LEVI STRAUSS & CO. You should read the following discussion and analysis of our financial condition and results of operations together with our consolidated financial statements and related notes thereto included in Part II, Item 8 of this Annual Report on Form 10-K. Some of the information contained in this discussion and analysis or set forth elsewhere in this Annual Report, including information with respect to our plans and strategy for our business, includes forward-looking statements that involve risks and uncertainties. See "Special Note Regarding Forward-Looking Statements" and "Risk Factors" for a discussion of forward-looking statements and important factors that could cause actual results to differ materially from the results described in or implied by the forward-looking statements. We use a 52- or 53-week fiscal year, with each fiscal year ending on the Sunday that is closest toNovember 30 of that year. See "-Financial Information Presentation-Fiscal Year." This Management's Discussion and Analysis of Financial Condition and Results of Operations is designed to provide a reader of our financial statements with a narrative from the perspective of our management on our financial condition, results of operations, liquidity and certain other factors that may affect our future results. To supplement our consolidated financial statements prepared and presented in accordance with generally accepted accounting principles inthe United States ("GAAP"), we use certain non-GAAP financial measures throughout this Annual Report, as described further below, to provide investors with additional useful information about our financial performance, to enhance the overall understanding of our past performance and future prospects and to allow for greater transparency with respect to important metrics used by our management for financial and operational decision-making. We are presenting these non-GAAP financial measures to assist investors in seeing our financial performance from management's view and because we believe they provide an additional tool for investors to use in comparing our core financial performance over multiple periods with other companies in our industry. However, non-GAAP financial measures have limitations in their usefulness to investors because they have no standardized meaning prescribed by GAAP and are not prepared under any comprehensive set of accounting rules or principles. In addition, non-GAAP financial measures may be calculated differently from, and therefore may not be directly comparable to, similarly titled measures used by other companies. As a result, non-GAAP financial measures should be viewed as supplementing, and not as an alternative or substitute for, our consolidated financial statements prepared and presented in accordance with GAAP.
Overview
We are an iconic American company with a rich history of profitable growth, quality, innovation and corporate citizenship. Our story began inSan Francisco, California , in 1853 as a wholesale dry goods business. We created the first riveted blue jean 20 years later. Today we design, market and sell products that include jeans, casual and dress pants, tops, shorts, skirts, dresses, jackets, footwear and related accessories for men, women and children around the world under our Levi's®, Dockers®, Signature by Levi Strauss & Co.™ and Denizen® brands. We service our consumers through our global infrastructure which develops, sources and markets our products around the world. In the fourth quarter of fiscal 2021, we acquired Beyond Yoga®, which is a premium athletic and lifestyle apparel brand. We operate our business according to three reportable segments:Americas ,Europe , andAsia , collectively comprising our Levi's Brands business, which includes the Levi's, Signature by Levi Strauss & Co.™ and Denizen® brands. The Dockers® and Beyond Yoga® businesses do not meet the quantitative thresholds for reportable segments and therefore are presented in our financial statements under the caption of Other Brands. Our iconic, enduring brands are brought to life every day around the world by our talented and creative employees and partners. The Levi's® brand epitomizes classic, authentic American style and effortless cool. We have cultivated Levi's® as a lifestyle brand that is inclusive and democratic in the eyes of consumers while offering products that feel exclusive, personalized and original. This approach has enabled the Levi's® brand to evolve with the times and continually reach a new, younger audience, while our rich heritage continues to drive relevance and appeal across demographics. The Dockers® brand helped drive "Casual Friday" in the 1990s and has been a cornerstone of casual menswear for more than 30 years. Seen as the khaki leader, Dockers® has returned to itsCalifornia roots and is bringing a full range of casual, versatile styles for men and women to show up with cool confidence every day. The Signature by Levi Strauss & Co.™ and Denizen® brands, which we developed for value-conscious consumers, offer quality craftsmanship and great fit and style at affordable prices. The Beyond Yoga® brand is a body positive, premium athleisure apparel brand focused on quality, fit and comfort. We recognize wholesale revenue from sales of our products through third-party retailers such as department stores, specialty retailers, third-party e-commerce sites and franchise locations dedicated to our brands. We also sell our products directly to consumers through a variety of formats, including our own company-operated mainline and outlet stores, company- 41
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operated e-commerce sites and select shop-in-shops that we operate within department stores and other third-party retail locations. As ofNovember 27, 2022 , our products were sold in approximately 50,000 retail locations in more than 110 countries, including approximately 3,200 brand-dedicated stores and shop-in-shops. As ofNovember 27, 2022 , we had company-operated stores located in 38 countries and approximately 550 company-operated shop-in-shops. The remainder of our brand-dedicated stores and shop-in-shops were operated by franchisees and other partners. Across all of our brands, pants - including jeans, casual pants, dress pants, shorts, skirts, and activewear - represented 67% of our total units sold in both fiscal years 2022 and 2021, respectively. Tops - including shirts, sweaters, jackets, dresses and jumpsuits - represented 26% and 25% of our total units sold in fiscal years 2022 and 2021, respectively. The remainder of our products are footwear and accessories. Men's products generated 65% of our net revenues in both fiscal years 2022 and 2021. Women's products generated 33% of our net revenues in both fiscal years 2022 and 2021. The remainder of our products are non-gendered. Products other than denim bottoms - which include tops, footwear and accessories and pants excluding jeans - represented 38% and 37% of our net revenues in fiscal years 2022 and 2021, respectively. OurEurope andAsia businesses, collectively, contributed 41% of our net revenues and 41% of our segment operating income in fiscal year 2022, as compared to 44% of our net revenues and 39% of our segment operating income in fiscal year 2021. Revenues from our international business, which includes ourEurope andAsia segments, as well asCanada andLatin America from ourAmericas segment, represented 53% of our net revenues in fiscal year 2022, as compared to 55% in fiscal year 2021. Sales of Levi's® brand products represented approximately 87% of our net revenues in both fiscal year 2022 and fiscal year 2021. Our wholesale channel generated 62% and 64% of our net revenues in fiscal years 2022 and 2021, respectively. Our DTC channel generated 38% and 36% of our net revenues in fiscal years 2022 and 2021, respectively, with our company operated e-commerce business representing 19% and 21% of DTC channel net revenues and 7% and 8% of total net revenues in fiscal years 2022 and 2021, respectively. Our global digital business, which includes our e-commerce sites as well as the online business of our wholesale customers, including that of traditional wholesalers as well as pure-play (online-only) wholesalers represent approximately 22% of our total net revenues in both fiscal years. Our key long-term objectives are to strengthen our brands globally in order to deliver sustainable profitable growth and generate industry-leading shareholder returns. Critical strategies to achieve these objectives include being a brand-led business, putting DTC first, and further diversifying across geographies, categories, genders and channels. We intend to achieve these strategies through operational excellence, financial discipline, and the digital transformation of our business processes and ways of working, including continuing to invest in key omni-channel capabilities, digital tools across the business and updating our ERP system.
