues in any of these years.
Cost of Goods Sold
Cost of goods sold includes the expenses incurred to acquire and produce inventory for sale, including product costs, labor and related overhead, inbound freight, internal transfers, and the cost of operating the Company’s remaining manufacturing facilities, including the related depreciation expense.
Selling, General and Administrative Expenses
Selling, general and administrative expenses (“SG&A”) are primarily comprised of costs relating to advertising, marketing, selling, distribution, information technology and other corporate functions. Selling costs include, among other things, all occupancy costs associated with company-operated stores and with the Company’s company-operatedshop-in-shops located within department stores. The Company expenses advertising costs as incurred. For 2016, 2015 and 2014, total advertising expense was $284.0 million, $276.4 million and $272.8 million, respectively. Distribution costs include costs related to receiving and inspection at distribution centers, warehousing, shipping to the Company’s customers, handling and certain other activities associated with the Company’s distribution network. These expenses totaled $168.3 million, $159.7 million, and $168.7 million for 2016, 2015 and 2014, respectively.
Recently Issued Accounting Standards
The following recently issued accounting standards, all of which are FASB Accounting Standards Updates (“ASU”), have been grouped by their required effective dates for the Company:
First Quarter of 2018
| • | Quarterly Reports on |
LEVI STRAUSS & CO. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS — (continued)
FOR THE YEARS ENDED NOVEMBER 27, 2016, NOVEMBER 29, 2015, AND NOVEMBER 30, 2014
First Quarter of 2019
| • | Current Reports on Form |
LEVI STRAUSSLevi Strauss & CO. AND SUBSIDIARIESCo.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS — (continued)1155 Battery Street
FOR THE YEARS ENDED NOVEMBER 27, 2016, NOVEMBER 29, 2015, AND NOVEMBER 30, 2014San Francisco, California 94111
Attention: Investor Relations
First QuarterTelephone: (800) 438-0349 or (415) 501-6000
To obtain timely delivery of 2020
First Quarterany of 2021
The components of property, plant and equipment (“PP&E”) were as follows:
| November 27, 2016 | November 29, 2015 | |||||||
| (Dollars in thousands) | ||||||||
Land | $ | 8,178 | $ | 13,180 | ||||
Buildings and leasehold improvements | 379,217 | 384,228 | ||||||
Machinery and equipment | 407,527 | 393,806 | ||||||
Capitalizedinternal-use software | 418,493 | 378,643 | ||||||
Construction in progress | 36,778 | 31,985 | ||||||
|
|
|
| |||||
Subtotal | 1,250,193 | 1,201,842 | ||||||
Accumulated depreciation | (856,588 | ) | (811,013 | ) | ||||
|
|
|
| |||||
PP&E, net | $ | 393,605 | $ | 390,829 | ||||
|
|
|
| |||||
Depreciation expense for the years ended November 27, 2016, November 29, 2015, and November 30, 2014, was $103.7 million, $99.8 million and $106.5 million, respectively.
LEVI STRAUSS & CO. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS — (continued)
FOR THE YEARS ENDED NOVEMBER 27, 2016, NOVEMBER 29, 2015, AND NOVEMBER 30, 2014
The changes in the carrying amount of goodwill by business segment for the years ended November 27, 2016, and November 29, 2015, were as follows:
| Americas | Europe | Asia | Total | |||||||||||||
| (Dollars in thousands) | ||||||||||||||||
Balance, November 30, 2014 | $ | 207,419 | $ | 29,937 | $ | 1,565 | $ | 238,921 | ||||||||
Additions | 424 | 137 | — | 561 | ||||||||||||
Foreign currency fluctuation | (27 | ) | (4,050 | ) | (364 | ) | (4,441 | ) | ||||||||
|
|
|
|
|
|
|
| |||||||||
Balance, November 29, 2015 | 207,816 | 26,024 | 1,201 | 235,041 | ||||||||||||
Additions | — | — | — | — | ||||||||||||
Foreign currency fluctuation | (93 | ) | (683 | ) | 15 | (761 | ) | |||||||||
|
|
|
|
|
|
|
| |||||||||
Balance, November 27, 2016 | $ | 207,723 | $ | 25,341 | $ | 1,216 | $ | 234,280 | ||||||||
|
|
|
|
|
|
|
| |||||||||
Other intangible assets, net, were as follows:
| November 27, 2016 | November 29, 2015 | |||||||||||||||||||||||
| Gross Carrying Value | Accumulated Amortization | Total | Gross Carrying Value | Accumulated Amortization | Total | |||||||||||||||||||
| (Dollars in thousands) | ||||||||||||||||||||||||
Non-amortized intangible assets: | ||||||||||||||||||||||||
Trademarks | $ | 42,743 | $ | — | $ | 42,743 | $ | 42,743 | $ | — | $ | 42,743 | ||||||||||||
Amortized intangible assets: | ||||||||||||||||||||||||
Acquired contractual rights | 2,843 | (2,640 | ) | 203 | 6,954 | (6,347 | ) | 607 | ||||||||||||||||
Customer lists | — | — | — | 15,915 | (15,915 | ) | — | |||||||||||||||||
|
|
|
|
|
|
|
|
|
|
|
| |||||||||||||
Total | $ | 45,586 | $ | (2,640 | ) | $ | 42,946 | $ | 65,612 | $ | (22,262 | ) | $ | 43,350 | ||||||||||
|
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|
|
|
|
|
|
|
|
|
| |||||||||||||
For the years ended November 27, 2016, November 29, 2015, and November 30, 2014, amortization of these intangible assets was $0.2 million, $2.1 million and $2.8 million, respectively. The amortization of these intangible assets in the succeeding fiscal years is immaterial.
As of November 27, 2016, there was no impairment to the carrying value of the Company’s goodwillour filings, agreements ornon-amortized intangible assets.
LEVI STRAUSS & CO. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS — (continued)
FOR THE YEARS ENDED NOVEMBER 27, 2016, NOVEMBER 29, 2015, AND NOVEMBER 30, 2014
The following table presents the Company’s financial instruments that are carried at fair value:
| November 27, 2016 | November 29, 2015 | |||||||||||||||||||||||
| Fair Value Estimated Using | Fair Value Estimated Using | |||||||||||||||||||||||
| Fair Value | Level 1 Inputs(1) | Level 2 Inputs(2) | Fair Value | Level 1 Inputs(1) | Level 2 Inputs(2) | |||||||||||||||||||
| (Dollars in thousands) | ||||||||||||||||||||||||
Financial assets carried at fair value | ||||||||||||||||||||||||
Rabbi trust assets | $ | 27,131 | $ | 27,131 | $ | — | $ | 26,013 | $ | 26,013 | $ | — | ||||||||||||
Forward foreign exchange contracts, net(3) | 23,267 | — | 23,267 | 27,131 | — | 27,131 | ||||||||||||||||||
|
|
|
|
|
|
|
|
|
|
|
| |||||||||||||
Total | $ | 50,398 | $ | 27,131 | $ | 23,267 | $ | 53,144 | $ | 26,013 | $ | 27,131 | ||||||||||||
|
|
|
|
|
|
|
|
|
|
|
| |||||||||||||
Financial liabilities carried at fair value | ||||||||||||||||||||||||
Forward foreign exchange contracts, net(3) | $ | 5,533 | $ | — | $ | 5,533 | $ | 7,809 | $ | — | $ | 7,809 | ||||||||||||
|
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| |||||||||||||
The following table presents the carrying value, including related accrued interest, and estimated fair value of the Company’s financial instruments that are carried at adjusted historical cost:
| November 27, 2016 | November 29, 2015 | |||||||||||||||
| Carrying Value | Estimated Fair Value | Carrying Value | Estimated Fair Value | |||||||||||||
| (Dollars in thousands) | ||||||||||||||||
Financial liabilities carried at adjusted historical cost | ||||||||||||||||
Senior revolving credit facility | $ | — | $ | — | $ | 99,020 | $ | 99,020 | ||||||||
4.25%Yen-denominated Eurobonds due 2016(1) | — | — | 32,736 | 33,593 | ||||||||||||
6.875% senior notes due 2022(1) | 527,102 | 550,700 | 527,715 | 570,355 | ||||||||||||
5.00% senior notes due 2025(1) | 483,735 | 480,121 | 482,145 | 480,945 | ||||||||||||
Short-term borrowings | 39,009 | 39,009 | 15,996 | 15,996 | ||||||||||||
|
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|
|
|
|
|
| |||||||||
Total | $ | 1,049,846 | $ | 1,069,830 | $ | 1,157,612 | $ | 1,199,909 | ||||||||
|
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|
|
| |||||||||
LEVI STRAUSS & CO. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS — (continued)
FOR THE YEARS ENDED NOVEMBER 27, 2016, NOVEMBER 29, 2015, AND NOVEMBER 30, 2014
The Company’s foreign currency management objective is to minimize the effect of fluctuations in foreign exchange rates on nonfunctional currency cash flows and selected assets or liabilities without exposing the Company to additional risk associated with transactions that could be regarded as speculative. Forward exchange contracts on various currencies are entered into to manage foreign currency exposures associated with certain product sourcing activities, some intercompany sales, foreign subsidiaries’ royalty payments, interest payments, earnings repatriations, net investment in foreign operations and funding activities. The Company manages certain forecasted foreign currency exposures and uses a centralized currency management operation to take advantage of potential opportunities to naturally offset foreign currency exposures against each other. The Company had designated a portion of its outstandingYen-denominated Eurobonds as a net investment hedge to manage foreign currency exposures in its foreign operations. The Company does not apply hedge accounting to its derivative transactions. As of November 27, 2016, the Company had forward foreign exchange contracts to buy $674.9 million and to sell $364.9 million against various foreign currencies. These contracts are at various exchange rates and expire at various dates through February 2018.
The table below provides data about the carrying values of derivative instruments andnon-derivative instruments:
| November 27, 2016 | November 29, 2015 | |||||||||||||||||||||||
| Assets | (Liabilities) | Derivative Net Carrying Value | Assets | (Liabilities) | Derivative Net Carrying Value | |||||||||||||||||||
| Carrying Value | Carrying Value | Carrying Value | Carrying Value | |||||||||||||||||||||
| (Dollars in thousands) | ||||||||||||||||||||||||
Derivatives not designated as hedging instruments | ||||||||||||||||||||||||
Forward foreign exchange contracts(1) | $ | 30,160 | $ | (6,893 | ) | $ | 23,267 | $ | 31,808 | $ | (4,677 | ) | $ | 27,131 | ||||||||||
Forward foreign exchange contracts(2) | 1,481 | (7,014 | ) | (5,533 | ) | 253 | (8,062 | ) | (7,809 | ) | ||||||||||||||
|
|
|
|
|
|
|
| |||||||||||||||||
Total | $ | 31,641 | $ | (13,907 | ) | $ | 32,061 | $ | (12,739 | ) | ||||||||||||||
|
|
|
|
|
|
|
| |||||||||||||||||
Non-derivatives designated as hedging instruments | ||||||||||||||||||||||||
Yen-denominated Eurobonds | $ | — | $ | — | $ | — | $ | (7,832 | ) | |||||||||||||||
|
|
|
|
|
|
|
| |||||||||||||||||
LEVI STRAUSS & CO. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS — (continued)
FOR THE YEARS ENDED NOVEMBER 27, 2016, NOVEMBER 29, 2015, AND NOVEMBER 30, 2014
The Company’sover-the-counter forward foreign exchange contracts are subject to International Swaps and Derivatives Association, Inc. master agreements. These agreements permit thenet-settlement of these contracts on aper-institution basis and are offset accordingly. The table below presents the gross and net amounts of these contracts recognized on the Company’s consolidated balance sheets by type of financial instrument:
| November 27, 2016 | November 29, 2015 | |||||||||||||||||||||||
| Gross Amounts of Recognized Assets / (Liabilities) | Gross Amounts Offset in the Statement of Financial Position | Net Amounts of Assets / (Liabilities) Presented in the Statement of Financial Position | Gross Amounts of Recognized Assets / (Liabilities) | Gross Amounts Offset in the Statement of Financial Position | Net Amounts of Assets / (Liabilities) Presented in the Statement of Financial Position | |||||||||||||||||||
| (Dollars in thousands) | ||||||||||||||||||||||||
Over-the-counter forward foreign exchange contracts | ||||||||||||||||||||||||
Financial assets | $ | 29,240 | $ | (8,374 | ) | $ | 20,866 | $ | 30,837 | $ | (4,930 | ) | $ | 25,907 | ||||||||||
Financial liabilities | (10,365 | ) | 8,374 | (1,991 | ) | (7,599 | ) | 4,930 | (2,669 | ) | ||||||||||||||
|
|
|
| |||||||||||||||||||||
Total | $ | 18,875 | $ | 23,238 | ||||||||||||||||||||
|
|
|
| |||||||||||||||||||||
Embedded derivative contracts | ||||||||||||||||||||||||
Financial assets | $ | 2,401 | $ | — | $ | 2,401 | $ | 1,224 | $ | — | $ | 1,224 | ||||||||||||
Financial liabilities | (3,542 | ) | — | (3,542 | ) | (5,140 | ) | — | (5,140 | ) | ||||||||||||||
|
|
|
| |||||||||||||||||||||
Total | $ | (1,141 | ) | $ | (3,916 | ) | ||||||||||||||||||
|
|
|
| |||||||||||||||||||||
The table below provides data about the amount of gains and losses related to derivative instruments andnon-derivative instruments designated as net investment hedges included in “Accumulated other comprehensive loss” (“AOCI”) on the Company’s consolidated balance sheets, and in “Other income (expense), net” in the Company’s consolidated statements of income:
| Gain or (Loss) Recognized in AOCI (Effective Portion) | Gain or (Loss) Recognized in Other Income (Expense), net (Ineffective Portion and Amount Excluded from Effectiveness Testing) | |||||||||||||||||||
| As of November 27, 2016 | As of November 29, 2015 | Year Ended | ||||||||||||||||||
| November 27, 2016 | November 29, 2015 | November 30, 2014 | ||||||||||||||||||
| (Dollars in thousands) | ||||||||||||||||||||
Forward foreign exchange contracts | $ | 4,637 | $ | 4,637 | ||||||||||||||||
Yen-denominated Eurobonds | (19,811 | ) | (18,982 | ) | $ | 2,627 | $ | 965 | $ | 3,767 | ||||||||||
Euro senior notes | (15,751 | ) | (15,751 | ) | — | — | — | |||||||||||||
Cumulative income taxes | 12,168 | 11,849 | ||||||||||||||||||
|
|
|
| |||||||||||||||||
Total | $ | (18,757 | ) | $ | (18,247 | ) | ||||||||||||||
|
|
|
| |||||||||||||||||
LEVI STRAUSS & CO. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS — (continued)
FOR THE YEARS ENDED NOVEMBER 27, 2016, NOVEMBER 29, 2015, AND NOVEMBER 30, 2014
The table below provides data about the amount of gains and losses related to derivatives not designated as hedging instruments included in “Other income (expense), net” in the Company’s consolidated statements of income:
| Year Ended | ||||||||||||
| November 27, 2016 | November 29, 2015 | November 30, 2014 | ||||||||||
| (Dollars in thousands) | ||||||||||||
Forward foreign exchange contracts: | ||||||||||||
Realized | $ | 17,175 | $ | 14,720 | $ | (6,184 | ) | |||||
Unrealized | (1,315 | ) | 19,386 | (4,920 | ) | |||||||
|
|
|
|
|
| |||||||
Total | $ | 15,860 | $ | 34,106 | $ | (11,104 | ) | |||||
|
|
|
|
|
| |||||||
| November 27, 2016 | November 29, 2015 | |||||||
| (Dollars in thousands) | ||||||||
Long-term debt | ||||||||
Unsecured: | ||||||||
6.875% senior notes due 2022 | $ | 524,396 | 524,807 | |||||
5.00% senior notes due 2025 | 481,860 | 480,131 | ||||||
|
|
|
| |||||
Total unsecured | 1,006,256 | 1,004,938 | ||||||
|
|
|
| |||||
Total long-term debt | $ | 1,006,256 | $ | 1,004,938 | ||||
|
|
|
| |||||
Short-term debt and current maturities of long-term debt | ||||||||
Secured: | ||||||||
Senior revolving credit facility | $ | — | $ | 99,000 | ||||
Unsecured: | ||||||||
Current maturities of 4.25%Yen-denominated Eurobonds due 2016 | — | 32,625 | ||||||
Short-term borrowings | 38,922 | 15,978 | ||||||
|
|
|
| |||||
Total short-term debt and current maturities of long-term debt | $ | 38,922 | $ | 147,603 | ||||
|
|
|
| |||||
Total debt | $ | 1,045,178 | $ | 1,152,541 | ||||
|
|
|
| |||||
Senior Revolving Credit Facility
The Company is a party to a credit agreement for a senior secured revolving credit facility. The credit facility provides for an asset-based facility, in which the borrowing availability is primarily based on the value of the U.S. Levi’s® trademarks and the levels of accounts receivable and inventory in the United States and Canada, as further described below.