Impact of Russia-Ukraine Crisis on our Business
As a result ofRussia's invasion ofUkraine , we suspended our business initiatives and the majority of our commercial activity inRussia andUkraine in the second quarter of 2022. This included the closure of the majority of our company-operated stores inRussia , as well as the suspension of shipments to our wholesale and licensing customers inRussia andUkraine . In response to this crisis,the United States and other countries have implemented economic and other sanctions. These sanctions currently, and any additional sanctions may in the future, impact our ability to conduct business inRussia . Given the high level of uncertainty surrounding the future operations of our business inRussia , including the ability to generate future cash flows, the carrying value of our long-lived assets specific to our commercial business inRussia were deemed to be not recoverable. As a result of theRussia -Ukraine crisis, during the second quarter of 2022, we recorded total charges of$60.4 million . The charges reflect the full impairment of long-lived assets, including$35.4 million related to certain store right-of-use assets,$11.6 million related to goodwill and$4.1 million related to property, plant and equipment, as well as$9.3 million of other incremental charges. During the second half of 2022, we recognized a$15.8 million gain related to the early termination of certain store lease agreements related to theRussia -Ukraine crisis. All charges are included in selling, general and administrative ("SG&A") expenses in the accompanying consolidated statements of operations. We are monitoring the effects of this conflict and expect that we will adjust our plans accordingly as the situation progresses. For the year endedNovember 27, 2022 , the results of operations for our businesses inRussia andUkraine were not material to our consolidated financial statements. However, the impact to ourEurope segment was an approximate$57 million decrease in net revenues on a constant currency basis as compared to the prior year. Net revenues fromRussia represented approximately 2% of our total net revenues for fiscal year 2021. There is still uncertainty regarding the extent to which the war and its broader macroeconomic implications will impact ourEurope segment and overall business, financial condition and results of operations. 42
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Supply Chain and
Port congestion, inventory delays, increased and unpredictable lead times, labor shortages, and storage and process capacity pressures within ourU.S. distribution centers, are impacting our ability to service consumer and wholesale customer demand, mainly withinthe United States . During the fourth quarter of 2022, we estimate that these disruptions have resulted in the inability to fulfillU.S. wholesale customer orders with an estimated impact on net revenues of approximately$35 million to$45 million . In an effort to mitigate unpredictable lead times and prepare for our ERP system implementation inApril 2023 , we intentionally received future season, or core, inventory earlier than our typical practice during the second half of 2022. As ofNovember 27, 2022 , we had$420.1 million of inventory in-transit, including inventory received earlier than needed and not yet able to be processed due to process capacity pressures within our distribution centers. These factors are contributing to our elevated inventory levels. While we expect supply chain disruption to continue into the first half of fiscal 2023, we are planning an approximate 25% reduction in inventory buys through the second quarter of fiscal 2023, as we expect to service customer demand using inventories received in 2022. Additionally, competition for, and price volatility of, resources throughout the supply chain have increased, resulting in higher product costs. Trends affecting the supply chain include fluctuating prices and inflationary pressures on labor and raw materials. Trends such as these can result in higher product costs and increased pressure to reduce costs and raise product prices. We continue to pursue mitigation strategies and create new efficiencies in our global supply chain. Effects of Inflation Inflationary pressures have negatively impacted our revenue, operating margins and net income in fiscal 2022, including increased costs of labor, products and freight, and beginning inJuly 2022 , a slowdown in consumer demand for our products. We implemented price increases on many of our products in 2022 in an effort to mitigate the effect of higher costs. Inflation did not have a significant impact on our results of operations in 2021. If these inflationary pressures continue, our revenue, gross and operating margins and net income will be impacted in 2023.
Impact of COVID-19 on Our Business
The ongoing impact of the COVID-19 pandemic continues to affect our business and results of operations, although to a lesser extent than in prior years. Currently, its effect is primarily on our global supply chain as noted above.
Strict lockdowns and zero-tolerance policy shutdowns inChina have resulted in temporary store closures and reduced traffic throughout the country during 2022. Across the rest of our markets, most of our company-operated stores and wholesale customer doors were open throughout the year.
We cannot predict how the COVID-19 pandemic may impact our business and results of operations in fiscal year 2023.
Other Factors Affecting Our Business
We believe the other key business and marketplace factors that are impacting our business include the following:
•The rapid strengthening of theU.S. Dollar relative to major foreign currencies, including the Euro and British Pound, unfavorably impacted our 2022 results. Continued significant fluctuations of foreign currencies against theU.S. Dollar, may further negatively impact our financial results, revenue, operating margins and net income. •Inflation and other macroeconomic pressures in theU.S. and the global economy such as rising interest rates, energy prices and recession fears are creating a complex and challenging retail environment for us and our customers as consumers reduce discretionary spending. A decline in consumer spending, for any reason, could have an adverse effect on our revenues, operating margins and net income. Inability to appropriately forecast consumer demand could lead to elevated inventory levels both with us and our customers, resulting in fewer full-priced sales and a more promotional environment. Additionally, elevated inventory levels, combined with the uneven flow of receipts and shipments could cause further capacity pressures within ourU.S. distribution centers, resulting in higher costs and limiting our ability to fulfill our customer's demand. These trends may impact our financial results, affecting inventory, revenue, operating margins and net income. •Consumer expectations and related competitive pressures have increased and are expected to continue to increase relative to various aspects of our e-commerce business, including speed of product delivery, shipping charges, return privileges, and other evolving expectations. We continue to invest in our online platforms, information systems, digital, data and AI capabilities, as well as in personnel to support the creation of a fully integrated omni-channel shopping experience. There can be no assurance that we will be able to successfully meet these expectations which may impact our financial results. 43
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•The diversification of our business model across geographies, channels, brands, and categories affects our gross margin. For example, if our sales in higher gross margin geographies, channels, brands and categories grow at a faster rate than in our lower gross margin business geographies, channels, brands and categories, we would expect a favorable impact to aggregate gross margin over time. Gross margin in ourEurope segment is generally higher than in ourAmericas andAsia segments. DTC sales generally have higher gross margins than sales through third parties, although DTC sales also typically have higher selling expenses. Value brands, which are focused on the value-conscious consumer, generally generate lower gross margin. Enhancements to our existing product offerings, or our expansion into new brands and products categories, may also impact our future gross margin. •The current domestic and international political environment, including volatile trade relations, the conflict involvingRussia andUkraine , and civil unrest taking place in certain parts of the world have resulted in uncertainty surrounding the future state of the global economy. Further, there is greater uncertainty with respect to potential changes in tax and trade regulations, sanctions and export controls which also increase volatility in the global economy. Such changes may require us to modify our current sourcing practices, which may impact our product costs, and, if not mitigated, could have a material adverse effect on our business and results of operations. •As climate change evolves, we expect an increase in both the frequency and severity of seasonal and severe weather events, which may affect our consumer traffic and demand, as well as the activities of our suppliers, manufacturers, and customers. Weather events, such as droughts, heatwaves, floods, wildfires and winter storms could impact store traffic and conversion as the timing for seasonal products may be unpredictable. Additionally, weather events like the recent flooding inPakistan , could impact the cost or availability of raw materials integral to our products such as cotton. •There has been increased focus from our stakeholders, including consumers, employees and investors, and more recently regulatory organizations on corporate environmental, social, and governance ("ESG") practices, including practices related to the causes and impacts of climate change. We expect that stakeholder expectations with respect to ESG practices will continue to evolve rapidly, which may necessitate additional resources to monitor, report on, and adjust our operations. •Wholesaler/retailer dynamics and wholesale channels remain challenged by mixed growth prospects due to increased competition from e-commerce shopping, pricing transparency enabled by the proliferation of online technologies, and vertically-integrated specialty stores. Retailers, including our top customers, have in the past and may in the future decide to consolidate, undergo restructurings or rationalize their stores, which could result in a reduction in the number of stores that carry our products. These factors contribute to a global market environment of intense competition, constant product innovation and continuing cost pressure, and combine with the continuing global economic conditions to create a challenging commercial and economic environment. We evaluate these factors as we develop and execute our strategies. Seasonality of Sales
We typically achieve our largest quarterly revenues in the fourth quarter. In fiscal year 2022, our net revenues in the first, second, third and fourth quarters represented 26%, 24%, 24% and 26%, respectively, of our total net revenues for the year. In fiscal year 2021, 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.
To mitigate risks associated with theApril 2023 U.S. ERP implementation, we plan to accelerate wholesale shipments, typically made in the second quarter to the first quarter of 2023. As a result, we estimate that approximately$80 million to$100 million of corresponding net revenues will shift from the second quarter to the first quarter of 2023. Additionally, given the impact on our channel mix, we estimate that gross margins in the first quarter will be unfavorably impacted and gross margins in the second quarter will be favorably impacted. We typically achieve a significant amount of revenues from our DTC channel on the Friday followingThanksgiving Day , which is commonly referred to as Black Friday. Due to the timing of our fiscal year end, a particular fiscal year might include one, two or no Black Fridays, which could impact our net revenues for the fiscal year. Fiscal years 2022 and 2021 included one Black Friday. The level of our working capital reflects the seasonality of our business and varies throughout the year to support our seasonal and holiday revenue patterns as well as business trends. 44
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Our Results for the Fourth Quarter of Fiscal Year 2022
•Net revenues. Compared to the fourth quarter of fiscal year 2021, consolidated net revenues decreased 5.7% on a reported basis and 0.4% on a constant-currency basis. Excluding the effects of currency, revenue growth was essentially flat, as growth inAsia andLatin America was offset with a decline inEurope and theU.S. , primarily driven by the impact of theRussia -Ukraine crisis, and ongoing macroeconomic challenges and supply chain disruptions.
•Operating income. Compared to the fourth quarter of 2021, consolidated
operating income decreased 26.5% to
•Net income. Compared to the fourth quarter of 2021, consolidated net income of$150.6 million decreased from$153.0 million . The decrease was primarily due to lower operating income as described above partially offset by lower income tax expense in the current year. The prior year also included the recognition of$6.2 million in incremental charges related to the early extinguishment of debt.
•Adjusted EBIT. Compared to the fourth quarter of 2021, Adjusted EBIT of
•Adjusted net income. Compared to the fourth quarter of 2021, Adjusted net
income of
•Diluted earnings per share. Compared to the fourth quarter of 2021, diluted earnings per share of$0.38 increased from$0.37 due to a decrease in weighted-average common shares outstanding resulting from incremental share repurchases in the current year partially offset with lower net income described above. •Adjusted diluted earnings per share. Compared to the fourth quarter of 2021, Adjusted diluted earnings per share of$0.34 decreased from$0.41 mainly due to the lower Adjusted net income described above. Currency translation unfavorably affected Adjusted diluted earnings per share by$0.04 . •Inventory. Compared to the end of the fourth quarter of 2021, inventory as of the end of the fourth quarter of fiscal 2022 has increased 58% primarily due to an increase in goods-in-transit units, intentional earlier receipts and carryforward of future season, or core, inventory to supportU.S. implementation of a new ERP system and to mitigate supply chain risk, and the inflation impact on product costs. Higher goods-in-transit and the impact of the ERP contributed approximately 16% and 7% to the increase, respectively.
Our Fiscal Year 2022 Results
•Net revenues. Compared to fiscal year 2021, consolidated net revenues increased 7.0% on a reported basis and 11.9% on a constant-currency basis. The increase was driven by growth across all segments as a result of higher traffic and demand in the current year, despite macroeconomic challenges and supply chain disruptions that began to impact parts of the business in the second half of 2022. •Operating income. Compared to fiscal year 2021, consolidated operating income decreased 5.8% to$646.5 million from$686.2 million as higher net revenues were offset with a lower gross margin and higher SG&A expenses in the current year, which included$40.5 million of impairment and other net charges related to theRussia -Ukraine crisis. As a result of these additional charges, operating margin was 10.5%, 140 basis points lower than 2021. •Net income. Compared to fiscal year 2021, consolidated net income increased to$569.1 million from$553.5 million . The increase was due to lower interest expense and the inclusion of a COVID-19 subsidy gain in the current year, which was partially offset with lower operating income described above and higher income tax expense. The prior year also included the recognition of$36.5 million in incremental charges related to the early extinguishment of debt. •Adjusted EBIT. Compared to fiscal year 2021, Adjusted EBIT of$713.0 million was essentially flat as higher net revenues in the current year were offset with higher Adjusted SG&A expenses. Adjusted EBIT margin was 11.6%, 80 basis points lower than the prior year on a reported basis and 40 basis points lower on a constant-currency basis. •Adjusted net income. Compared to fiscal year 2021, Adjusted net income increased to$603.9 million from$600.9 million . The increase was primarily due to lower interest expense partially offset with higher income tax expense in the current year. 45
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•Diluted earnings per share. Compared to fiscal year 2021, diluted earnings per
share of
•Adjusted diluted earnings per share. Compared to fiscal year 2021, Adjusted diluted earnings per share of$1.50 increased from$1.47 due to the higher Adjusted net income described above as well as a decrease in weighted-average common shares outstanding resulting from incremental share repurchases in the current year. Currency translation unfavorably affected Adjusted diluted earnings per share by 0.12.
For more information on Adjusted gross margin, Adjusted SG&A, Adjusted EBIT,
Adjusted net income and Adjusted diluted earnings per share, measures not
prepared in accordance with
Financial Information Presentation
Fiscal year. We use a 52- or 53-week fiscal year, with each fiscal year ending on the Sunday that is closest toNovember 30 of that year. Certain of our foreign subsidiaries have fiscal years endingNovember 30 . Each fiscal year generally consists of four 13-week quarters, with each quarter ending on the Sunday that is closest to the last day of the last month of that quarter. Fiscal years 2022 and 2021 were 52-week years, ending onNovember 27, 2022 andNovember 28, 2021 , respectively and each quarter of fiscal years 2022 and 2021 consisted of 13 weeks. Segments. Our Levi's Brands business, which includes Levi's®, Signature by Levi Strauss & Co.™ and Denizen® brands, is defined by geographical regions into three segments:Americas ,Europe andAsia . Our Dockers® and Beyond Yoga® businesses are managed separately and do not meet the quantitative thresholds of a reportable operating segment and are reported in our financial statements under the caption of Other Brands.
Classification. Our classification of certain significant revenues and expenses reflects the following:
•Net revenues comprise net sales and licensing revenues. Net sales include sales of products to wholesale customers, including franchised stores, and direct sales to consumers at our company-operated stores and shop-in-shops located within department stores and other third-party locations, as well as company-operated e-commerce sites. Net revenues include discounts, allowances for estimated returns and incentives. Licensing revenues, which include revenues from the use of our trademarks in connection with the manufacturing, advertising and distribution of trademarked products by third-party licensees, are earned and recognized as products are sold by licensees based on royalty rates as set forth in the applicable licensing agreements.
•Cost of goods sold primarily comprises product costs, labor and related overhead, sourcing costs, inbound freight, internal transfers and the cost of operating our manufacturing facilities, including the related depreciation expense. On both a reported and constant-currency basis, cost of goods sold reflects the transactional currency impact resulting from the purchase of products in a currency other than the functional currency.
•Selling expenses include, among other things, all occupancy costs and depreciation associated with our company-operated stores and commissions associated with our company-operated shop-in-shops, as well as costs associated with our e-commerce operations.
•We reflect substantially all distribution costs in selling, general and administrative expenses, including costs related to receiving and inspection at distribution centers, warehousing, shipping to our customers, handling, and certain other activities associated with our distribution network.
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Results of Operations
A discussion regarding our results of operations for fiscal year 2022 compared to fiscal year 2021 is presented below. A discussion regarding our results of operations for fiscal year 2021 compared to fiscal year 2020 can be found under Item 7 - Management's Discussion and Analysis in our Annual Report on Form 10-K for the year endedNovember 28, 2021 , filed with theSEC onJanuary 26, 2022 .