Availability, interest and maturity.The maximum availability under the credit facility is $850.0 million, of which $800.0 million is available to the Company for revolving loans in U.S. Dollars and $50.0 million is
LEVI STRAUSS & CO. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS — (continued)
FOR THE YEARS ENDED NOVEMBER 27, 2016, NOVEMBER 29, 2015, AND NOVEMBER 30, 2014
available to the Company for revolving loans either in U.S. Dollars or Canadian Dollars. Subject to the availability under the borrowing base, the Company may make and repay borrowings from time to time until the maturity of the credit facility. The Company may make voluntary prepayments of borrowings at any time anddocuments, you must make mandatory prepayments if certain events occur. The current maturityyour request to us no later than five business days before the expiration date of the credit facility is March 21, 2019. Of the maximum availability of $850.0 million, $350.0 million is secured by the U.S. Levi’s® trademarks. The interest rate for borrowing under the credit facility is LIBOR plus 125 to 200 basis points, depending on borrowing base availability, and the range of the rate for undrawn availability is 25 to 30 basis points (depending on the Company’s credit ratings). Upon the maturity date, all of the obligations outstanding under the credit agreement become due.exchange offer.
The Company’s unused availability under its amended and restated senior secured revolving credit facility was $784.3 million at November 27, 2016, as the Company’s total availability of $838.0 million, based on the collateral levels discussed above, was reduced by $53.7 million of letters of credit and other credit usage allocated under the facility. The $53.7 million was comprised of $2.4 million of other credit usage and $51.3 million ofstand-by letters of credit with various international banks which serve as guarantees to cover U.S. workers’ compensation claims and the working capital requirements for certain subsidiaries, primarily India.
Guarantees and security.The Company’s obligations under the credit agreement are guaranteed by its domestic subsidiaries. The obligations under the agreement are secured by specified domestic assets, including certain U.S. trademarks associated with the Levi’s® brand and accounts receivable, goods and inventory in the United States. Additionally, the obligations of Levi Strauss & Co. (Canada) Inc. under the credit agreement are secured by Canadian accounts receivable, goods, inventory and other Canadian assets. The lien on the U.S. Levi’s® trademarks and related intellectual property may be released at the Company’s discretion so long as it meets certain conditions; such release would reduce the borrowing base.
Covenants.The credit agreement contains customary covenants restricting the Company’s activities as well as those of the Company’s subsidiaries, including limitations on the ability to sell assets; engage in mergers; enter into transactions involving related parties or derivatives; incur or prepay indebtedness or grant liens or negative pledges on the Company’s assets; make loans or other investments; pay dividends or repurchase stock or other securities; guaranty third-party obligations; and make changes in the Company’s corporate structure. There are exceptions to these covenants, and some are only applicable when unused availability falls below specified thresholds. In addition, the credit agreement includes, as a financial covenant, a springing fixed charge coverage ratio of 1.0:1.0, which arises when availability falls below a specified threshold.
Events of default.The credit agreement contains customary events of default, including payment failures; failure to comply with covenants; failure to satisfy other obligations under the credit agreements or related documents; defaults in respect of other indebtedness; bankruptcy, insolvency and inability to pay debts when due; material judgments; pension plan terminations or specified underfunding; substantial stock ownership changes; and specified changes in the composition of the Board. The cross-default provisions in the agreement apply if a default occurs on other indebtedness in excess of $50.0 million and the applicable grace period in respect of the indebtedness has expired, such that the lenders of or trustee for the defaulted indebtedness have the right to accelerate. If an event of default occurs under the credit agreement, the lenders may terminate their commitments, declare immediately payable all borrowings under the agreement and foreclose on the collateral.
LEVI STRAUSS & CO. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS — (continued)
FOR THE YEARS ENDED NOVEMBER 27, 2016, NOVEMBER 29, 2015, AND NOVEMBER 30, 2014
Yen-denominated Eurobonds due 2016
In 1996, the Company issued ¥20 billion principal amount Eurobonds (equivalent to approximately $180.0 million at the time of issuance) due in November 2016, with interest payable at 4.25% per annum. The Company repurchased a portion of theYen-denominated Eurobonds due 2016 in May 2010, and again in May 2012. The remaining balance was repaid at maturity in November 2016.
Senior Notes due 2020
The Company issued $525.0 million in aggregate principal amount of 7.625% senior notes due 2020 (the “Senior Notes due 2020”) to qualified institutional buyers in May 2010 which were later exchanged for notes in an exchange offer registered under the Securities Act of 1933, as amended (the “Securities Act”).
The notes were unsecured obligations that ranked equally with all of the Company’s other existing and future unsecured and unsubordinated debt. On April 20, 2015, the company commenced a cash tender offer for the outstanding amount of its Senior Notes due 2020. The tender offer expired April 24, 2015, and the Company redeemed all the remaining notes that were not tendered in the offer on May 28, 2015.
Senior Notes due 2022
Principal, interest and maturity.On May 8, 2012, the Company issued $385.0 million in aggregate principal amount of 6.875% senior notes due 2022 (the “Original Senior Notes due 2022”) to qualified institutional buyers and to purchasers outside the United States, which were later exchanged for new notes in the same principal amount with substantially identical terms, except that the new notes were registered under the Securities Act.
On March 14, 2013, the Company issued an additional $140.0 million in 6.875% senior notes due 2022 (the “Additional Senior Notes due 2022”) to qualified institutional buyers in compliance with the Securities Act, which were later exchanged for new notes in the same principal amount with substantially identical terms, except that the new notes were registered under the Securities Act (the Additional Senior Notes due 2022 along with the Original Senior Notes due 2022, hereinafter referred to as the “Senior Notes due 2022”). The Additional Senior Notes due 2022 were offered at a premium of $11.2 million, which will be amortized as a reduction to interest expense over the term of the notes. Costs of approximately $2.6 million associated with the issuance of the Additional Senior Notes due 2022, representing underwriting fees and other expenses, are also amortized to interest expense over the term of the notes.
The notes are unsecured obligations that rank equally with all of the Company’s other existing and future unsecured and unsubordinated debt. The Senior Notes due 2022 mature on May 1, 2022. Interest on the notes is payable semi-annually in arrears on May 1 and November 1.
The Company may redeem some or all of the Senior Notes due 2022 prior to May 1, 2017, at a price equal to 100% of the principal amount plus accrued and unpaid interest and a “make-whole” premium. On or after May 1, 2017, the Company may redeem all or any portion of the notes, at once or over time, at redemption prices specified in the indenture governing the notes, plus accrued and unpaid interest, if any, to the date of redemption. Costs of approximately $7.4 million associated with the issuance of the notes, representing underwriting fees and other expenses, are amortized to interest expense over the term of the notes.
Covenants and other terms.The Additional Senior Notes due 2022 and the Original Senior Notes due 2022 are treated as a single class for all purposes under the indenture governing the Company’s Senior Notes due
LEVI STRAUSS & CO. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS — (continued)
FOR THE YEARS ENDED NOVEMBER 27, 2016, NOVEMBER 29, 2015, AND NOVEMBER 30, 2014
2022. The indenture governing the notes contains covenants that limit, among other things, the Company’s and certain of the Company’s subsidiaries’ ability to incur additional debt; make certain restricted payments; consummate specified asset sales; enter into transactions with affiliates; incur liens; impose restrictions on the ability of its subsidiaries to pay dividends or make payments to the Company and its restricted subsidiaries; enter into sale and leaseback transactions; merge or consolidate with another person; and dispose of all or substantially all of the Company’s assets. The indenture provides for customary events of default (subject in certain cases to customary grace and cure periods), which include nonpayment, breach of covenants in the indenture, payment defaults or acceleration of other indebtedness, a failure to pay certain judgments and certain events of bankruptcy and insolvency. Generally, if an event of default occurs, the trustee under the indenture or holders of at least 25% in principal amount of the then outstanding notes may declare all notes to be due and payable immediately. Upon the occurrence of a change in control (as defined in the indenture), each holder of notes may require the Company to repurchase all or a portion of the notes in cash at a price equal to 101% of the principal amount of notes to be repurchased, plus accrued and unpaid interest, if any, thereon to the date of purchase.
Issuance of Senior Notes due 2025
Principal, interest, and maturity.On April 27, 2015, the Company issued $500.0 million in aggregate principal amount of 5.00% senior notes due 2025 (the “Senior Notes due 2025”) to qualified institutional buyers and to purchasers outside the United States, which were later exchanged for new notes in the same principal amount with substantially identical terms, except that the new notes were registered under the Securities Act. The notes are unsecured obligations that rank equally with all of the Company’s other existing and future unsecured and unsubordinated debt. The Senior Notes due 2025 will mature on May 1, 2025. Interest on the notes is payable semi-annually in arrears on May 1 and November 1, commencing on November 1, 2015. The Company may redeem some or all of the Senior Notes due 2025 prior to May 1, 2020, at a price equal to 100% of the principal amount, plus accrued and unpaid interest, if any, to the date of redemption, and a “make-whole” premium; on or after this date, the Company may redeem all or any portion of the notes, at once or over time, at redemption prices specified in the indenture governing the notes, plus accrued and unpaid interest, if any, to the date of redemption. In addition, at any time prior to May 1, 2018, the Company may redeem up to a maximum of 40% of the original aggregate principal amount of the Senior Notes due 2025 with the proceeds of certain equity offerings at a redemption price of 105% of the principal amount of the Senior Notes due 2025, plus accrued and unpaid interest, if any, to the date of redemption. The Company recorded a discount of $13.9 million in conjunction with the issuance of the Senior Notes due 2025, related to tender and redemption premiums paid to certain holders of the Senior Notes due 2020 who participated in the issuance of the Senior Notes due 2025, which will be amortized to interest expense over the term of the notes. Costs of approximately $6.9 million associated with the issuance of the notes, representing underwriting fees and other expenses, were capitalized and will be amortized to interest expense over the term of the notes.
Covenants.The indenture contains covenants that limit, among other things, the Company’s and certain of the Company’s subsidiaries’ ability to incur additional debt, make certain restricted payments, consummate specified asset sales, enter into transactions with affiliates, incur liens, impose restrictions on the ability of its subsidiaries to pay dividends or make payments to the Company and its restricted subsidiaries, merge or consolidate with another person, and dispose of all or substantially all of the Company’s assets. The indenture provides for customary events of default (subject in certain cases to customary grace and cure periods), which include nonpayment, breach of covenants in the indenture, payment defaults or acceleration of other indebtedness, a failure to pay certain judgments and certain events of bankruptcy and insolvency. Generally, if an event of default occurs, the trustee under the indenture or holders of at least 25% in principal amount of the then outstanding Senior Notes due 2025 may declare all the Senior Notes due 2025 to be due and payable
LEVI STRAUSS & CO. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS — (continued)
FOR THE YEARS ENDED NOVEMBER 27, 2016, NOVEMBER 29, 2015, AND NOVEMBER 30, 2014
immediately. Upon the occurrence of a change in control (as defined in the indenture), each holder of notes may require the Company to repurchase all or a portion of the notes in cash at a price equal to 101% of the principal amount of notes to be repurchased, plus accrued and unpaid interest, if any, thereon to the date of purchase.
Short-term Borrowings
Short-term borrowings consist of term loans and revolving credit facilities at various foreign subsidiaries which the Company expects to either pay over the next twelve months or refinance at the end of their applicable terms. Certain of these borrowings are guaranteed bystand-by letters of credit allocated under the Company’s amended and restated senior secured revolving credit facility.
Loss on Early Extinguishment of Debt
For the year ended November 29, 2015, the Company recorded a loss of $14.0 million on early extinguishment of debt, comprised of tender and redemption premiums of $7.5 million, and thewrite-off of $3.5 million of unamortized debt issuance costs, and $3.0 million of other costs.
For the year ended November 30, 2014, the Company recorded a loss of $20.3 million on early extinguishment of debt as a result of our debt refinancing activities during 2014. The loss was comprised of redemption premiums of $15.2 million and thewrite-off of $5.1 million of unamortized debt issuance costs.
Principal Payments on Short-term and Long-term Debt
The table below sets forth, as of November 27, 2016, the Company’s required aggregate short-term and long-term debt principal payments (inclusive of premium and discount) for the next five fiscal years and thereafter.
| (Dollars in thousands) | ||||
2017 | $ | 38,922 | ||
2018 | — | |||
2019 | — | |||
2020 | — | |||
2021 | — | |||
Thereafter | 1,018,591 | |||
|
| |||
Total future debt principal payments | $ | 1,057,513 | ||
|
| |||
Interest Rates on Borrowings
The Company’s weighted-average interest rate on average borrowings outstanding during 2016, 2015 and 2014 was 6.37%, 6.72% and 7.58%, respectively. The weighted-average interest rate on average borrowings outstanding includes the amortization of capitalized bank fees and underwriting fees, and excludes interest on obligations to participants under deferred compensation plans.