The following table summarizes, for the periods indicated, our consolidated statements of operations, the changes in these items from period to period and these items expressed as a percentage of net revenues:
Year Ended
November 27, November 28,
% 2022 2021
November 27, November 28, Increase % of Net % of Net
2022 2021 (Decrease) Revenues Revenues
(Dollars in millions, except per share amounts)
Net revenues $ 6,168.6 $ 5,763.9 7.0 % 100.0 % 100.0 %
Cost of goods sold 2,619.8 2,417.2 8.4 % 42.5 % 41.9 %
Gross profit 3,548.8 3,346.7 6.0 % 57.5 % 58.1 %
Selling, general and administrative expenses 2,893.2 2,652.2 9.1 % 46.9 % 46.0 %
Restructuring charges, net 9.1 8.3 9.6 % 0.1 % 0.1 %
Operating income 646.5 686.2 (5.8) % 10.5 % 11.9 %
Interest expense (25.7) (72.9) 64.7 % (0.4) % (1.3) %
Loss on early extinguishment of debt - (36.5) 100.0 % - % (0.6) %
Other income, net 28.8 3.4 * 0.5 % 0.1 %
Income before income taxes 649.6 580.2 12.0 % 10.5 % 10.1 %
Income tax expense 80.5 26.7 * 1.3 % 0.5 %
Net income $ 569.1 $ 553.5 2.8 % 9.2 % 9.6 %
Earnings per common share attributable to
common stockholders:
Basic $ 1.43 $ 1.38 3.6 % * *
Diluted $ 1.41 $ 1.35 4.4 % * *
Weighted-average common shares outstanding:
Basic 397.3 401.6 (1.1) % * *
Diluted 403.8 409.8 (1.5) % * *
_____________
* Not meaningful
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Net revenues
The following table presents net revenues for each reportable segment for the
periods indicated, and the changes in net revenues for each reportable segment
on both reported and constant-currency bases from period to period:
Year Ended
% Increase (Decrease)
November 27, November 28, As Constant
2022 2021 Reported Currency
(Dollars in millions)
Net revenues:
Levi's Brands:
Americas $ 3,187.4 $ 2,934.8 8.6 % 9.0 %
Europe 1,597.2 1,704.0 (6.3) % 3.8 %
Asia 952.1 834.7 14.1 % 23.6 %
Total Levi's Brands net revenues: 5,736.7 5,473.5 4.8 % 9.6 %
Other Brands 431.9 290.4 48.7 % 54.9 %
Total net revenues $ 6,168.6 $ 5,763.9 7.0 % 11.9 %
As compared to the same period in the prior year, total net revenues were
affected unfavorably by approximately
Americas . Net revenues in ourAmericas segment increased on both reported and constant-currency bases, with currency affecting net revenues unfavorably by approximately$10 million . Constant-currency net revenues increased as a result of higher revenue across both our wholesale and DTC channels. Wholesale channel revenue increased across all markets, driven by strong growth of our Levi's brand products inthe United States andLatin America .U.S. wholesale channel revenue grew due to an increase in units sold as well as price increases, despite supply chain disruptions,U.S. distribution center capacity constraints and the softening of consumer demand in the second half of the year. The increased revenue inLatin America was driven by both higher volume and price increases. The increase in DTC channel revenue was driven by strong performance within our company-operated stores, as higher traffic in the current year led to an increase in units sold, as compared to the prior year, where traffic was tempered from the lingering impacts of the ongoing pandemic. Additionally, price increases taken throughout the year and store expansion attributed to the revenue growth, as there were 21 more stores in operation as ofNovember 27, 2022 , as compared toNovember 28, 2021 . E-commerce revenue increased primarily from higher average selling prices.Europe . Net revenues inEurope decreased on a reported basis and increased on a constant-currency basis, with currency translation affecting net revenues unfavorably by approximately$166 million . Excluding the effects of currency, theRussia -Ukraine crisis adversely impacted net revenues by approximately$57 million for the fiscal year 2022. Constant-currency net revenues increased in 2022 driven by higher DTC channel revenue despite softened consumer spending in the second half of the year and an approximate$51 million decrease in DTC revenue due to theRussia -Ukraine crisis. The increase in DTC channel revenue was driven by strong performance in our company-operated stores, driven in part from an increase in units sold as consumers returned to in-store shopping after being impacted by the pandemic in the prior year, as well as the benefit of price increases taken throughout the year. This growth was partially offset by 55 fewer stores in operation as ofNovember 27, 2022 , as compared toNovember 28, 2021 , primarily due to the closure of stores inRussia . E-commerce revenue declined primarily due to lower online traffic as compared to the prior year. Wholesale channel revenue decreased, as growth in the first half of the year was offset by softened consumer spending in the second half due to ongoing macroeconomic challenges. As compared to the prior year, growth in franchise partners and higher average selling prices were offset with a decrease in units sold to our traditional wholesale customers, as they tempered demand amid the slowdown in consumer spending.Asia . Net revenues inAsia increased on both reported and constant-currency bases, with currency translation affecting net revenues unfavorably by approximately$64 million . Excluding the effects of currency, net revenues for 2022 grew across both our wholesale and DTC channels, despite continued COVID-19 related lockdowns inChina , which resulted in a decline in net revenues of approximately$33 million in comparison to the prior year. 48
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The increase in wholesale channel revenue was primarily due to growth across most markets, particularlyIndia , as a result of higher demand and order replenishments in the current year as compared to the prior year, which was impacted by COVID-19 related restrictions and lockdowns in a number of markets. Price increases taken in the current year also attributed to revenue growth. Additionally, net revenues of our digital wholesale customers grew in 2022 as compared to the prior year. The increase in DTC channel revenue was primarily due to strong performance in our company-operated stores, as higher traffic in the current year led to an increase in units sold, as compared to the prior year, which was impacted by COVID-19 related restrictions and lockdowns in a number of markets. Additionally, price increases taken throughout the year and store expansion attributed to the revenue growth, as there were 28 more stores in operation as ofNovember 27, 2022 , as compared toNovember 28, 2021 , as well as the addition of approximately 80 company-operated shop in shops which were previously licensed inThailand . E-commerce revenue grew primarily due to increased online traffic as compared to the prior year. Other Brands. Net revenues in Other Brands increased on both reported and constant-currency bases, with currency translation affecting net revenues unfavorably by approximately$12 million . The increase in net revenues was primarily driven by the inclusion of a full year of Beyond Yoga® revenues, approximately$98 million , in the current year as compared to the prior year which included revenues as of the the date of acquisition, as well as growth of our Dockers® brand. 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 27, November 28, Increase
2022 2021 (Decrease)
(Dollars in millions)
Net revenues $ 6,168.6 $ 5,763.9 7.0 %
Cost of goods sold 2,619.8 2,417.2 8.4 %
Gross profit $ 3,548.8 $ 3,346.7 6.0 %
Gross margin 57.5 % 58.1 %
As compared to the same period in the prior year, currency translation
unfavorably impacted gross profit by approximately $155 million . The decrease in
gross margin was primarily due to the unfavorable impact of currency, including
transaction and translation impacts, which negatively impacted gross margin by
approximately 50 basis points. Favorable product mix and price increases were
mostly offset with higher product costs, lower full priced sales and the
inclusion of $15 million in reductions in COVID-19 related inventory costs
recognized in the prior year.
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Selling, general and administrative expenses
The following table shows SG&A expenses for the periods indicated, the changes
in these items from period to period and these items expressed as a percentage
of net revenues:
Year Ended
November 27, November 28,
% 2022 2021
November 27, November 28, Increase % of Net % of Net
2022 2021 (Decrease) Revenues Revenues
(Dollars in millions)
Selling $ 1,220.2 $ 1,136.0 7.4 % 19.8 % 19.7 %
Advertising and promotion 463.7 434.5 6.7 % 7.5 % 7.5 %
Administration 481.2 485.5 (0.9) % 7.8 % 8.4 %
Other 728.2 596.2 22.1 % 11.8 % 10.3 %
Total SG&A expenses $ 2,893.3 $ 2,652.2 9.1 % 46.9 % 46.0 %
Currency translation affected SG&A expenses favorably by approximately
Selling. Currency translation impacted selling expenses favorably by approximately$58 million for the year endedNovember 27, 2022 . The increase in selling expenses is primarily due to higher sales volume in the current year as compared to the prior year which included temporary store closures in certain markets as a result of the pandemic as well as higher labor costs in the current year as a result of inflation.
Advertising and promotion. Currency translation impacted advertising and
promotion expense favorably by approximately
Administration. Administration expenses include functional administrative and organization costs. Currency translation impacted administration expenses favorably by approximately$12 million for the year endedNovember 27, 2022 . The decrease in administration costs was primarily due to lower incentive compensation costs as compared to the prior year, which was partially offset by the recognition of$40.5 million in charges related to theRussia -Ukraine crisis, mostly impairment charges, including$33.3 million related to certain store right-of-use assets,$11.6 million related to goodwill and$4.1 million related to other property, plant and equipment, net of a$15.8 million gain on the early termination of store leases. Other. Other costs include distribution, information resources, and marketing organization costs. Currency translation impacted other SG&A expenses favorably by approximately$14 million for fiscal year 2022. The increase in other costs was primarily due to higher distribution expenses attributable to higher labor costs as a result of inflation. Higher information technology expenses also contributed to the increase in costs as we continue to make ongoing strategic investments in technology and our DTC business.
Restructuring charges, net
During the year endedNovember 27, 2022 , we recognized restructuring charges of$9.1 million as compared to restructuring charges of$8.3 million in the prior year. The charges consist primarily of severance and other post-employment benefits related to a restructuring initiative that commenced during the year and is expected to continue through fiscal year 2023. 50
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Operating income
The following table shows operating income for each reportable segment and corporate expenses for the periods indicated, the changes in these items from period to period and these items expressed as a percentage of corresponding segment net revenues or consolidated net revenues:
Year Ended
November 27, November 28,
% 2022 2021
November 27, November 28, Increase % of Net % of Net
2022 2021 (Decrease) Revenues Revenues
(Dollars in millions)
Operating income:
Levi's Brands:
Americas $ 654.4 $ 660.2 (0.9) % 20.5 % 22.5 %
Europe 349.9 396.4 (11.7) % 21.9 % 23.3 %
Asia 111.2 35.1 216.8 % 11.7 % 4.2 %
Total Levi's Brands operating income 1,115.5 1,091.7 2.2 % 19.4 % 19.9 %
Other Brands 17.1 10.4 64.4 % 4.0 % 3.6 %
Restructuring charges, net (9.1) (8.3) 9.6 % (0.1) % v (0.1) % v
Corporate expenses (477.0) (407.6) 17.0 % (7.7) % v (7.1) % v
Total operating income $ 646.5 $ 686.2 (5.8) % 10.5 % v 11.9 % v
Operating margin 10.5 % 11.9 %
______________
v Percentage of consolidated net revenues
Currency translation affected total operating income in fiscal year 2022
unfavorably by approximately
Segment operating income.
•Americas. Currency translation unfavorably affected operating income in the segment by approximately$4 million as compared to the prior year. Operating income for fiscal 2022 was essentially flat as compared to the prior year, as higher net revenues were offset with higher SG&A expenses as a percentage of net revenues. •Europe. Currency translation unfavorably affected operating income in the segment by approximately$45 million as compared to the prior year. Excluding the effects of currency, the decrease in operating income was primarily due to higher SG&A expenses as a percentage of net revenues, partially offset with higher net revenues and gross margin. •Asia. Currency translation unfavorably affected operating income in the segment by approximately$7 million as compared to the prior year. Excluding the effects of currency, the increase in operating income was primarily due to higher net revenues and gross margin in the current year, as well as leverage on SG&A expenses as they represented a lower percentage of net revenues as compared to the prior year. •Other Brands. Currency translation did not have a significant impact on operating income for fiscal year 2022. The increase in operating income was primarily due to higher net revenues and gross margin in the current year as compared to the prior year, as SG&A expenses as a percentage of net revenues were flat. Restructuring charges, net. Currency translation did not have a significant impact on operating income for fiscal year 2022. During the years endedNovember 27, 2022 andNovember 28, 2021 , we recognized restructuring charges of$9.1 million and$8.3 million , respectively, consisting primarily of severance and other post-employment benefits. Corporate expenses. Currency translation favorably affected corporate expenses by approximately$5 million as compared to the prior year. Corporate expenses represent costs that management does not attribute to any of our operating segments. Included in corporate expenses are certain impairment charges, acquisition related charges, COVID-19 related 51
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charges and other corporate staff costs. Corporate expenses also include costs associated with our global inventory sourcing organization which are reported as a component of consolidated gross margin. The increase in corporate expenses for the year endedNovember 27, 2022 primarily reflects$40.5 million in charges related to theRussia -Ukraine crisis, primarily related to impairment and other related charges, net of a$15.8 million gain on the early termination of certain store leases. Higher global sourcing costs, including foreign currency transaction losses related to the procurement of inventory on behalf of our foreign subsidiaries and higher information technology expenses also contributed to the increase in corporate expenses. This was partially offset with higher foreign exchange gains from our hedging program recognized in the current year as compared to the prior-year period. Operating margin. Currency translation affected total operating margin in fiscal year 2022 unfavorably by approximately 40 basis points as compared to the prior year. Compared to fiscal year 2021, consolidated operating income decreased 5.8% to$646.5 million from$686.2 million as higher net revenues were offset with a lower gross margin and higher SG&A expenses in the current year, which included$40.5 million of impairment and other net charges related to theRussia -Ukraine crisis. During fiscal year 2022, the unfavorable impact of transactional currency was approximately 40 basis points.
Interest expense
Interest expense was$25.7 million for the year endedNovember 27, 2022 , as compared to$72.9 million in the prior year. Interest expense decreased due to lower interest on debt borrowings in the current year, related to our debt refinancing activities performed in the second quarter of 2021. Additionally, in comparison to prior year, interest expense related to our deferred compensation plans was$29.6 million lower, due to the favorable impact of changes in market conditions.
Our weighted-average interest rate on average borrowings outstanding for fiscal year 2022 was 3.96%, as compared to 4.32% for fiscal year 2021.
Loss on early extinguishment of debt
During the year ended
Other income, net Other income, net, primarily consists of foreign exchange management activities and transactions. For the years endedNovember 27, 2022 andNovember 28, 2021 , we recorded net other income of$28.8 million and$3.4 million , respectively. The increase in other income was primarily due to the recognition of a$12.5 million COVID-19 related subsidy gain received from the German government in the current year as reimbursement for COVID-19 losses incurred in prior years and the recognition of net unrealized gains on marketable securities held in connection with our deferred compensation plan of$6.9 million , including$19.9 million of gains related to prior periods. Additionally, we incurred a lower amount of foreign exchange management losses as compared to the prior year.