Dividends and Restrictions
The terms of the indentures relating to the Company’s unsecured notes and its amended and restated senior secured revolving credit facility agreement contain covenants that restrict the Company’s ability to pay dividends to its stockholders. For information about the Company’s dividend payments, see Note 15. As of November 27, 2016, and at the time the dividends were paid, the Company met the requirements of its debt instruments.
LEVI STRAUSS & CO. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS — (continued)
FOR THE YEARS ENDED NOVEMBER 27, 2016, NOVEMBER 29, 2015, AND NOVEMBER 30, 2014
Subsidiaries of the Company that are not wholly-owned subsidiaries and that are “restricted subsidiaries” under the Company’s indentures are permitted under the indentures to pay dividends to all stockholders either on a pro rata basis or on a basis that results in the receipt by the Company or a restricted subsidiary that is the parent of the restricted subsidiary of dividends or distributions of greater value than it would receive on a pro rata basis.
The terms of the indentures relating to the Company’s unsecured notes and its amended and restated senior secured revolving credit facility agreement contain covenants that restrict (in each case subject to certain exceptions) the Company or any restricted subsidiary from entering into any arrangements that would restrict the payment of dividends or of any obligation owed by the restricted subsidiary to the Company or any other restricted subsidiary, the making of any loans or advances to the Company or any other restricted subsidiary, or transferring any of its property to the Company or any other restricted subsidiary.
Indemnification agreements.In the ordinary course of business, the Company enters into agreements containing indemnification provisions under which the Company agrees to indemnify the other party for specified claims and losses. For example, the Company’s 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 the Company to pay certain amounts associated with claims brought against the other party as the result of trademark infringement, negligence or willful misconduct of Company employees, breach of contract by the Company including inaccuracy of representations and warranties, specified lawsuits in which the Company and the other party areco-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. The Company has insurance coverage that minimizes the potential exposure to certain of such claims. The Company also believes that the likelihood of material payment obligations under these agreements to third parties is low.
Covenants.The Company’s long-term debt agreements contain customary covenants restricting its activities as well as those of its subsidiaries, including limitations on its, and its subsidiaries’, ability to sell assets; engage in mergers; enter into capital leases or certain leases not in the ordinary course of business; enter into transactions involving related parties or derivatives; incur or prepay indebtedness or grant liens or negative pledges on its assets; make loans or other investments; pay dividends or repurchase stock or other securities; guaranty third-party obligations; make capital expenditures; and make changes in its corporate structure. For additional information, see Note 6. As of November 27, 2016, the Company was in compliance with all of these covenants.
Pension plans.The Company has severalnon-contributory defined benefit retirement plans covering eligible employees. Plan assets are invested in a diversified portfolio of securities including stocks, bonds, cash equivalents and other alternative investments including real estate investment trust funds. Benefits payable under the plans are based on years of service, final average compensation, or both. The Company retains the right to amend, curtail or discontinue any aspect of the plans, subject to local regulations.
Postretirement plans.The Company maintains plans that provide postretirement benefits to eligible employees, principally health care, to substantially all U.S. retirees and their qualified dependents. These plans were established with the intention that they would continue indefinitely. However, the Company retains the right
LEVI STRAUSS & CO. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS — (continued)
FOR THE YEARS ENDED NOVEMBER 27, 2016, NOVEMBER 29, 2015, AND NOVEMBER 30, 2014
to amend, curtail or discontinue any aspect of the plans at any time. The plans are contributory and contain certain cost-sharing features, such as deductibles and coinsurance. The Company’s policy is to fund postretirement benefits as claims and premiums are paid.
The following tables summarize activity of the Company’s defined benefit pension plans and postretirement benefit plans:
| Pension Benefits | Postretirement Benefits | |||||||||||||||
| 2016 | 2015 | 2016 | 2015 | |||||||||||||
| (Dollars in thousands) | ||||||||||||||||
Change in benefit obligation: | ||||||||||||||||
Benefit obligation at beginning of year | $ | 1,194,365 | $ | 1,289,337 | $ | 117,740 | $ | 134,084 | ||||||||
Service cost | 8,234 | 8,352 | 200 | 251 | ||||||||||||
Interest cost(1) | 37,819 | 47,179 | 3,223 | 4,588 | ||||||||||||
Plan participants’ contribution | 484 | 534 | 4,172 | 4,512 | ||||||||||||
Actuarial loss (gain)(2) | 33,948 | (56,352 | ) | 5,556 | (5,918 | ) | ||||||||||
Net curtailment loss | 119 | 300 | — | — | ||||||||||||
Impact of foreign currency changes | (15,435 | ) | (21,306 | ) | — | — | ||||||||||
Plan settlements(3) | (417 | ) | (4,145 | ) | — | — | ||||||||||
Special termination benefits | — | — | — | — | ||||||||||||
Net benefits paid | (67,183 | ) | (69,534 | ) | (18,440 | ) | (19,777 | ) | ||||||||
|
|
|
|
|
|
|
| |||||||||
Benefit obligation at end of year | $ | 1,191,934 | $ | 1,194,365 | $ | 112,451 | $ | 117,740 | ||||||||
|
|
|
|
|
|
|
| |||||||||
Change in plan assets: | ||||||||||||||||
Fair value of plan assets at beginning of year | 838,551 | 878,823 | — | — | ||||||||||||
Actual return on plan assets(4) | 49,986 | 10,185 | — | — | ||||||||||||
Employer contribution | 31,147 | 36,151 | 14,268 | 15,265 | ||||||||||||
Plan participants’ contributions | 484 | 534 | 4,172 | 4,512 | ||||||||||||
Plan settlements(3) | (417 | ) | (4,145 | ) | — | ��� | ||||||||||
Impact of foreign currency changes | (15,246 | ) | (13,463 | ) | — | — | ||||||||||
Net benefits paid | (67,183 | ) | (69,534 | ) | (18,440 | ) | (19,777 | ) | ||||||||
|
|
|
|
|
|
|
| |||||||||
Fair value of plan assets at end of year | 837,322 | 838,551 | — | — | ||||||||||||
|
|
|
|
|
|
|
| |||||||||
Unfunded status at end of year | $ | (354,612 | ) | $ | (355,814 | ) | $ | (112,451 | ) | $ | (117,740 | ) | ||||
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| |||||||||
LEVI STRAUSS & CO. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS — (continued)
FOR THE YEARS ENDED NOVEMBER 27, 2016, NOVEMBER 29, 2015, AND NOVEMBER 30, 2014
Amounts recognized in the Company’s consolidated balance sheets as of November 27, 2016, and November 29, 2015, consist of the following:
| Pension Benefits | Postretirement Benefits | |||||||||||||||
| 2016 | 2015 | 2016 | 2015 | |||||||||||||
| (Dollars in thousands) | ||||||||||||||||
Unfunded status recognized on the balance sheet: | ||||||||||||||||
Prepaid benefit cost | $ | 5,555 | $ | 8,842 | $ | — | $ | — | ||||||||
Accrued benefit liability – current portion | (9,142 | ) | (9,044 | ) | (11,485 | ) | (12,500 | ) | ||||||||
Accrued benefit liability – long-term portion | (351,025 | ) | (355,612 | ) | (100,966 | ) | (105,240 | ) | ||||||||
|
|
|
|
|
|
|
| |||||||||
| $ | (354,612 | ) | $ | (355,814 | ) | $ | (112,451 | ) | $ | (117,740 | ) | |||||
|
|
|
|
|
|
|
| |||||||||
Accumulated other comprehensive loss: | ||||||||||||||||
Net actuarial loss | $ | (385,942 | ) | $ | (365,657 | ) | $ | (28,665 | ) | $ | (26,076 | ) | ||||
Net prior service benefit | 420 | 471 | — | — | ||||||||||||
|
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|
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| |||||||||
| $ | (385,522 | ) | $ | (365,186 | ) | $ | (28,665 | ) | $ | (26,076 | ) | |||||
|
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|
|
|
|
| |||||||||
The accumulated benefit obligation for all defined benefit plans was $1.2 billion and $1.2 billion at November 27, 2016, and November 29, 2015, respectively. Information for the Company’s defined benefit plans with an accumulated or projected benefit obligation in excess of plan assets is as follows:
| Pension Benefits | ||||||||
| 2016 | 2015 | |||||||
| (Dollars in thousands) | ||||||||
Accumulated benefit obligations in excess of plan assets: | ||||||||
Aggregate accumulated benefit obligation | $ | 1,079,316 | $ | 1,053,493 | ||||
Aggregate fair value of plan assets | 725,830 | 694,440 | ||||||
Projected benefit obligations in excess of plan assets: | ||||||||
Aggregate projected benefit obligation | $ | 1,086,842 | $ | 1,087,588 | ||||
Aggregate fair value of plan assets | 726,675 | 722,931 | ||||||
LEVI STRAUSS & CO. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS — (continued)
FOR THE YEARS ENDED NOVEMBER 27, 2016, NOVEMBER 29, 2015, AND NOVEMBER 30, 2014
The components of the Company’s net periodic benefit cost were as follows:
| Pension Benefits | Postretirement Benefits | |||||||||||||||||||||||
| 2016 | 2015 | 2014 | 2016 | 2015 | 2014 | |||||||||||||||||||
| (Dollars in thousands) | ||||||||||||||||||||||||
Net periodic benefit cost: | ||||||||||||||||||||||||
Service cost | $ | 8,234 | $ | 8,352 | $ | 8,397 | $ | 200 | $ | 251 | $ | 255 | ||||||||||||
Interest cost(1) | 37,819 | 47,179 | 54,958 | 3,223 | 4,588 | 5,199 | ||||||||||||||||||
Expected return on plan assets | (48,422 | ) | (50,825 | ) | (55,521 | ) | — | — | — | |||||||||||||||
Amortization of prior service benefit | (61 | ) | (61 | ) | (53 | ) | — | — | (5 | ) | ||||||||||||||
Amortization of actuarial loss | 12,036 | 12,578 | 10,932 | 2,967 | 4,511 | 4,201 | ||||||||||||||||||
Curtailment (gain) loss | (140 | ) | 656 | 2,614 | — | — | 733 | |||||||||||||||||
Special termination benefit | — | — | 35 | — | — | — | ||||||||||||||||||
Net settlement loss (gain) | 49 | (45 | ) | 30,558 | — | — | — | |||||||||||||||||
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| |||||||||||||
Net periodic benefit cost | 9,515 | 17,834 | 51,920 | 6,390 | 9,350 | 10,383 | ||||||||||||||||||
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|
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| |||||||||||||
Changes in accumulated other comprehensive loss: | ||||||||||||||||||||||||
Actuarial loss (gain) | 32,187 | (15,228 | ) | 92,544 | 5,556 | (5,918 | ) | 6,453 | ||||||||||||||||
Amortization of prior service benefit | 61 | 61 | 53 | — | — | 5 | ||||||||||||||||||
Amortization of actuarial loss | (12,036 | ) | (12,578 | ) | (10,932 | ) | (2,967 | ) | (4,511 | ) | (4,201 | ) | ||||||||||||
Curtailment gain (loss) | 173 | (656 | ) | 113 | — | — | — | |||||||||||||||||
Net settlement (loss) gain | (49 | ) | 45 | (30,712 | ) | — | — | — | ||||||||||||||||
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| |||||||||||||
Total recognized in accumulated other comprehensive loss | 20,336 | (28,356 | ) | 51,066 | 2,589 | (10,429 | ) | 2,257 | ||||||||||||||||
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| |||||||||||||
Total recognized in net periodic benefit cost and accumulated other comprehensive loss | $ | 29,851 | $ | (10,522 | ) | $ | 102,986 | $ | 8,979 | $ | (1,079 | ) | $ | 12,640 | ||||||||||
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The amounts that will be amortized from “Accumulated other comprehensive loss” into net periodic benefit cost in 2017 for the Company’s defined benefit pension and postretirement benefit plans are expected to be $13.4 million and $1.3 million, respectively.
LEVI STRAUSS & CO. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS — (continued)
FOR THE YEARS ENDED NOVEMBER 27, 2016, NOVEMBER 29, 2015, AND NOVEMBER 30, 2014
Assumptions used in accounting for the Company’s benefit plans were as follows:
| Pension Benefits | Postretirement Benefits | |||||||||||||||||||||||
| 2016 | 2015 | 2014 | 2016 | 2015 | 2014 | |||||||||||||||||||
Weighted-average assumptions used to determine net periodic benefit cost: | ||||||||||||||||||||||||
Discount rate | 4.0 | % | 3.8 | % | 4.6 | % | 3.8 | % | 3.6 | % | 4.2 | % | ||||||||||||
Expected long-term rate of return on plan assets | 5.9 | % | 5.9 | % | 6.3 | % | ||||||||||||||||||
Rate of compensation increase | 3.4 | % | 3.4 | % | 3.7 | % | ||||||||||||||||||
Weighted-average assumptions used to determine benefit obligations: | ||||||||||||||||||||||||
Discount rate | 3.8 | % | 4.0 | % | 3.8 | % | 3.7 | % | 3.8 | % | 3.6 | % | ||||||||||||
Rate of compensation increase | 3.4 | % | 3.4 | % | 3.4 | % | ||||||||||||||||||
Assumed health care cost trend rates were as follows: | ||||||||||||||||||||||||
Health care trend rate assumed for next year | 6.4 | % | 6.4 | % | 7.0 | % | ||||||||||||||||||
Rate trend to which the cost trend is assumed to decline | 4.4 | % | 4.4 | % | 4.5 | % | ||||||||||||||||||
Year that rate reaches the ultimate trend rate | 2038 | 2038 | 2028 | |||||||||||||||||||||
For the Company’s U.S. benefit plans, the discount rate used to determine the present value of the future pension and postretirement plan obligations was based on a yield curve constructed from a portfolio of high quality corporate bonds with various maturities. 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. The Company utilized a variety of country-specific third-party bond indices to determine the appropriate discount rates to use for the benefit plans of its foreign subsidiaries.
The Company bases the overall expected long-term rate of return on assets on anticipated long-term returns of individual asset classes and each pension plans’ target asset allocation strategy based on current economic conditions. For the U.S. pension plan, the expected long-term returns for each asset class are determined through a mean-variance model to estimate20-year returns for the plan.
Health care cost trend rate assumptions are not a significant input in the calculation of the amounts reported for the Company’s postretirement benefits plans. A one percentage-point change in assumed health care cost trend rates would have no significant effect on the total service and interest cost components or on the postretirement benefit obligation.
Consolidated pension plan assets relate primarily to the U.S. pension plan. The Company utilizes the services of independent third-party investment managers to oversee the management of U.S. pension plan assets. The Company’s investment strategy is to invest plan assets in a diversified portfolio of domestic and international equity securities, fixed income securities and real estate and other alternative investments with the objective of generating long-term growth in plan assets at a reasonable level of risk. Prohibited investments for the U.S. pension plan include certain privately placed or othernon-marketable debt instruments, letter stock, commodities or commodity contracts and derivatives of mortgage-backed securities, such as interest-only, principal-only or inverse floaters. The current target allocation percentages for the Company’s U.S. pension plan assets are40-44% for equity securities,48-52% for fixed income securities and6-10% for other alternative investments, including real estate.
LEVI STRAUSS & CO. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS — (continued)
FOR THE YEARS ENDED NOVEMBER 27, 2016, NOVEMBER 29, 2015, AND NOVEMBER 30, 2014
The fair value of the Company’s pension plan assets by asset class are as follows:
| Year Ended November 27, 2016 | ||||||||||||||||
Asset Class | Total | Quoted Prices in Active Markets for Identical Assets (Level 1) | Significant Observable Inputs (Level 2) | Significant Unobservable Inputs (Level 3) | ||||||||||||
| (Dollars in thousands) | ||||||||||||||||
Cash and cash equivalents | $ | 2,676 | $ | 2,676 | $ | — | $ | — | ||||||||
Equity securities(1) | ||||||||||||||||
U.S. large cap | 190,811 | — | 190,811 | — | ||||||||||||
U.S. small cap | 37,434 | — | 37,434 | — | ||||||||||||
International | 144,241 | — | 144,241 | — | ||||||||||||
Fixed income securities(2) | 395,995 | — | 395,995 | — | ||||||||||||
Other alternative investments | ||||||||||||||||
Real estate(3) | 53,783 | — | 53,783 | — | ||||||||||||
Private equity(4) | 1,344 | — | — | 1,344 | ||||||||||||
Hedge fund(5) | 7,337 | — | 7,337 | — | ||||||||||||
Other(6) | 3,701 | — | 3,701 | — | ||||||||||||
|
|
|
|
|
|
|
| |||||||||
Total investments at fair value | $ | 837,322 | $ | 2,676 | $ | 833,302 | $ | 1,344 | ||||||||
|
|
|
|
|
|
|
| |||||||||
| Year Ended November 29, 2015 | ||||||||||||||||
Asset Class | Total | Quoted Prices in Active Markets for Identical Assets (Level 1) | Significant Observable Inputs (Level 2) | Significant Unobservable Inputs (Level 3) | ||||||||||||
| (Dollars in thousands) | ||||||||||||||||
Cash and cash equivalents | $ | 1,706 | $ | 1,706 | $ | — | $ | — | ||||||||
Equity securities(1) | ||||||||||||||||
U.S. large cap | 185,526 | — | 185,526 | — | ||||||||||||
U.S. small cap | 31,935 | — | 31,935 | — | ||||||||||||
International | 133,298 | — | 133,298 | — | ||||||||||||
Fixed income securities(2) | 415,228 | — | 415,228 | — | ||||||||||||
Other alternative investments | ||||||||||||||||
Real estate(3) | 58,364 | — | 58,364 | — | ||||||||||||
Private equity(4) | 1,720 | — | — | 1,720 | ||||||||||||
Hedge fund(5) | 7,488 | — | 7,488 | — | ||||||||||||
Other(6) | 3,286 | — | 3,286 | — | ||||||||||||
|
|
|
|
|
|
|
| |||||||||
Total investments at fair value | $ | 838,551 | $ | 1,706 | $ | 835,125 | $ | 1,720 | ||||||||
|
|
|
|
|
|
|
| |||||||||
LEVI STRAUSS & CO. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS — (continued)
FOR THE YEARS ENDED NOVEMBER 27, 2016, NOVEMBER 29, 2015, AND NOVEMBER 30, 2014
The fair value of plan assets are composed of U.S. plan assets of $697.4 million andnon-U.S. plan assets of $139.9 million. The fair values of the substantial majority of the equity, fixed income and real estate investments are based on the net asset value of commingled trust funds that passively track various market indices.
The Company’s estimated future benefit payments to participants, which reflect expected future service, as appropriate are anticipated to be paid as follows:
Fiscal year | Pension Benefits | Postretirement Benefits | Total | |||||||||
| (Dollars in thousands) | ||||||||||||
2017 | $ | 65,722 | $ | 14,237 | $ | 79,959 | ||||||
2018 | 66,084 | 13,338 | 79,422 | |||||||||
2019 | 65,849 | 12,799 | 78,648 | |||||||||
2020 | 66,539 | 12,282 | 78,821 | |||||||||
2021 | 67,646 | 11,528 | 79,174 | |||||||||
2022-2024 | 350,466 | 46,026 | 396,492 | |||||||||
At November 27, 2016, the Company’s contributions to its pension plans in 2017 were estimated to be approximately $53.2 million.
The Company’s Employee Savings and Investment Plan (“ESIP”) is a qualified plan that covers eligible home office employees. The Company matches 125% of ESIP participant’s contributions to all funds maintained under the qualified plan up to the first 6.0% of eligible compensation. Total amounts charged to expense for the Company’s employee investment plans for the years ended November 27, 2016, November 29, 2015, and November 30, 2014, were $12.0 million, $11.5 million and $12.1 million, respectively.
Annual Incentive Plan
The Annual Incentive Plan (“AIP”) provides a cash bonus that is earned based upon the Company’s business unit and consolidated financial results as measured againstpre-established internal targets and upon the performance and job level of the individual. Total amounts charged to expense for this plan for the years ended November 27, 2016, November 29, 2015, and November 30, 2014 were $68.3 million, $65.7 million and $68.3 million, respectively. Total amounts accrued for this plan as of November 27, 2016, and November 29, 2015 were $68.5 million and $69.9 million, respectively.
Long-Term Incentive Plans
2016 Equity Incentive Plan (“EIP”). In July 2006, the Board adopted, and the stockholders approved, the EIP. The EIP was subsequently amended in 2011 and 2014 and then amended and restated by the Board of Directors and approved by the stockholders in April 2016. For more information on this plan, see Note 11.
Cash Long-Term Incentive Plan (“LTIP”). The Company established a long-term cash incentive plan effective at the beginning of 2005. Executive officers are not participants in this plan. Performance will be
LEVI STRAUSS & CO. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS — (continued)
FOR THE YEARS ENDED NOVEMBER 27, 2016, NOVEMBER 29, 2015, AND NOVEMBER 30, 2014
measured at the end of a three-year period based on the Company’s performance against the followingpre-established targets: (i) the target compound annual growth rate in the Company’s net revenues over the three-year period; and (ii) the Company’s average margin of net earnings over the three-year period adjusted for certain items such as interest and taxes. Beginning in 2015, the Company introduced an additional target: total shareholder return over the three-year period relative to an expanded peer group. Awards will be paid out in the quarter following the end of the three-year period based on Company performance against thepre-established targets.
The Company recorded expense for the LTIP of $4.9 million, $4.3 million, and $2.3 million for the years ended November 27, 2016, November 29, 2015, and November 30, 2014, respectively. As of November 27, 2016, and November 29, 2015, the Company had accrued a total of $10.2 million and $8.8 million, respectively, for the LTIP.
The Company recognized stock-based compensation expense of $20.3 million, $25.6 million and $24.8 million, and related income tax benefits of $7.8 million, $9.8 million and $9.6 million, respectively, for the years ended November 27, 2016, November 29, 2015 and November 30, 2014, respectively. As of November 27, 2016, there was $37.6 million of total unrecognized compensation cost related to unvested equity and liability awards, which cost is expected to be recognized over a weighted-average period of 2.14 years. No stock-based compensation cost has been capitalized in the accompanying consolidated financial statements.
2016 Equity Incentive Plan
In April 2016, the Company amended, restated and renamed the 2006 Equity Incentive Plan to the 2016 Equity Incentive Plan (“EIP”). Under the Company’s EIP, a variety of stock awards, including stock options, restricted stock, restricted stock units (“RSUs”), stock appreciation rights (“SARs”) and cash or equity settled performance awards may be granted. The aggregate number of shares of common stock authorized for issuance under the EIP is 8,000,000 shares. At November 27, 2016, 2,906,683 shares remained available for issuance.
Under the EIP, stock awards have a maximum contractual term of ten years and generally must have an exercise price at least equal to the fair market value of the Company’s common stock on the grant date. Awards generally vest according to terms determined at the time of grant, or as otherwise determined by the Board in its discretion.
Upon the exercise of a SAR, the participant will receive shares of common stock. The number of shares of common stock issued per SAR unit exercised is equal to (i) the excess of theper-share fair market value of the Company’s common stock on the date of exercise over the exercise price of the SAR, divided by (ii) theper-share fair market value of the Company’s common stock on the date of exercise.
Onlynon-employee members of the Board have received RSUs. Each recipient’s vested RSUs are converted to a share of common stock six months after their discontinuation of service with the Company. The RSUs additionally have “dividend equivalent rights,” of which dividends paid by the Company on its common stock are credited by the equivalent addition of RSUs.
Shares of common stock will be issued from the Company’s authorized but unissued shares and are subject to the Stockholders Agreement that governs all shares.
LEVI STRAUSS & CO. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS — (continued)
FOR THE YEARS ENDED NOVEMBER 27, 2016, NOVEMBER 29, 2015, AND NOVEMBER 30, 2014
Shares of common stock issued under the EIP contain certain repurchase rights, which may be exercised only with respect to shares of the Company’s common stock that have been held by a participant for at least six months following their issuance date. The holder is exposed to the risk and rewards of ownership for a reasonable period of time. Accordingly, the SARs and RSUs are classified as equity awards, and are reported in “Stockholders’ equity” in the accompanying consolidated balance sheets.
Temporary equity.Equity-classified stock-based awards that may be settled in cash at the option of the holder are presented on the balance sheet outside permanent equity. Accordingly, “Temporary equity” on the face of the accompanying consolidated balance sheets includes the portion of the intrinsic value of these awards generally relating to the elapsed service period since the grant date as well as the fair value of common stock issued pursuant to the EIP. The increase in temporary equity from the year ended November 29, 2015 to November 27, 2016, was primarily due additional vesting of performance awards and service awards.
Equity Awards
SARs.The Company grants SARs, which include service or performance conditions, to a small group of the Company’s senior executives. Beginning in 2013, the Company issued cliff vesting performance awards (“performance-based SARs”) to align with the achievement of three-year financial performance goals. SARs activity during the year ended November 27, 2016 was as follows:
| Service SARs | Performance-based SARs | |||||||||||||||||||||||
| Units | Weighted- Average Exercise Price | Weighted- Average Remaining Contractual Life (Years) | Units | Weighted- Average Exercise Price | Weighted- Average Remaining Contractual Life (Years) | |||||||||||||||||||
| (Units in thousands) | ||||||||||||||||||||||||
Outstanding at November 29, 2015 | 2,669 | $ | 47.02 | 4.3 | 1,228 | $ | 54.96 | 5.0 | ||||||||||||||||
Granted | 629 | 62.27 | 419 | 62.27 | ||||||||||||||||||||
Exercised | (71 | ) | 46.80 | (45 | ) | 42.44 | ||||||||||||||||||
Forfeited | (106 | ) | 64.88 | (92 | ) | 68.32 | ||||||||||||||||||
Expired | (19 | ) | 74.05 | — | — | |||||||||||||||||||
Canceled/Performance adjusted | — | — | (308 | ) | 40.43 | |||||||||||||||||||
|
|
|
| |||||||||||||||||||||
Outstanding at November 27, 2016 | 3,102 | $ | 49.35 | 3.9 | 1,202 | $ | 60.68 | 5.0 | ||||||||||||||||
|
|
|
| |||||||||||||||||||||
Vested and expected to vest at November 27, 2016 | 3,028 | $ | 48.96 | 3.8 | 1,040 | $ | 59.96 | 4.9 | ||||||||||||||||
|
|
|
| |||||||||||||||||||||
Exercisable at November 27, 2016 | 1,902 | $ | 38.63 | 2.8 | 263 | $ | 40.09 | 3.3 | ||||||||||||||||
|
|
|
| |||||||||||||||||||||
SARs with service conditions (“service SARs”) vest fromthree-and-a-half to four years, and have maximum contractual lives ranging from seven to ten years. The performance-based SARs vest at varying unit amounts, up to 150% of those awarded, based on the attainment of certain three-year cumulative performance goals and have maximum contractual lives of seven years. The total intrinsic value of service SARs exercised during the year ended November 27, 2016, and November 29, 2015, was $1.4 million and $4.7 million, respectively. The total intrinsic value of performance SARs exercised during the year ended November 27, 2016 was $1.0 million. The total fair value of service SARs vested as of November 27, 2016, and November 29, 2015, was $54.0 million and $51.8 million, respectively. The total fair value of performance SARs vested as of November 27, 2016 was $7.1 million. Unrecognized future compensation costs as of November 27, 2016 of $12.9 million for service
LEVI STRAUSS & CO. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS — (continued)
FOR THE YEARS ENDED NOVEMBER 27, 2016, NOVEMBER 29, 2015, AND NOVEMBER 30, 2014
SARs and $6.0 million for performance-based SARs are expected to be recognized over weighted-average periods of 2.69 years and 1.99 years, respectively. The Company believes it is probable that the performance-based SARs will vest.