Income tax expense
Income tax expense was$80.5 million for the year endedNovember 27, 2022 , compared to$26.7 million for the prior year. Our effective income tax rate was 12.4% for the year endedNovember 27, 2022 , compared to 4.6% for the prior year. The increase in the effective tax rate in fiscal year 2022 as compared to fiscal year 2021 was primarily driven by lower benefit from the foreign derived intangible income deduction on actual and deemed royalty income and lower benefit from stock-based compensation exercises in fiscal year 2022, partially offset by a higher benefit from an international intellectual property transaction. 52
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Liquidity and Capital Resources
Liquidity outlook
We believe we will have adequate liquidity over the next 12 months and in the
longer term to operate our business and to meet our cash requirements. We plan
to deploy capital across all four of our capital allocation priorities: (1) to
reinvest 3.5-4% of our revenue in capital, including high growth investment
opportunities and initiatives, to grow our business organically, (2) to return
capital to our stockholders in the form of cash dividends, with a dividend
payout ratio target of 25-35% of net income; (3) to pursue high return on
investment acquisitions, both organic and inorganic, that support our current
strategies; and (4) to repurchase shares with the goal of offsetting dilution or
opportunistic buybacks or both, while maintaining an adequate public float of
our shares. Our aim is to return 55-65% of our Adjusted free cash flow to
stockholders in the form of dividends and share repurchases. We continue to
concentrate our capital investments in new stores, distribution capacity and
technology to accelerate the profitable growth of our business. For more
information on our calculation of Adjusted free cash flow, a non-GAAP financial
measures, see "- Non-GAAP Financial Measures."
Future determinations regarding the declaration and payment of dividends, if
any, will be at the discretion of our board of directors and will depend on
then-existing conditions, including our results of operations, payout ratio,
capital requirements, financial condition, prospects, contractual arrangements,
any limitations on payment of dividends present in our current and future debt
agreements and other factors that our board of directors may deem relevant.
Additionally, while our board of directors has approved a share repurchase
program, the timing and actual number of shares repurchased will depend on a
variety of factors, including price, general business and market conditions and
alternate uses of capital and the program may be suspended or discontinued at
any time.
Cash sources
We have historically relied primarily on cash flows from operations, borrowings
under credit facilities, issuances of notes and other forms of debt financing.
We regularly explore financing and debt reduction alternatives, including new
credit agreements, unsecured and secured note issuances, equity financing,
equipment and real estate financing, securitizations and asset sales.
Our Credit Agreement provides for an asset-based, senior secured revolving
credit facility ("Credit 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 $1.0 billion , of which $950.0 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.
As of November 27, 2022 , we did not have any borrowings under the Credit
Facility, unused availability under the facility was $985.6 million , and our
total availability of $1.0 billion , based on collateral levels as defined by the
agreement, was reduced by $14.4 million of stand-by letters of credit and other
credit-related instruments. We also had cash and cash equivalents totaling
approximately $429.6 million and short-term investments of $70.6 million
resulting in a total liquidity position (unused availability and cash and cash
equivalents and short-term investments) of approximately $1.5 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,
payment of taxes resulting from net settlement of shares issued under our 2016
Equity Incentive Plan, as amended to date ("2016 Plan"), and our 2019 Equity
Incentive Plan as amended to date ("2019 Plan"), 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.
On
InJanuary 2023 , our board of directors declared a cash dividend of$0.12 per share to holders of record of its Class A and Class B common stock at the close of business onFebruary 8, 2023 , for a total quarterly dividend of approximately$47 million . In the absence of a dividend policy, we will continue to declare dividends on a quarterly basis and the expectation is that they will grow in line with net income. At this time, we expect dividends to be at$0.12 per share. 53
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Cash requirements for fiscal 2023 are expected to consist primarily of capital
expenditures for investments in new stores, distribution capacity and
technology. Total capital expenditures for fiscal 2023 are expected to be
approximately
The following table summarizes current and long-term material cash requirements as ofNovember 27, 2022 : Material Cash Requirements Total 2023 2024 2025 2026 2027 Thereafter (Dollars in millions) Short-term and long-term debt obligations$ 1,006 $ 12 $ - $ - $ -$ 494 $ 500 Interest(1) 221 37 36 36 34 22 56 Future minimum payments(2) 1,215 261 218 177 141 113 305 Inventory purchase commitments(3) 741 741 - - - - - Purchase obligations(4) 378 104 79 67 32 13 83 Postretirement obligations(5) 44 6 6 5 5 5 17 Pension obligations(6) 133 14 14 13 13 13 66 Long-term employee related benefits(7) 114 9 9 5 4 3 84 Total$ 3,852 $ 1,184 $ 362 $ 303 $ 229 $ 663 $ 1,111 ______________
(1)Interest obligations are computed using constant interest rates until maturity.
(2)Amounts reflect contractual obligations relating to our existing leased facilities as ofNovember 27, 2022 , and therefore do not reflect our planned future openings of company-operated retail stores. For more information, see "Item 2 - Properties."
(3)Inventory purchase commitments represent agreements to purchase fixed or minimum quantities of goods, including fabric commitments, at determinable prices.
(4)Amounts reflect estimated commitments of
(5)The amounts presented in the table represent an estimate for the next ten years of our projected payments, based on information provided by our plans' actuaries, and have not been reduced by estimated Medicare subsidy receipts, the amounts of which are not material. Our policy is to fund postretirement benefits as claims and premiums are paid. For more information, see Note 10 to our audited consolidated financial statements included in this report. (6)The amounts presented in the table represent an estimate of our projected contributions to the plans for the next ten years based on information provided by our plans' actuaries. ForU.S. qualified plans, these estimates can exceed the projected annual minimum required contributions in an effort to level out potential future funding requirements and provide annual funding flexibility. The 2023 contribution amounts will be recalculated at the end of the plans' fiscal years, which for ourU.S. pension plan is at the beginning of our third fiscal quarter. Accordingly, actual contributions may differ materially from those presented here, based on factors such as changes in discount rates and the valuation of pension assets. For more information, see Note 10 to our audited consolidated financial statements included in this report.
(7)Long-term employee-related benefits primarily relate to the current and non-current portion of deferred compensation arrangements and workers' compensation. We estimated these payments based on prior experience and forecasted activity for these items. For more information, see Note 11 to our audited consolidated financial statements included in this report.
The above table does not include amounts related to our uncertain tax positions of$38.1 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. Based on the fair value of our capital stock and the number of shares outstanding as ofNovember 27, 2022 , future payments related to shares surrendered for employee tax withholding on the exercise or vesting of outstanding equity awards could range up to approximately$50 million , which could become payable in 2023. Information in the above table reflects our estimates of future cash payments. These estimates and projections are based upon assumptions that are inherently subject to significant economic, competitive, legislative and other uncertainties and contingencies, many of which are beyond our control. Accordingly, our actual expenditures and liabilities may be materially higher or lower than the estimates and projections reflected in the above table. The inclusion of these projections and estimates should not be regarded as a representation by us that the estimates will prove to be correct. 54
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Cash flows
The following table summarizes, for the periods indicated, selected items in our consolidated statements of cash flows:
Year Ended
November 27, November 28,
2022 2021
(Dollars in millions)
Cash provided by operating activities $ 228.1 $ 737.3
Cash used for investing activities (235.7)
(571.8)
Cash (used for) provided by financing activities (365.4)
(840.9)
Cash and cash equivalents as of fiscal year end 429.6
810.3
Cash flows from operating activities
Cash provided by operating activities was
Cash flows from investing activities
Cash used for investing activities was$235.7 million for fiscal year 2022, as compared to$571.8 million for fiscal year 2021. The decrease in cash used for investing activities is due to payments incurred in fiscal year 2021 for a business acquisition, along with higher net receipts to settle foreign exchange contracts and from short-term investments in fiscal year 2022. These were partially offset by higher payments for capital expenditures during fiscal year 2022.
Cash flows from financing activities
Cash used for financing activities was$365.4 million for fiscal year 2022, as compared to$840.9 million for fiscal year 2021. Cash used in 2022 primarily reflects common stock repurchases of$175.7 million and dividend payments of$174.3 million . Cash used in fiscal year 2021 primarily reflects redemption of$1.0 billion senior notes due 2025, dividend payments of$104.4 million , and common stock repurchases of$85.9 million , partially offset by proceeds from issuance of new senior notes of$500.0 million .