The weighted-average grant date fair value of SARs was estimated using the Black-Scholes option valuation model, unless the awards were subject to market conditions, in which case the Company utilized the Monte Carlo simulation model. The weighted-average grant date fair values and corresponding weighted-average assumptions used in the Black-Scholes option valuation model were as follows:
| Service SARs Granted | Performance-based SARs Granted | |||||||||||||||||||||||
| 2016 | 2015 | 2014 | 2016 | 2015 | 2014 | |||||||||||||||||||
Weighted-average grant date fair value | $ | 15.74 | $ | 18.24 | $ | 14.62 | $ | 15.94 | $ | 18.73 | $ | 15.75 | ||||||||||||
Weighted-average assumptions: | ||||||||||||||||||||||||
Expected life (in years) | 4.8 | 4.7 | 4.7 | 5.0 | 5.0 | 5.0 | ||||||||||||||||||
Expected volatility | 36.4 | % | 31.8 | % | 31.8 | % | 36.3 | % | 31.8 | % | 33.1 | % | ||||||||||||
Risk-free interest rate | 1.1 | % | 1.2 | % | 1.5 | % | 1.1 | % | 1.3 | % | 1.6 | % | ||||||||||||
Expected dividend | 2.5 | % | 1.6 | % | 1.2 | % | 2.5 | % | 1.6 | % | 1.2 | % | ||||||||||||
The weighted-average grant date fair value of SARs subject to market conditions was estimated using a Monte Carlo simulation model. The weighted-average grant date fair values and corresponding weighted-average assumptions used in the model were as follows:
| Performance-based SARs Granted | ||||||||||||
| 2016 | 2015 | 2014 | ||||||||||
Weighted-average grant date fair value | $ | 20.56 | $ | 21.41 | $ | 22.63 | ||||||
Weighted-average assumptions: | ||||||||||||
Expected life (in years) | 4.8 | 4.8 | 4.8 | |||||||||
Expected volatility | 36.5 | % | 30.1 | % | 33.0 | % | ||||||
Risk-free interest rate | 1.5 | % | 1.6 | % | 2.2 | % | ||||||
Expected dividend | 2.6 | % | 1.8 | % | 1.0 | % | ||||||
RSUs.The Company grants RSUs to certain members of its Board. RSU activity during the year ended November 27, 2016 was as follows:
| Units | Weighted-Average Fair Value | |||||||
| (Units in thousands) | ||||||||
Outstanding at November 29, 2015 | 66 | $ | 58.51 | |||||
Granted | 23 | 67.95 | ||||||
Converted | (13 | ) | 61.47 | |||||
|
| |||||||
Outstanding, vested and expected to vest at November 27, 2016 | 76 | $ | 60.90 | |||||
|
| |||||||
The weighted-average grant date fair value of RSUs was estimated using the Evercore stock valuation. The total fair value of RSUs outstanding, vested and expected to vest as of November 27, 2016, and November 29, 2015, was $5.1 million and $4.5 million, respectively.
LEVI STRAUSS & CO. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS — (continued)
FOR THE YEARS ENDED NOVEMBER 27, 2016, NOVEMBER 29, 2015, AND NOVEMBER 30, 2014
RSUs vest in a series of three equal installments at thirteen months, twenty-four months andthirty-six months following the date of grant. However, if the recipient’s continuous service terminates for a reason other than cause after the first vesting installment, but prior to full vesting, then the remaining unvested portion of the award becomes fully vested as of the date of such termination.
Liability Awards
Cash settled liability awards provide long-term incentive compensation for select levels of the Company’s management. The common stock values used in the determination of the cash settled awards and payouts are approved by the Board based on the Evercore stock valuation. Unvested awards are subject to forfeiture upon termination of employment, but are subject in some cases to early vesting upon specified events, as defined in the agreement. From 2008 through 2012, the Company’s Total Shareholder Return Plan (“TSRP”) provided grants of units that vest over a three-year performance period. Upon vesting of a TSRP unit, the participant would receive a cash payout in an amount equal to the excess of theper-share value of the Company’s common stock at the end of the three-year performance period over theper-share value at the date of grant. In 2013, the Company replaced the TSRP with the Phantom Restricted Stock Unit Plan (“PRSU”). The PRSU provides for grants of units, with actual number of units vesting subject to a minimum and maximum, based on the fair value of the common stock at the end of a three-year performance period. Upon vesting of a PRSU unit, the participant will receive a cash payout in an amount equal to the vested units multiplied by the fair value of the Company’s common stock at the end of the three-year performance period. Unrecognized future compensation cost as of November 27, 2016, for PRSUs is $18.7 million and is expected to be recognized over a weighted-average period of 1.81 years. The Company believes it is probable that the liability awards will vest.
Liability award activity during the year ended November 27, 2016 was as follows:
| PRSUs | ||||||||||||
| Units | Weighted- Average Exercise Price | Weighted- Average Fair Value At Period End | ||||||||||
Outstanding at November 29, 2015 | 626 | $ | 57.92 | $ | 68.00 | |||||||
Granted | 334 | 61.94 | ||||||||||
Vested | (245 | ) | 38.40 | |||||||||
Performance adjustment of PRSU | (6 | ) | 111.34 | |||||||||
Forfeited | (70 | ) | 67.58 | |||||||||
|
| |||||||||||
Outstanding at November 27, 2016 | 639 | $ | 65.92 | $ | 67.00 | |||||||
|
| |||||||||||
Expected to vest at November 27, 2016 | 560 | $ | 66.09 | $ | 67.00 | |||||||
|
| |||||||||||
Exercisable at November 27, 2016 | — | $ | — | $ | — | |||||||
|
| |||||||||||
The total intrinsic value of PRSU awards exercised during the year ended November 27, 2016 was $15.8 million. The weighted-average fair value of PRSUs at the grant date was estimated using the Evercore stock valuation while the PRSUs fair value at November 27, 2016, was estimated using an internally derived calculation consistent with Evercore’s calculation methodology.
As of November 29, 2015, there were no TSRP awards outstanding, vested or expected to vest, due to the replacement of the TSRP with the PRSU. The total intrinsic value of TSRPs exercised during the years ended November 29, 2015 and November 30, 2014 was $5.6 million and $3.5 million, respectively. The total fair value
LEVI STRAUSS & CO. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS — (continued)
FOR THE YEARS ENDED NOVEMBER 27, 2016, NOVEMBER 29, 2015, AND NOVEMBER 30, 2014
of TSRPs vested as of November 30, 2014 was $6.9 million. The weighted-average fair value of TSRPs at November 30, 2014, was estimated using the Black-Scholes option valuation model. The weighted-average assumptions used in the TSRPs Black-Scholes model were as follows:
| ||||
| ||||
| ||||
| ||||
| ||||
Long-term employee-related benefit liabilities primarily consist of the Company’s liabilities for its deferred compensation plans.
Deferred compensation plan for executives and outside directors, establishedJanuary 1, 2003. The Company has anon-qualified deferred compensation plan for executives and outside directors that was established on January 1, 2003 and amended thereafter. The deferred compensation plan obligations are payable in cash upon retirement, termination of employment and/or certain other times in alump-sum distribution or in installments, as elected by the participant in accordance with the plan. As of November 27, 2016, and November 29, 2015, these plan liabilities totaled $23.6 million and $24.2 million, respectively, of which $0.9 million and $1.5 million was included in “Accrued salaries, wages and employee benefits” as of November 27, 2016, and November 29, 2015, respectively. The Company held funds of approximately $27.1 million and $26.0 million in an irrevocable grantor’s rabbi trust as of November 27, 2016, and November 29, 2015, respectively, related to this plan. Rabbi trust assets are classified asavailable-for-sale marketable securities and are included in “Other current assets” or “Othernon-current assets” on the Company’s consolidated balance sheets. Unrealized gains and losses on these marketable securities are reported as a separate component of stockholders’ equity and included in AOCI on the Company’s consolidated balance sheets.
Deferred compensation plan for executives, prior to January 1, 2003. The Company also maintains anon-qualified deferred compensation plan for certain management employees relating to compensation deferrals for the period prior to January 1, 2003. The rabbi trust is not a feature of this plan. As of November 27, 2016, and November 29, 2015, liabilities for this plan totaled $32.2 million and $35.1 million, respectively, of which $4.5 million and $3.8 million, respectively, was included in “Accrued salaries, wages and employee benefits” on the Company’s consolidated balance sheets.
Interest earned by the participants in deferred compensation plans was $2.5 million, $1.9 million and $5.3 million for the years ended November 27, 2016, November 29, 2015, and November 30, 2014, respectively. The charges were included in “interest expense” in the Company’s consolidated statements of income.
In 2014, the Company announced and began to implement a global productivity initiative designed to streamline operations and fuel long-term profitable growth. The majority of the actions related to the global productivity initiative were implemented through the end of 2016. The Company does not anticipate any significant additional costs associated with the global productivity initiative.
LEVI STRAUSS & CO. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS — (continued)
FOR THE YEARS ENDED NOVEMBER 27, 2016, NOVEMBER 29, 2015, AND NOVEMBER 30, 2014
The Company recognized restructuring charges, net, of $0.3 million, $14.1 million and $128.4 million for the years ended November 27, 2016, November 29, 2015 and November 30, 2014, respectively. These restructuring charges were recorded in “Restructuring, net” in the Company’s consolidated statements of income. Related charges of $7.2 million, $30.7 million, and $27.6 million for the years ended November 27, 2016, November 29, 2015 and November 30, 2014, respectively, consist primarily of consulting fees for the Company’scentrally-led cost-savings and productivity projects, as well as transition costs associated with the Company’s decision to outsource certain global business service activities. These related charges represent costs incurred associated with ongoing operations which will benefit future periods and thus were recorded in “Selling, general and administrative expenses” in the Company’s consolidated statements of income.
The table below summarizes the components of charges included in “Restructuring, net” in the Company’s consolidated statements of income:
| Year Ended | ||||||||||||
| November 27, 2016 | November 29, 2015 | November 30, 2014 | ||||||||||
| (Dollars in thousands) | ||||||||||||
Restructuring, net: | ||||||||||||
Severance and employee-related benefits(1) | $ | 1,963 | $ | 14,819 | $ | 104,398 | ||||||
Adjustments to severance and employee-related benefits | (1,789 | ) | (4,182 | ) | (5,697 | ) | ||||||
Other(2) | 311 | 2,776 | 26,377 | |||||||||
Noncash pension and postretirement curtailment (gains) losses, net(3) | (173 | ) | 658 | 3,347 | ||||||||
|
|
|
|
|
| |||||||
Total | $ | 312 | $ | 14,071 | $ | 128,425 | ||||||
|
|
|
|
|
| |||||||
LEVI STRAUSS & CO. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS — (continued)
FOR THE YEARS ENDED NOVEMBER 27, 2016, NOVEMBER 29, 2015, AND NOVEMBER 30, 2014
The following table summarizes the activities associated with restructuring liabilities for the years ended November 27, 2016, November 29, 2015 and November 30, 2014. In the table below, “Charges” represents the initial charge related to the restructuring activity. “Adjustments” includes revisions of estimates related to severance, employee-related benefits, lease and other contract termination costs, and other restructuring costs. “Payments” consists of cash payments for severance, employee-related benefits, lease and other contract termination costs, and other restructuring costs.
| Year Ended November 27, 2016 | ||||||||||||||||||||||||
| Liabilities November 29, 2015 | Charges | Adjustments | Payments | Foreign Currency Fluctuation | Liabilities November 27, 2016 | |||||||||||||||||||
| (Dollars in thousands) | ||||||||||||||||||||||||
Severance and employee-related benefits | $ | 20,774 | $ | 1,963 | $ | (1,789 | ) | $ | (16,500 | ) | $ | 430 | $ | 4,878 | ||||||||||
Other | 964 | 311 | — | (1,275 | ) | — | — | |||||||||||||||||
|
|
|
|
|
|
|
|
|
|
|
| |||||||||||||
Total | $ | 21,738 | $ | 2,274 | $ | (1,789 | ) | $ | (17,775 | ) | $ | 430 | $ | 4,878 | ||||||||||
|
|
|
|
|
|
|
|
|
|
|
| |||||||||||||
Current portion | $ | 20,141 | $ | 4,878 | ||||||||||||||||||||
Long-term portion | 1,597 | — | ||||||||||||||||||||||
|
|
|
| |||||||||||||||||||||
Total | $ | 21,738 | $ | 4,878 | ||||||||||||||||||||
|
|
|
| |||||||||||||||||||||
| Year Ended November 29, 2015 | ||||||||||||||||||||||||
| Liabilities November 30, 2014 | Charges | Adjustments | Payments | Foreign Currency Fluctuation | Liabilities November 29, 2015 | |||||||||||||||||||
| (Dollars in thousands) | ||||||||||||||||||||||||
Severance and employee-related benefits | $ | 56,963 | $ | 14,819 | $ | (4,182 | ) | $ | (41,907 | ) | $ | (4,919 | ) | $ | 20,774 | |||||||||
Other | 6,400 | 3,243 | (467 | ) | (8,217 | ) | 5 | 964 | ||||||||||||||||
|
|
|
|
|
|
|
|
|
|
|
| |||||||||||||
Total | $ | 63,363 | $ | 18,062 | $ | (4,649 | ) | $ | (50,124 | ) | $ | (4,914 | ) | $ | 21,738 | |||||||||
|
|
|
|
|
|
|
|
|
|
|
| |||||||||||||
Current portion | $ | 57,817 | $ | 20,141 | ||||||||||||||||||||
Long-term portion | 5,546 | 1,597 | ||||||||||||||||||||||
|
|
|
| |||||||||||||||||||||
Total | $ | 63,363 | $ | 21,738 | ||||||||||||||||||||
|
|
|
| |||||||||||||||||||||
| Year Ended November 30, 2014 | ||||||||||||||||||||||||
| Liabilities November 24, 2013 | Charges | Adjustments | Payments | Foreign Currency Fluctuation | Liabilities November 30, 2014 | |||||||||||||||||||
| (Dollars in thousands) | ||||||||||||||||||||||||
Severance and employee-related benefits | $ | — | $ | 104,398 | $ | (5,697 | ) | $ | (38,527 | ) | $ | (3,211 | ) | $ | 56,963 | |||||||||
Other | — | 25,027 | 1,350 | (19,977 | ) | — | 6,400 | |||||||||||||||||
|
|
|
|
|
|
|
|
|
|
|
| |||||||||||||
Total | $ | — | $ | 129,425 | $ | (4,347 | ) | $ | (58,504 | ) | $ | (3,211 | ) | $ | 63,363 | |||||||||
|
|
|
|
|
|
|
|
|
|
|
| |||||||||||||
Current portion | $ | — | $ | 57,817 | ||||||||||||||||||||
Long-term portion | — | 5,546 | ||||||||||||||||||||||
|
|
|
| |||||||||||||||||||||
Total | $ | — | $ | 63,363 | ||||||||||||||||||||
|
|
|
| |||||||||||||||||||||
LEVI STRAUSS & CO. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS — (continued)
FOR THE YEARS ENDED NOVEMBER 27, 2016, NOVEMBER 29, 2015, AND NOVEMBER 30, 2014
Operating Lease Commitments
The Company is obligated under operating leases for manufacturing, finishing and distribution facilities, office space, retail stores and equipment. At November 27, 2016, obligations for future minimum payments under operating leases were as follows:
| (Dollars in thousands) | ||||
2017 | $ | 159,101 | ||
2018 | 121,638 | |||
2019 | 99,499 | |||
2020 | 79,074 | |||
2021 | 61,368 | |||
Thereafter | 148,500 | |||
|
| |||
Total future minimum lease payments | $ | 669,180 | ||
|
| |||
In general, leases relating to real estate may include renewal options of various length. The San Francisco headquarters office lease contains multiple renewal options of up to 57 years. Rental expense for the years ended November 27, 2016, November 29, 2015, and November 30, 2014, was $204.6 million, $192.5 million and $193.0 million, respectively.
Forward Foreign Exchange Contracts
The Company usesover-the-counter derivative instruments to manage its exposure to foreign currencies. The Company is exposed to credit loss in the event of nonperformance by the counterparties to the forward foreign exchange contracts. However, the Company believes that its exposures are appropriately diversified across counterparties and that these counterparties are creditworthy financial institutions. See Note 5 for additional information.
Other Contingencies
Litigation.In the ordinary course of business, the Company has various pending cases involving contractual matters, facility and employee-related matters, distribution matters, product liability claims, trademark infringement and other matters. The Company does not believe any of these pending legal proceedings will have a material impact on its financial condition, results of operations or cash flows.
The Company paid a cash dividend of $60.0 million on our common stock in the second quarter of 2016, and cash dividends of $50.0 million and $30.0 million in the first half of each of 2015 and 2014, respectively. Subsequent to the Company’s year end, the Company’s Board of Directors declared a cash dividend of $70.0 million, payable in two $35 million installments. The Company expects to pay the first installment in the first quarter of 2017 and the second installment in the fourth quarter of 2017.
The Company does not have an established annual dividend policy. The Company will continue to review its ability to pay cash dividends at least annually, and dividends may be declared at the discretion of the Board depending upon, among other factors, the Company’s financial condition and compliance with the terms of the Company’s debt agreements.
LEVI STRAUSS & CO. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS — (continued)
FOR THE YEARS ENDED NOVEMBER 27, 2016, NOVEMBER 29, 2015, AND NOVEMBER 30, 2014
Accumulated other comprehensive income (loss) is summarized below:
| Levi Strauss & Co. | Noncontrolling Interest | |||||||||||||||||||||||||||
| Pension and Postretirement Benefits | Translation Adjustments | Unrealized Gain (Loss) on Marketable Securities | Total | Foreign Currency Translation | Totals | |||||||||||||||||||||||
| Net Investment Hedges | Foreign Currency Translation | |||||||||||||||||||||||||||
| (Dollars in thousands) | ||||||||||||||||||||||||||||
Accumulated other comprehensive income (loss) at November 24, 2013 | $ | (226,772 | ) | $ | (26,699 | ) | $ | (59,824 | ) | $ | 1,266 | $ | (312,029 | ) | $ | 9,366 | $ | (302,663 | ) | |||||||||
|
|
|
|
|
|
|
|
|
|
|
|
|
| |||||||||||||||
Gross changes | (53,323 | ) | 13,404 | (35,872 | ) | 1,577 | (74,214 | ) | (329 | ) | (74,543 | ) | ||||||||||||||||
Tax | 18,641 | (8,426 | ) | 1,297 | (609 | ) | 10,903 | — | 10,903 | |||||||||||||||||||
|
|
|
|
|
|
|
|
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|
|
|
|
| |||||||||||||||
Other comprehensive income (loss), net of tax | (34,682 | ) | 4,978 | (34,575 | ) | 968 | (63,311 | ) | (329 | ) | (63,640 | ) | ||||||||||||||||
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|
|
|
|
|
|
|
|
| |||||||||||||||
Accumulated other comprehensive income (loss) at November 30, 2014 | (261,454 | ) | (21,721 | ) | (94,399 | ) | 2,234 | (375,340 | ) | 9,037 | (366,303 | ) | ||||||||||||||||
|
|
|
|
|
|
|
|
|
|
|
|
|
| |||||||||||||||
Gross changes | 38,785 | 385 | (28,719 | ) | (575 | ) | 9,876 | (72 | ) | 9,804 | ||||||||||||||||||
Tax | (13,671 | ) | 3,089 | (3,241 | ) | 221 | (13,602 | ) | — | (13,602 | ) | |||||||||||||||||
|
|
|
|
|
|
|
|
|
|
|
|
|
| |||||||||||||||
Other comprehensive income (loss), net of tax | 25,114 | 3,474 | (31,960 | ) | (354 | ) | (3,726 | ) | (72 | ) | (3,798 | ) | ||||||||||||||||
|
|
|
|
|
|
|
|
|
|
|
|
|
| |||||||||||||||
Accumulated other comprehensive income (loss) at November 29, 2015 | (236,340 | ) | (18,247 | ) | (126,359 | ) | 1,880 | (379,066 | ) | 8,965 | (370,101 | ) | ||||||||||||||||
|
|
|
|
|
|
|
|
|
|
|
|
|
| |||||||||||||||
Gross changes | (22,925 | ) | (829 | ) | (30,848 | ) | 143 | (54,459 | ) | 468 | (53,991 | ) | ||||||||||||||||
Tax | 7,238 | 319 | (1,291 | ) | (55 | ) | 6,211 | — | 6,211 | |||||||||||||||||||
|
|
|
|
|
|
|
|
|
|
|
|
|
| |||||||||||||||
Other comprehensive income (loss), net of tax | (15,687 | ) | (510 | ) | (32,139 | ) | 88 | (48,248 | ) | 468 | (47,780 | ) | ||||||||||||||||
|
|
|
|
|
|
|
|
|
|
|
|
|
| |||||||||||||||
Accumulated other comprehensive income (loss) at November 27, 2016 | $ | (252,027 | ) | $ | (18,757 | ) | $ | (158,498 | ) | $ | 1,968 | $ | (427,314 | ) | $ | 9,433 | $ | (417,881 | ) | |||||||||
|
|
|
|
|
|
|
|
|
|
|
|
|
| |||||||||||||||
No material amounts were reclassified out of “Accumulated other comprehensive loss” into net income other than those that pertain to the Company’s pension and postretirement benefit plans. Please see Note 8 for additional information. These amounts are included in “Selling, general and administrative expenses” in the Company’s consolidated statements of income.
LEVI STRAUSS & CO. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS — (continued)
FOR THE YEARS ENDED NOVEMBER 27, 2016, NOVEMBER 29, 2015, AND NOVEMBER 30, 2014
The following table summarizes significant components of “Other income (expense), net”:
| Year Ended | ||||||||||||
| November 27, 2016 | November 29, 2015 | November 30, 2014 | ||||||||||
| (Dollars in thousands) | ||||||||||||
Foreign exchange management gains (losses)(1) | $ | 15,860 | $ | 34,106 | $ | (11,104 | ) | |||||
Foreign currency transaction (losses) gains(2) | (7,166 | ) | (64,161 | ) | (15,331 | ) | ||||||
Interest income | 1,376 | 1,253 | 1,930 | |||||||||
Investment income | 976 | 697 | 562 | |||||||||
Other(3) | 7,177 | 2,672 | 1,886 | |||||||||
|
|
|
|
|
| |||||||
Total other income (expense), net | $ | 18,223 | $ | (25,433 | ) | $ | (22,057 | ) | ||||
|
|
|
|
|
| |||||||
The Company’s income tax expense was $116.1 million, $100.5 million and $49.5 million for the years 2016, 2015 and 2014, respectively. The Company’s effective income tax rate was 28.5%, 32.4%, and 32.2% for 2016, 2015 and 2014, respectively.
The decrease in effective income tax rate in 2016 as compared to 2015 is primarily due to a favorable impact of foreign operations as compared to 2015. The effective tax rate increased in 2015 as compared to 2014 primarily due to aone-time, incremental annual tax benefit associated with multi-year California Enterprise Zone credits recognized in 2014, partially offset by a $8.0 million discrete tax benefit recognized in 2015 attributable to deductions taken for losses on the investments in a consolidated subsidiary.
LEVI STRAUSS & CO. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS — (continued)
FOR THE YEARS ENDED NOVEMBER 27, 2016, NOVEMBER 29, 2015, AND NOVEMBER 30, 2014
The Company’s income tax expense differed from the amount computed by applying the U.S. federal statutory income tax rate of 35% to income before income taxes as follows:
| Year Ended | ||||||||||||||||||||||||
| November 27, 2016 | November 29, 2015 | November 30, 2014 | ||||||||||||||||||||||
| (Dollars in thousands) | ||||||||||||||||||||||||
Income tax expense at U.S. federal statutory rate | $ | 142,541 | 35.0 | % | $ | 108,639 | 35.0 | % | $ | 53,849 | 35.0 | % | ||||||||||||
State income taxes, net of U.S. federal impact | 6,943 | 1.7 | % | 8,938 | 2.9 | % | 7 | — | ||||||||||||||||
Impact of foreign operations | (28,727 | ) | (7.1 | )% | (7,286 | ) | (2.3 | )% | (5,296 | ) | (3.4 | )% | ||||||||||||
Reassessment of tax liabilities | (2,387 | ) | (0.6 | )% | (7,577 | ) | (2.4 | )% | (3,466 | ) | (2.3 | )% | ||||||||||||
Deduction related to subsidiaries | (6,788 | ) | (1.7 | )% | (8,060 | ) | (2.6 | )% | — | — | ||||||||||||||
Write-off of deferred tax assets | — | — | 1,718 | 0.6 | % | 4,899 | 3.2 | % | ||||||||||||||||
Other, includingnon-deductible expenses | 4,469 | 1.2 | % | 4,135 | 1.2 | % | (448 | ) | (0.3 | )% | ||||||||||||||
|
|
|
|
|
| |||||||||||||||||||
Total | $ | 116,051 | 28.5 | % | $ | 100,507 | 32.4 | % | $ | 49,545 | 32.2 | % | ||||||||||||
|
|
|
|
|
| |||||||||||||||||||
Impact of foreign operations.The increase of tax rate benefit in 2016 as compared to 2015 is primarily due to a favorable change in the mix of earnings in jurisdictions with lower effective tax rate and lower amount of foreign losses with no tax benefit in 2016 as compared to 2015.
Reassessment of tax liabilities.In 2016, the $2.4 million tax benefit is primarily attributable to the lapse of statutes of limitations in various jurisdictions. In 2015, the $7.6 million tax benefit primarily related to remeasurement of a tax position and the lapse of statutes of limitations in various jurisdictions.
Deduction related to subsidiaries.In 2016, the $6.8 million benefit is primarily related to a discrete tax benefit attributable to deductions for worthless debts in a consolidated subsidiary. In 2015 the $8.1 million discrete tax benefit is primarily attributable to the deductions for losses on the investments in a consolidated subsidiary.
The U.S. and foreign components of income before income taxes were as follows:
| Year Ended | ||||||||||||
| November 27, 2016 | November 29, 2015 | November 30, 2014 | ||||||||||
| (Dollars in thousands) | ||||||||||||
Domestic | $ | 189,478 | $ | 194,540 | $ | 31,733 | ||||||
Foreign | 217,782 | 115,858 | 122,121 | |||||||||
|
|
|
|
|
| |||||||
Total income before income taxes | $ | 407,260 | $ | 310,398 | $ | 153,854 | ||||||
|
|
|
|
|
| |||||||
LEVI STRAUSS & CO. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS — (continued)
FOR THE YEARS ENDED NOVEMBER 27, 2016, NOVEMBER 29, 2015, AND NOVEMBER 30, 2014
Income tax expense consisted of the following:
| Year Ended | ||||||||||||
| November 27, 2016 | November 29, 2015 | November 30, 2014 | ||||||||||
| (Dollars in thousands) | ||||||||||||
U.S. Federal | ||||||||||||
Current | $ | 7,122 | $ | 3,299 | $ | 15,470 | ||||||
Deferred | 66,840 | 56,155 | (1,983 | ) | ||||||||
|
|
|
|
|
| |||||||
| $ | 73,962 | $ | 59,454 | $ | 13,487 | |||||||
|
|
|
|
|
| |||||||
U.S. State | ||||||||||||
Current | $ | 2,097 | $ | 1,334 | $ | 4,096 | ||||||
Deferred | 4,846 | 7,604 | (4,089 | ) | ||||||||
|
|
|
|
|
| |||||||
| $ | 6,943 | $ | 8,938 | $ | 7 | |||||||
|
|
|
|
|
| |||||||
Foreign | ||||||||||||
Current | $ | 40,754 | $ | 37,488 | $ | 58,156 | ||||||
Deferred | (5,608 | ) | (5,373 | ) | (22,105 | ) | ||||||
|
|
|
|
|
| |||||||
| $ | 35,146 | $ | 32,115 | $ | 36,051 | |||||||
|
|
|
|
|
| |||||||
Consolidated | ||||||||||||
Current | $ | 49,973 | $ | 42,121 | $ | 77,722 | ||||||
Deferred | 66,078 | 58,386 | (28,177 | ) | ||||||||
|
|
|
|
|
| |||||||
Total income tax expense | $ | 116,051 | $ | 100,507 | $ | 49,545 | ||||||
|
|
|
|
|
| |||||||
LEVI STRAUSS & CO. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS — (continued)
FOR THE YEARS ENDED NOVEMBER 27, 2016, NOVEMBER 29, 2015, AND NOVEMBER 30, 2014
Deferred Tax Assets and Liabilities
The Company’s deferred tax assets and deferred tax liabilities were as follows:
| November 27, 2016 | November 29, 2015 | |||||||
| (Dollars in thousands) | ||||||||
Deferred tax assets | ||||||||
Foreign tax credit carryforwards | $ | 92,845 | $ | 116,862 | ||||
State net operating loss carryforwards | 8,721 | 12,412 | ||||||
Foreign net operating loss carryforwards | 85,095 | 91,235 | ||||||
Employee compensation and benefit plans | 247,235 | 255,458 | ||||||
Advance royalties | 58,633 | 69,881 | ||||||
Accrued liabilities | 28,680 | 31,915 | ||||||
Sales returns and allowances | 29,338 | 26,461 | ||||||
Inventory | 14,272 | 17,196 | ||||||
Property, plant and equipment | 6,971 | 16,459 | ||||||
Other | 14,472 | 17,528 | ||||||
|
|
|
| |||||
Total gross deferred tax assets | 586,262 | 655,407 | ||||||
Less: Valuation allowance | (68,212 | ) | (75,753 | ) | ||||
|
|
|
| |||||
Deferred tax assets, net of valuation allowance | 518,050 | 579,654 | ||||||
|
|
|
| |||||
Deferred tax liabilities | ||||||||
Unrealized gains or losses on investments | — | (344 | ) | |||||
|
|
|
| |||||
Total net deferred tax assets | $ | 518,050 | $ | 579,310 | ||||
|
|
|
| |||||
Net deferred tax assets | $ | 586,262 | $ | 655,063 | ||||
Valuation allowance | (68,212 | ) | (75,753 | ) | ||||
|
|
|
| |||||
Total net deferred tax assets | $ | 518,050 | $ | 579,310 | ||||
|
|
|
| |||||
Foreign tax credit carryforwards.The foreign tax credit carryforwards at November 27, 2016, are subject to expiration through 2022 if not utilized.