Indebtedness
The borrower of substantially all of our debt isLevi Strauss & Co. , the parent andU.S. operating company. Of our total debt of$1.0 billion as ofNovember 27, 2022 , 100% was fixed-rate debt, net of capitalized debt issuance costs. As ofNovember 27, 2022 , our required aggregate debt principal payments of$1.0 billion begin in 2027. Short-term borrowings of$11.7 million at various foreign subsidiaries were expected to be either paid over the next 12 months or refinanced at the end of their applicable terms.
Our long-term debt agreements contain customary covenants restricting our
activities as well as those of our subsidiaries. We were in compliance with all
of these covenants as of
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Non-GAAP Financial Measures
Adjusted Gross Profit, Adjusted Gross Margin, Adjusted SG&A, Adjusted EBIT, Adjusted EBIT Margin, Adjusted EBITDA, Adjusted Net Income, Adjusted Net Income Margin, and Adjusted Diluted Earnings per Share
We define the following non-GAAP measures as follows:
Most comparable GAAP measure Non-GAAP measure Non-GAAP measure definition Gross profit Adjusted gross profit Gross
profit excluding COVID-19 and acquisition
related inventory costs
Gross margin Adjusted gross margin Adjusted gross profit as a percentage of net
revenues
SG&A expenses excluding changes in fair value on
Selling, general and cash-settled stock-based compensation, COVID-19
administration ("SG&A") Adjusted SG&A related charges, acquisition and integration related
expenses charges, impairment charges and early termination
gains, net and restructuring related charges,
severance and other, net.
SG&A margin Adjusted SG&A margin Adjusted SG&A as a percentage of net revenues
Net income excluding income tax expense, interest
expense, other (income) expense, net, loss on early
extinguishment of debt, impact of changes in fair
Net income Adjusted EBIT value on cash-settled stock-based compensation,
COVID-19 related inventory costs and other charges,
acquisition and integration related charges, and
restructuring and restructuring related charges,
severance and other, net.
Net income margin Adjusted EBIT margin Adjusted EBIT as a percentage of net revenues.
Net income excluding loss on early extinguishment of
debt, COVID-19 government subsidy gains, unrealized
gains on marketable securities originating in prior
years, charges related to the impact of changes in
fair value on cash-settled stock-based compensation,
COVID-19 related inventory costs and other charges,
Net income Adjusted net income acquisition and integration related charges, and
restructuring and restructuring related charges,
severance and other, net, and re-measurement of our
deferred tax assets and liabilities based on the
lower rates as a result of the Tax Cuts and Jobs Act
("Tax Act"), adjusted to give effect to the income
tax impact of such adjustments.
Net income Adjusted EBITDA Adjusted EBIT excluding depreciation and
amortization expense
Net income margin Adjusted net income
margin Adjusted net income as a percentage of net revenues
Diluted earnings per share Adjusted diluted Adjusted net income per weighted-average number of
earnings per share diluted common shares outstanding
We believe Adjusted gross profit, Adjusted gross margin, Adjusted SG&A, Adjusted SG&A margin, Adjusted EBIT, Adjusted EBIT margin, Adjusted net income, Adjusted EBITDA, Adjusted net income margin and Adjusted diluted earnings per share are useful to investors because they help identify underlying trends in our business that could otherwise be masked by certain expenses that we include in calculating net income but that can vary from company to company depending on its financing, capital structure and the method by which its assets were acquired, and can also vary significantly from period to period. Our management also uses Adjusted EBIT in conjunction with other GAAP financial measures for planning purposes, including as a measure of our core operating results and the effectiveness of our business strategy, and in evaluating our financial performance. Adjusted gross profit, Adjusted gross margin, Adjusted SG&A, Adjusted SG&A margin, Adjusted EBIT, Adjusted EBIT margin, Adjusted net income, Adjusted EBITDA, Adjusted net income margin and Adjusted diluted earnings per share have limitations as analytical tools and should not be considered in isolation or as a substitute for an analysis of our results prepared and presented in accordance with GAAP. Some of these limitations include:
•Adjusted EBIT, Adjusted EBIT margin and Adjusted EBITDA do not reflect income tax payments that reduce cash available to us;
•Adjusted EBIT, Adjusted EBIT margin and Adjusted EBITDA do not reflect interest
expense, or the cash requirements necessary to service interest or principal
payments on our indebtedness, which reduces cash available to us;
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•Adjusted EBIT, Adjusted EBIT margin and Adjusted EBITDA exclude other income, which includes realized and unrealized gains and losses on our forward foreign exchange contracts and transaction gains and losses on our foreign exchange balances, although these items affect the amount and timing of cash available to us when these gains and losses are realized;
•Adjusted net income, Adjusted net income margin and Adjusted diluted earnings per share exclude COVID-19 government subsidy gains, unrealized gains on marketable securities originating in prior years, and loss on early extinguishment of debt;
•all of these non-GAAP financial measures exclude the expense resulting from the impact of changes in fair value on our cash-settled stock-based compensation awards; •all of these non-GAAP financial measures exclude COVID-19 related inventory costs and other charges, acquisition and integration charges, and restructuring and restructuring related charges, severance and other, net which can affect our current and future cash requirements; •all of these non-GAAP financial measures exclude certain other SG&A expense items, which include severance, transaction and deal related costs, including acquisition and integration costs which can affect our current and future cash requirements; •the expenses and other items that we exclude in our calculations of all of these non-GAAP financial measures may differ from the expenses and other items, if any, that other companies may exclude from all of these non-GAAP financial measures or similarly titled measures; •Adjusted EBITDA excludes the recurring, non-cash expenses of depreciation of property and equipment and, although these are non-cash expenses, the assets being depreciated may need to be replaced in the future; and
•Adjusted net income, Adjusted net income margin and Adjusted diluted earnings per share do not include all of the effects of income taxes and changes in income taxes reflected in net income.
Because of these limitations, all of these non-GAAP financial measures should be
considered along with net income and other operating and financial performance
measures prepared and presented in accordance with GAAP.
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Adjusted Gross Profit, Adjusted SG&A, Adjusted Net Income and Adjusted Diluted Earnings per Share:
The following tables present our statement of operations on an as reported
basis, as well as on an as adjusted basis, which is after the consideration of
non-GAAP adjustments. All of these non-GAAP financial measures should be
considered along with net income and other operating and financial performance
measures prepared and presented in accordance with GAAP.
Year Ended
Non-GAAP
As reported Adjustments As adjusted
(Dollars in millions)
Net revenues $ 6,168.6 $ - $ 6,168.6
Cost of goods sold 2,619.8 (3.4) 2,616.4
Gross profit/Adjusted gross profit(1) 3,548.8 3.4 3,552.2
Gross margin/Adjusted gross margin 57.5 % 57.6 %
SG&A expenses/Adjusted SG&A(2) 2,893.2 (54.0) 2,839.2
SG&A margin/Adjusted SG&A margin 46.9 % 46.0 %
Restructuring charges, net 9.1 (9.1) -
Operating income/Adjusted EBIT(3) 646.5 66.5 713.0
Operating margin/Adjusted EBIT margin(3) 10.5 % 11.6 %
Interest expense (25.7) - (25.7)
Other income (expense), net(4) 28.8 (32.4) (3.6)
Income before income taxes 649.6 34.1 683.7
Income tax expense(5) 80.5 (0.7) 79.8
Net income/Adjusted net income $ 569.1 $ 34.8 $ 603.9
Net income margin/Adjusted net income margin 9.2 % 9.8 %
Diluted earnings per share/Adjusted diluted earnings per
share $ 1.41 $ 0.09 $ 1.50
_____________
(1)Adjustments include (i) $1.4 million in COVID-19 related inventory charges;
and, (ii) $2.0 million in acquisition charges related to the inventory markup
above historical carrying value associated with the Beyond Yoga acquisition.