Foreign net operating loss carryforwards.As of November 27, 2016, the Company had a deferred tax asset of $85.1 million for foreign net operating loss carryforwards of $300.3 million. Approximately $142.2 million of these operating losses are subject to expiration through 2026. The remaining $158.1 million are available as indefinite carryforwards under applicable tax law.
LEVI STRAUSS & CO. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS — (continued)
FOR THE YEARS ENDED NOVEMBER 27, 2016, NOVEMBER 29, 2015, AND NOVEMBER 30, 2014
Valuation Allowance.The following table details the changes in valuation allowance during the year ended November 27, 2016:
| Valuation Allowance at November 29, 2015 | Changes in Related Gross Deferred Tax Asset | Release | Valuation Allowance at November 27, 2016 | |||||||||||||
| (Dollars in thousands) | ||||||||||||||||
U.S. state net operating loss carryforwards | $ | 3,500 | $ | (1,780 | ) | $ | — | $ | 1,720 | |||||||
Foreign net operating loss carryforwards and other foreign deferred tax assets | 72,253 | (3,247 | ) | (2,514 | ) | 66,492 | ||||||||||
|
|
|
|
|
|
|
| |||||||||
| $ | 75,753 | $ | (5,027 | ) | $ | (2,514 | ) | $ | 68,212 | |||||||
|
|
|
|
|
|
|
| |||||||||
At November 27, 2016, the Company’s valuation allowance primarily related to its gross deferred tax assets for state and foreign net operating loss carryforwards, which reduced such assets to the amount that will more likely than not be realized.
Unremitted earnings of certain foreign subsidiaries.For the year ended November 27, 2016, management asserted indefinite reinvestment on $100.0 million of undistributed foreign earnings, as management determined that this amount is required to meet ongoing working capital needs in certain foreign subsidiaries; no U.S. income taxes have been provided for such earnings. If the Company were to repatriate such foreign earnings to the United States, the deferred tax liability associated with such earnings would have been approximately $26.6 million.
Uncertain Income Tax Positions
As of November 27, 2016, the Company’s total gross amount of unrecognized tax benefits was $29.1 million, of which $21.7 million could impact the effective tax rate, if recognized, as compared to November 29, 2015, when the Company’s total gross amount of unrecognized tax benefits was $32.7 million, of which $20.6 million could have impacted the effective tax rate, if recognized.
LEVI STRAUSS & CO. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS — (continued)
FOR THE YEARS ENDED NOVEMBER 27, 2016, NOVEMBER 29, 2015, AND NOVEMBER 30, 2014
The following table reflects the changes to the Company’s unrecognized tax benefits for the year ended November 27, 2016 and November 29, 2015:
| November 27, 2016 | November 29, 2015 | |||||||
| (Dollars in thousands) | ||||||||
Unrecognized tax benefits beginning balance | $ | 32,704 | $ | 41,571 | ||||
Increases related to current year tax positions | 1,970 | 3,687 | ||||||
Increases related to tax positions from prior years | 45 | — | ||||||
Decreases related to tax positions from prior years | (584 | ) | (4,723 | ) | ||||
Settlement with tax authorities | — | — | ||||||
Lapses of statutes of limitation | (4,266 | ) | (7,576 | ) | ||||
Other, including foreign currency translation | (816 | ) | (255 | ) | ||||
|
|
|
| |||||
Unrecognized tax benefits ending balance | $ | 29,053 | $ | 32,704 | ||||
|
|
|
| |||||
The Company believes that it is reasonably possible that unrecognized tax benefits could decrease within the next twelve months by as much as $2.0 million due to the lapse of statutes of limitations.
As of November 27, 2016, and November 29, 2015, accrued interest and penalties primarily relating tonon-U.S. jurisdictions were $4.1 million and $6.7 million, respectively.
The Company’s income tax returns are subject to examination in the U.S. federal and state jurisdictions and numerous foreign jurisdictions. The following table summarizes the tax years that are either currently under audit or remain open and subject to examination by the tax authorities in the major jurisdictions in which the Company operates:
| ||||
| ||||
| ||||
| ||||
| ||||
| ||||
| ||||
| ||||
| ||||
| ||||
| ||||
| ||||
| ||||
| ||||
| ||||
| ||||
LEVI STRAUSS & CO. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS — (continued)
FOR THE YEARS ENDED NOVEMBER 27, 2016, NOVEMBER 29, 2015, AND NOVEMBER 30, 2014
Charles V. Bergh, President and Chief Executive Officer, Peter E. Haas Jr., a director of the Company, Kelly McGinnis, Senior Vice President of Corporate Affairs and Chief Communications Officer, and Liz O’Neil, Senior Vice President and Chief Supply Chain Officer, are board members of the Levi Strauss Foundation, which is not a consolidated entity of the Company. Seth R. Jaffe, Senior Vice President and General Counsel, is Vice President of the Levi Strauss Foundation. During 2016, 2015, and 2014, the Company donated $6.9 million, $7.0 million, and $6.3 million, respectively, to the Levi Strauss Foundation.
The Company manages its business according to three regional segments: the Americas, Europe and Asia. The Company considers its chief executive officer to be the Company’s chief operating decision maker. The Company’s chief operating decision maker manages business operations, evaluates performance and allocates resources based on the regional segments’ net revenues and operating income. The Company reports net trade receivables and inventories by segment as that information is used by the chief operating decision maker in assessing segment performance. The Company does not report its other assets by segment as that information is not used by the chief operating decision maker in assessing segment performance.
Effective as of the beginning of 2015, the Company’s regional licensing revenue, previously recorded centrally in the Company’s Americas region, was revised to be recorded in the Company’s respective regions. Regional licensing revenue are not significant to any of the Company’s regional segments individually in any of the periods presented herein, and accordingly, business segment information for the prior periods have not been revised.
LEVI STRAUSS & CO. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS — (continued)
FOR THE YEARS ENDED NOVEMBER 27, 2016, NOVEMBER 29, 2015, AND NOVEMBER 30, 2014
Business segment information for the Company is as follows:
| Year Ended | ||||||||||||
| November 27, 2016 | November 29, 2015 | November 30, 2014 | ||||||||||
| (Dollars in thousands) | ||||||||||||
Net revenues: | ||||||||||||
Americas | $ | 2,683,008 | $ | 2,726,461 | $ | 2,862,867 | ||||||
Europe | 1,091,362 | 1,016,418 | 1,143,313 | |||||||||
Asia | 778,369 | 751,614 | 747,812 | |||||||||
|
|
|
|
|
| |||||||
Total net revenues | $ | 4,552,739 | $ | 4,494,493 | $ | 4,753,992 | ||||||
Operating income: | ||||||||||||
Americas | $ | 482,226 | $ | 523,705 | $ | 531,064 | ||||||
Europe(1) | 197,136 | 184,362 | 181,036 | |||||||||
Asia | 105,073 | 121,645 | 108,511 | |||||||||
|
|
|
|
|
| |||||||
Regional operating income | 784,435 | 829,712 | 820,611 | |||||||||
Corporate: | ||||||||||||
Restructuring, net | 313 | 14,071 | 128,425 | |||||||||
Restructuring-related charges | 7,195 | 30,736 | 27,621 | |||||||||
Lump-sum pension settlement loss | — | — | 30,666 | |||||||||
Other corporate staff costs and expenses | 314,720 | 353,858 | 320,048 | |||||||||
|
|
|
|
|
| |||||||
Corporate expenses | 322,228 | 398,665 | 506,760 | |||||||||
|
|
|
|
|
| |||||||
Total operating income | 462,207 | 431,047 | 313,851 | |||||||||
Interest expense | (73,170 | ) | (81,214 | ) | (117,597 | ) | ||||||
Loss on early extinguishment of debt | — | (14,002 | ) | (20,343 | ) | |||||||
Other income (expense), net | 18,223 | (25,433 | ) | (22,057 | ) | |||||||
|
|
|
|
|
| |||||||
Income before income taxes | $ | 407,260 | $ | 310,398 | $ | 153,854 | ||||||
|
|
|
|
|
| |||||||
| Year Ended | ||||||||||||
| November 27, 2016 | November 29, 2015 | November 30, 2014 | ||||||||||
| (Dollars in thousands) | ||||||||||||
Depreciation and amortization expense: | ||||||||||||
Americas | $ | 30,322 | $ | 27,558 | $ | 29,508 | ||||||
Europe | 12,574 | 14,985 | 20,564 | |||||||||
Asia | 8,210 | 7,455 | 8,501 | |||||||||
Corporate | 52,772 | 52,046 | 50,901 | |||||||||
|
|
|
|
|
| |||||||
Total depreciation and amortization expense | $ | 103,878 | $ | 102,044 | $ | 109,474 | ||||||
|
|
|
|
|
| |||||||
LEVI STRAUSS & CO. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS — (continued)
FOR THE YEARS ENDED NOVEMBER 27, 2016, NOVEMBER 29, 2015, AND NOVEMBER 30, 2014
| November 27, 2016 | ||||||||||||||||||||
| Americas | Europe | Asia | Unallocated | Consolidated Total | ||||||||||||||||
| (Dollars in thousands) | ||||||||||||||||||||
Assets: | ||||||||||||||||||||
Trade receivables, net | $ | 326,211 | $ | 94,106 | $ | 46,510 | $ | 12,191 | $ | 479,018 | ||||||||||
Inventories | 391,713 | 125,029 | 121,544 | 77,895 | 716,181 | |||||||||||||||
All other assets | — | — | — | 1,791,897 | 1,791,897 | |||||||||||||||
|
| |||||||||||||||||||
Total assets | $ | 2,987,096 | ||||||||||||||||||
|
| |||||||||||||||||||
| November 29, 2015 | ||||||||||||||||||||
| Americas | Europe | Asia | Unallocated | Consolidated Total | ||||||||||||||||
| (Dollars in thousands) | ||||||||||||||||||||
Assets: | ||||||||||||||||||||
Trade receivables, net | $ | 343,808 | $ | 81,079 | $ | 53,613 | $ | 19,696 | $ | 498,196 | ||||||||||
Inventories | 359,879 | 109,604 | 91,390 | 45,986 | 606,859 | |||||||||||||||
All other assets | — | — | — | 1,779,340 | 1,779,340 | |||||||||||||||
|
| |||||||||||||||||||
Total assets | $ | 2,884,395 | ||||||||||||||||||
|
| |||||||||||||||||||
Geographic information for the Company was as follows:
| Year Ended | ||||||||||||
| November 27, 2016 | November 29, 2015 | November 30, 2014 | ||||||||||
| (Dollars in thousands) | ||||||||||||
Net revenues: | ||||||||||||
United States | $ | 2,302,668 | $ | 2,380,820 | $ | 2,490,994 | ||||||
Foreign countries | 2,250,071 | 2,113,673 | 2,262,998 | |||||||||
|
|
|
|
|
| |||||||
Total net revenues | $ | 4,552,739 | $ | 4,494,493 | $ | 4,753,992 | ||||||
|
|
|
|
|
| |||||||
Net deferred tax assets: | ||||||||||||
United States | $ | 444,295 | $ | 506,675 | $ | 580,122 | ||||||
Foreign countries | 78,806 | 73,965 | 80,742 | |||||||||
|
|
|
|
|
| |||||||
Total net deferred tax assets | $ | 523,101 | $ | 580,640 | $ | 660,864 | ||||||
|
|
|
|
|
| |||||||
Long-lived assets: | ||||||||||||
United States | $ | 311,358 | $ | 322,758 | $ | 322,329 | ||||||
Foreign countries | 108,332 | 89,062 | 84,507 | |||||||||
|
|
|
|
|
| |||||||
Total long-lived assets | $ | 419,690 | $ | 411,820 | $ | 406,836 | ||||||
|
|
|
|
|
| |||||||
LEVI STRAUSS & CO. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS — (continued)
FOR THE YEARS ENDED NOVEMBER 27, 2016, NOVEMBER 29, 2015, AND NOVEMBER 30, 2014
Set forth below are the consolidated statements of operations for the first, second, third and fourth quarters of 2016 and 2015.
Year Ended November 27, 2016 | First Quarter | Second Quarter | Third Quarter | Fourth Quarter | ||||||||||||
| (Dollars in thousands) | ||||||||||||||||
Net revenues | $ | 1,056,500 | $ | 1,011,587 | $ | 1,185,111 | $ | 1,299,541 | ||||||||
Cost of goods sold | 496,902 | 494,389 | 592,305 | 640,131 | ||||||||||||
|
|
|
|
|
|
|
| |||||||||
Gross profit | 559,598 | 517,198 | 592,806 | 659,410 | ||||||||||||
Selling, general and administrative expenses | 441,163 | 459,351 | 448,525 | 517,454 | ||||||||||||
Restructuring, net | 1,848 | (191 | ) | (627 | ) | (718 | ) | |||||||||
|
|
|
|
|
|
|
| |||||||||
Operating income | 116,587 | 58,038 | 144,908 | 142,674 | ||||||||||||
Interest expense | (14,902 | ) | (20,411 | ) | (19,170 | ) | (18,687 | ) | ||||||||
Other (expense) income, net | (2,219 | ) | 4,295 | 4,679 | 11,468 | |||||||||||
|
|
|
|
|
|
|
| |||||||||
Income before income taxes | 99,466 | 41,922 | 130,417 | 135,455 | ||||||||||||
Income tax expense | 33,175 | 10,862 | 32,713 | 39,301 | ||||||||||||
|
|
|
|
|
|
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Net income | 66,291 | 31,060 | 97,704 | 96,154 | ||||||||||||
Net (income) loss attributable to noncontrolling interest | (455 | ) | (335 | ) | 614 | 19 | ||||||||||
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Net income attributable to Levi Strauss & Co. | $ | 65,836 | $ | 30,725 | $ | 98,318 | $ | 96,173 | ||||||||
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Year Ended November 29, 2015 | First Quarter | Second Quarter | Third Quarter | Fourth Quarter | ||||||||||||
| (Dollars in thousands) | ||||||||||||||||
Net revenues | $ | 1,055,075 | $ | 1,012,180 | $ | 1,142,012 | $ | 1,285,226 | ||||||||
Cost of goods sold | 518,010 | 511,949 | 568,655 | 626,898 | ||||||||||||
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Gross profit | 537,065 | 500,231 | 573,357 | 658,328 | ||||||||||||
Selling, general and administrative expenses | 425,282 | 449,662 | 454,530 | 494,389 | ||||||||||||
Restructuring, net | 4,338 | 2,954 | 4,054 | 2,725 | ||||||||||||
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Operating income | 107,445 | 47,615 | 114,773 | 161,214 | ||||||||||||
Interest expense | (23,312 | ) | (21,913 | ) | (17,138 | ) | (18,851 | ) | ||||||||
Loss on early extinguishment of debt | — | (14,002 | ) | — | — | |||||||||||
Other (expense) income, net | (26,028 | ) | 7,639 | (8,316 | ) | 1,272 | ||||||||||
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Income before income taxes | 58,105 | 19,339 | 89,319 | 143,635 | ||||||||||||
Income tax expense | 19,822 | 7,887 | 30,858 | 41,940 | ||||||||||||
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Net income | 38,283 | 11,452 | 58,461 | 101,695 | ||||||||||||
Net loss (income) attributable to noncontrolling interest | 109 | 239 | (286 | ) | (517 | ) | ||||||||||
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Net income attributable to Levi Strauss & Co. | $ | 38,392 | $ | 11,691 | $ | 58,175 | $ | 101,178 | ||||||||
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LEVI STRAUSS & CO.
Offer to Exchange
all outstanding unregistered 3 3⁄8%5.00% Senior Notes due 20272025
(€475,000,000$500,000,000 aggregate principal amount outstanding)
for
3 3⁄8%5.00% Senior Notes due 20272025
(€475,000,000$500,000,000 aggregate principal amount)
which have been registered under the Securities Act of 1933
PROSPECTUS
, 2017
Until the date that is 90 days after the date of this prospectus, all dealers that effect transactions in these securities, whether or not participating in this offering, may be required to deliver a prospectus. This is in addition to the dealers’ obligation to deliver a prospectus when acting as underwriters with respect to their unsold allotments or subscriptions.2020
PART II
INFORMATION NOT REQUIRED IN THE PROSPECTUS
Item 20. Indemnification of Directors and Officers
Section 145(a) and (b) of the Delaware General Corporation Law (“DGCL”) provide generally that a corporation has the power to indemnify its officers, directors, employees and agents (or persons serving in such positions in another entity at the request of the corporation) against expenses, including attorneys’ fees, judgments, fines or settlement amounts actually and reasonably incurred by them in connection with the defense of any action by reason of being or having been directors or officers, if such person shall have acted in good faith and in a manner reasonably believed to be in or not opposed to the best interests of the corporation (and, with respect to any criminal action, had no reasonable cause to believe the person’s conduct was unlawful), except that if such action shall be by or in the right of the corporation, no such indemnification shall be provided as to any claim, issue or matter as to which such person shall have been judged to have been liable to the corporation unless and to the extent that the Court of Chancery of the State of Delaware, or another court in which the suit was brought, shall determine upon application that, in view of all of the circumstances of the case, such person is fairly and reasonably entitled to indemnity. The Registrant’s Certificate of Incorporation provides that the Registrant will indemnify its officers and directors to the fullest extent permitted by Delawareapplicable law.
As permitted by Section 102(b)(7) of the DGCL, the Registrant’s Certificate of Incorporation provides that no director shall be liable tothe liability of the directors of the Registrant or its stockholders for monetary damages for any breach of fiduciary duty as a director other than (i) for breaches of the director’s duty of loyaltyshall be eliminated to the Registrant or its stockholders, (ii) for acts or omissions not in good faith or which involve intentional misconduct or a knowing violation of law, (iii)fullest extent under Section 174 of the DGCL or (iv) for any transaction from which the director derived an improper personal benefit.applicable law.
As permitted by Section 145(g) of the DGCL and Registrant’sBy-laws, the directors and officers of the Registrant are covered by directors’ and officers’ liability and insurance policies.
We have entered into an agreement with each of our current directors that requires us to, among other things, indemnify such director to the fullest extent permitted by law against all expenses and costs actually and reasonably incurred and all amounts such director is legally obligated to pay if such director was or becomes a party to or a witness or other participant in, or is threatened to be made a party to or witness or other participant in, or is subpoenaed with respect to, a claim by reason of such person’s status as a director of the company or by reason of such person’s service, at our request, as a director, officer, employee or agent of another corporation or other enterprise. We are required to advance all expenses actually and reasonably incurred by a director in defending or being a witness in a claim in advance of its final disposition; however, in certain circumstances, we are entitled to be reimbursed by the director upon determination, as provided in the indemnification agreement, that the director was not permitted to be indemnified under applicable law.
II-1 Item 21. Exhibits and Financial Statements Schedules (a) Exhibits |
II-1(b) Financial Statement Schedules
II-2
II-3
Item 22. Undertakings
II-4
SCHEDULE II
LEVI STRAUSS & CO. AND SUBSIDIARIES
VALUATION AND QUALIFYING ACCOUNTS
Allowance for Doubtful Accounts | Balance at Beginning of Period | Additions Charged to Expenses | Deductions(1) | Balance at End of Period | ||||||||||||
| (Dollars in thousands) | ||||||||||||||||
November 27, 2016 | $ | 11,025 | $ | 2,195 | $ | 1,246 | $ | 11,974 | ||||||||
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November 29, 2015 | $ | 12,704 | $ | 1,875 | $ | 3,554 | $ | 11,025 | ||||||||
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November 30, 2014 | $ | 18,264 | $ | 662 | $ | 6,222 | $ | 12,704 | ||||||||
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Sales Returns | Balance at Beginning of Period | Additions Charged to Net Sales | Deductions(1) | Balance at End of Period | ||||||||||||
| (Dollars in thousands) | ||||||||||||||||
November 27, 2016 | $ | 34,021 | $ | 195,718 | $ | 193,282 | $ | 36,457 | ||||||||
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November 29, 2015 | $ | 32,191 | $ | 152,471 | $ | 150,641 | $ | 34,021 | ||||||||
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November 30, 2014 | $ | 32,675 | $ | 138,577 | $ | 139,061 | $ | 32,191 | ||||||||
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Sales Discounts and Incentives | Balance at Beginning of Period | Additions Charged to Net Sales | Deductions(1) | Balance at End of Period | ||||||||||||
| (Dollars in thousands) | ||||||||||||||||
November 27, 2016 | $ | 86,274 | $ | 325,843 | $ | 306,640 | $ | 105,477 | ||||||||
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November 29, 2015 | $ | 98,416 | $ | 306,497 | $ | 318,639 | $ | 86,274 | ||||||||
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November 30, 2014 | $ | 110,572 | $ | 322,164 | $ | 334,320 | $ | 98,416 | ||||||||
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Valuation Allowance Against Deferred Tax Assets | Balance at Beginning of Period | Charges/ (Releases) to Tax Expense | (Additions) / Deductions | Balance at End of Period | ||||||||||||
| (Dollars in thousands) | ||||||||||||||||
November 27, 2016 | $ | 75,753 | $ | (2,514 | ) | $ | 5,027 | $ | 68,212 | |||||||
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November 29, 2015 | $ | 89,814 | $ | — | $ | 14,061 | $ | 75,753 | ||||||||
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November 30, 2014 | $ | 96,026 | $ | — | $ | 6,212 | $ | 89,814 | ||||||||
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II-5
(a) The undersigned registrant hereby undertakes:
(1) To file, during any period in which offers or sales are being made, a post-effective amendment to this registration statement:
(i) To include any prospectus required by section 10(a)(3) of the Securities Act of 1933;
(ii) To reflect in the prospectus any facts or events arising after the effective date of the registration statement (or the most recent post-effective amendment thereof) which, individually or in the aggregate, represent a fundamental change in the information set forth in the registration statement.
Notwithstanding the foregoing, any increase or decrease in volume of securities offered (if the total dollar value of securities offered would not exceed that which was registered) and any deviation from the low or high end of the estimated maximum offering range may be reflected in the form of prospectus filed with the Commission pursuant to Rule 424(b) if, in the aggregate, the changes in volume and price represent no more than a 20% change in the maximum aggregate offering price set forth in the “Calculation of Registration Fee” table in the effective registration statement; and
(iii) To include any material information with respect to the plan of distribution not previously disclosed in the registration statement or any material change to such information in the registration statement.
(2) That, for the purpose of determining any liability under the Securities Act of 1933, each such post-effective amendment shall be deemed to be a new registration statement relating to the securities offered therein, and the offering of such securities at that time shall be deemed to be the initial bona fide offering thereof.
(3) To remove from registration by means of a post-effective amendment any of the securities being registered which remain unsold at the termination of the offering.
(4) That, for the purpose of determining liability of the registrant under the Securities Act of 1933 to any purchaser, each prospectus filed pursuant to Rule 424(b) as part of a registration statement relating to an offering, other than registration statements relying on Rule 430B or other than prospectuses filed in reliance on Rule 430A, shall be deemed to be part of and included in the registration statement as of the date it is first used after effectiveness. Provided, however, that no statement made in a registration statement or prospectus that is part of the registration statement or made in a document incorporated or deemed incorporated by reference into the registration statement or prospectus that is part of the registration statement will, as to a purchaser with a time of contract of sale prior to such first use, supersede or modify any statement that was made in the registration statement or prospectus that was part of the registration statement or made in any such document immediately prior to such date of first use.
(5) That, for the purpose of determining liability of the registrant under the Securities Act of 1933 to any purchaser in the initial distribution of the securities:
The undersigned registrant undertakes that in a primary offering of securities of the undersigned registrant pursuant to this registration statement, regardless of the underwriting method used to sell the securities to the purchaser, if the securities are offered or sold to such purchaser by means of any of the following communications, the undersigned registrant will be a seller to the purchaser and will be considered to offer or sell such securities to such purchaser:
(i) Any preliminary prospectus or prospectus of the undersigned registrant relating to the offering required to be filed pursuant to Rule 424;
(ii) Any free writing prospectus relating to the offering prepared by or on behalf of the undersigned registrant or used or referred to by the undersigned registrant;
II-6
(iii) The portion of any other free writing prospectus relating to the offering containing material information about the undersigned registrant or its securities provided by or on behalf of the undersigned registrant; and
II-3
(iv) Any other communication that is an offer in the offering made by the undersigned registrant to the purchaser.
(b) The undersigned registrant hereby undertakes that, for purposes of determining any liability under the Securities Act of 1933, each filing of the registrant’s annual report pursuant to Section 13(a) or Section 15(d) of the Securities Exchange Act of 1934 (and, where applicable, each filing of an employee benefit plan’s annual report pursuant to Section 15(d) of the Securities Exchange Act of 1934) that is incorporated by reference in the registration statement shall be deemed to be a new registration statement relating to the securities offered therein, and the offering of such securities at that time shall be deemed to be the initial bona fide offering thereof.
(c) Insofar as indemnification for liabilities arising under the Securities Act of 1933 may be permitted to directors, officers and controlling persons of the registrant pursuant to the foregoing provisions, or otherwise, the registrant has been advised that in the opinion of the Securities and Exchange Commission such indemnification is against public policy as expressed in the Securities Act of 1933 and is, therefore, unenforceable. In the event that a claim for indemnification against such liabilities (other than the payment by the registrant of expenses incurred or paid by a director, officer or controlling person of the registrant in the successful defense of any action, suit or proceeding) is asserted by such director, officer or controlling person in connection with the securities being registered, the registrant will, unless in the opinion of its counsel the matter has been settled by controlling precedent, submit to a court of appropriate jurisdiction the question whether such indemnification by it is against public policy as expressed in the Securities Act of 1933 and will be governed by the final adjudication of such issue.
(c) That,(d) The undersigned registrant hereby undertakes to respond to requests for purposes of determining any liability under the Securities Act of 1933, each filing of the registrant’s annual report pursuant to Section 13(a) or Section 15(d) of the Securities Exchange Act of 1934information that is incorporated by reference into the prospectus pursuant to Items 4, 10(b), 11, or 13 of this form, within one business day of receipt of such request, and to send the incorporated documents by first class mail or other equally prompt means. This includes information contained in documents filed subsequent to the effective date of the registration statement shall be deemed to be a new registration statement relatingthrough the date of responding to the securities offered therein, and the offering of such securities at that time shall be deemed to be the initial bona fide offering thereof.request.
(d)(e) The undersigned registrant hereby undertakes to supply by means of a post-effective amendment all information concerning a transaction, and the company being acquired involved therein, that was not the subject of and included in the registration statement when it became effective.
II-7II-4
SIGNATURES
Pursuant to the requirements of the Securities Act of 1933, the Registrant has duly caused this Registration Statement onForm S-4 to be signed on its behalf by the undersigned, thereunto duly authorized in the City and County of San Francisco, State of California, on April 21, 2017.July 7, 2020.
| LEVI STRAUSS & CO. | ||
/s/ Harmit Singh | ||
| Harmit Singh | ||
Executive Vice President and | ||
| Chief Financial Officer | ||
II-8
KNOW ALL PERSONS BY THESE PRESENTS, that each person whose signature appears below constitutes and appoints Harmit Singh, Seth R. Jaffe and David Jedrzejek, and Harmit Singh, and each of them, as his or her true and lawful attorney-in-factattorneys-in-fact and agents, with full power of substitution for him or her, and in his or her name in any and all capacities, to sign any and all amendments, supplements or other documents relating to this registration statement on FormS-4 he or she deems necessary or appropriate, and to file the same, with exhibits thereto and other documents in connection therewith, with the U.S. Securities and Exchange Commission, granting unto said attorneys-in-fact and agents, and each of them, full power and authority to do and perform each and every act and thing requisite and necessary to be done therewith, as fully to all intents and purposes as he or she might or could do in person, hereby ratifying and confirming all that suchsaid attorney-in-factattorneys-in-fact orand agents, and either of them, his or her substitute or substitutes, may lawfully do or cause to be done by virtue hereof.
Pursuant to the requirements of the Securities Act of 1933, this registration statement has been signed below by the following persons on behalf of the registrant and in the capacities and on the dates indicated.
Signature | Title | Date | ||
/s/ Stephen C. Neal Stephen C. Neal | Chairperson of the Board | |||
/s/ Charles V. Bergh Charles V. Bergh | Director, President and Chief Executive Officer (Principal Executive Officer) | |||
/s/ Troy Alstead Troy Alstead | Director | |||
/s/ Jill Beraud Jill Beraud | Director | |||
/s/ Robert A. Eckert Robert A. Eckert | Director | |||
/s/ Spencer C. Fleischer Spencer C. Fleischer | Director | |||
/s/
| Director | |||
II-5
Signature | Title | Date | ||
/s/
| Director | |||
/s/ Christopher J. McCormick Christopher J. McCormick | Director | |||
/s/ Jenny Ming Jenny Ming | Director | |||
/s/ Patricia Salas Pineda Patricia Salas Pineda | Director | |||
/s/ Joshua E. Prime Joshua E. Prime | Director | July 7, 2020 | ||
/s/ Gavin Brockett Gavin Brockett | Senior Vice President and Global Controller (Principal Accounting Officer) | July 7, 2020 | ||
/s/ Harmit Singh Harmit Singh | Executive Vice President and Chief Financial Officer (Principal Financial Officer) | |||
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II-9
EXHIBIT INDEX
II-6