(2)Adjustments include (i) $33.2 million in impairment charges and early
termination gains, net related to the Russia -Ukraine crisis; (ii) $10.3 million
in restructuring related charges, severance and other, net including $7.3
million in charges related to the Russia -Ukraine crisis; (iii) $6.0 million of
acquisition and integration related charges; and (iv) $3.9 million in COVID-19
related charges. Other charges included in restructuring related charges,
severance and other, net include charges related to transaction and deal related
costs.
(3)Adjusted EBIT and Adjusted EBIT margin are reconciled from net income and net
income margin, respectively, which are the most comparable GAAP measures. Refer
to the "Adjusted EBIT and Adjusted EBITDA" table for more information.
(4)Adjustments include (i) $19.9 million unrealized gains on marketable equity
securities recognized out-of-period in the fourth quarter of 2022; and, (ii)
$12.5 million gain reflecting a payment received from the German government as
reimbursement for COVID-19 losses incurred in prior years.
(5)Tax impact calculated using the annual effective tax rate, excluding discrete
costs and benefits. Additionally, $4.0 million of incremental tax expense
associated with the out-of-period adjustment recognized in the fourth quarter of
2022 have been excluded.
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Year Ended
Non-GAAP
As reported Adjustments As adjusted
(Dollars in millions)
Net revenues $ 5,763.9 $ - $ 5,763.9
Cost of goods sold 2,417.2 11.2 2,428.4
Gross profit/Adjusted gross profit(1) 3,346.7 (11.2) 3,335.5
Gross margin/Adjusted gross margin 58.1 % 57.9 %
SG&A expenses/Adjusted SG&A(2) 2,652.2 (29.6) 2,622.6
SG&A margin/Adjusted SG&A margin 46.0 % 45.5 %
Restructuring charges, net 8.3 (8.3) -
Operating income/Adjusted EBIT(3) 686.2 26.7 712.9
Operating margin/Adjusted EBIT margin(3) 11.9 % 12.4 %
Interest expense (72.9) - (72.9)
Loss on early extinguishment of debt (36.5) 36.5 -
Other income, net 3.4 - 3.4
Income before income taxes 580.2 63.2 643.4
Income tax expense(4) 26.7 15.8 42.5
Net income/Adjusted net income $ 553.5 $ 47.4 $ 600.9
Net income margin/Adjusted net income margin 9.6 % 10.4 %
Diluted earnings per share/Adjusted diluted earnings per
share $ 1.35 $ 0.12 $ 1.47
_____________
(1)Adjustments include (i) $15.1 million in reductions in COVID-19 related
inventory charges primarily related to reductions in our estimate of adverse
fabric purchase commitments, initially recorded in the second quarter of 2020;
and (ii) $3.9 million in acquisition charges related to the inventory markup
above historical carrying value associated with the Beyond Yoga acquisition.
(2)Adjustments include (i) $16.2 million in restructuring related charges,
severance and other, net; (ii) $5.4 million in COVID-19 related charges which
primarily include impairment charges of certain retail store related assets
partially offset with reductions in allowances related to customer receivables;
(iii) $4.2 million in charges related to changes in fair value on cash-settled
stock-based compensation; (iv) and $3.8 million in acquisition and integration
related charges. Other charges included in restructuring related charges,
severance and other, net include charges related to an international customs
audit and transaction and deal related costs.
(3)Adjusted EBIT and Adjusted EBIT margin is reconciled from net income and net
income margin, respectively, which are the most comparable GAAP measures. Refer
to the "Adjusted EBIT and Adjusted EBITDA" table for more information.
(4)Tax impact calculated using the annual effective tax rate, excluding discrete costs and benefits.
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Adjusted EBIT and Adjusted EBITDA:
The following table presents a reconciliation of net income, the most directly
comparable financial measure calculated in accordance with GAAP, to Adjusted
EBIT and Adjusted EBITDA for each of the periods presented.
Year Ended
November 27, November 28,
2022 2021
(Dollars in millions)
Most comparable GAAP measure:
Net income $ 569.1 $ 553.5
Non-GAAP measure:
Net income 569.1 553.5
Income tax expense 80.5 26.7
Interest expense 25.7 72.9
Other income, net (28.8) (3.4)
Loss on early extinguishment of debt - 36.5
Impact of changes in fair value on cash-settled stock-based compensation
0.6 4.2
COVID-19 related inventory costs and other charges 5.3 (9.7)
Acquisition and integration related charges(1) 8.0 7.7
Impairment charges and early termination gains, net(2) 33.2 -
Restructuring and restructuring related charges, severance and other, net(3)
19.4 24.5
Adjusted EBIT $ 713.0 $ 712.9
Depreciation and amortization(4) 154.5 142.0
Adjusted EBITDA $ 867.5 $ 854.9
Adjusted EBIT margin 11.6 % 12.4 %
_____________
(1)Acquisition and integration related charges include the inventory markup above historical carrying value as well as SG&A expenses associated with the Beyond Yoga acquisition.
(2)For the year endedNovember 27, 2022 , impairment charges and early termination gains, net include$4.1 million of property, plant and equipment,$11.6 million of goodwill and$33.3 million of certain store right-of-use assets, net of a$15.8 million on the early termination of store leases related to theRussia -Ukraine crisis. (3)For the year endedNovember 27, 2022 , restructuring and restructuring related charges, severance and other, net includes$7.3 million of charges related to theRussia -Ukraine crisis. Other, net includes charges related to an international customs audit, transaction and deal related costs.
(4)Depreciation and amortization amount net of amortization included in Restructuring and restructuring related charges, severance and other, net.
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Net Debt and Leverage Ratio:
We define net debt, as total debt, excluding finance leases, less cash and cash
equivalents and short-term investments in marketable securities. We define
leverage ratio, as the ratio of total debt to the last 12 months Adjusted
EBITDA. Our management believes that net debt and leverage ratio are important
measures to monitor our financial flexibility and evaluate the strength of our
balance sheet. Net debt and leverage ratio have limitations as analytical tools
and may vary from similarly titled measures used by other companies. Net debt
and leverage ratio should not be considered in isolation or as substitutes for
an analysis of our results prepared and presented in accordance with GAAP.
The following table presents a reconciliation of total debt, excluding capital
leases, the most directly comparable financial measure calculated in accordance
with GAAP, to net debt for each of the periods presented.
November 27 , November 28,
2022 2021
(Dollars in millions)Most comparable GAAP measure: Total debt, excluding finance leases$ 996.2 $ 1,026.6 Non-GAAP measure: Total debt, excluding finance leases$ 996.2 $ 1,026.6 Cash and cash equivalents (429.6) (810.3) Short-term investments in marketable securities (70.6) (91.5) Net debt$ 496.0 $ 124.8 The following table presents a reconciliation of total debt, excluding capital leases, the most directly comparable financial measure calculated in accordance with GAAP, to leverage ratio for each of the periods presented. November 27, November 28, 2022 2021 (Dollars in millions)
Total debt, excluding finance leases
1.1 1.2
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Adjusted Free Cash Flow:
In fiscal 2022, the definition of Adjusted free cash flow, a non-GAAP financial
measure, was revised to include net cash flow from operating activities less
purchases of property, plant and equipment. Previously, we defined Adjusted free
cash flow as net cash flow from operating activities less purchases of property,
plant and equipment, plus proceeds on settlement of forward foreign exchange
contracts not designated for hedge accounting, less payment of debt
extinguishment costs, less repurchases of common stock, tax withholdings on
equity award exercises, and cash dividends to stockholders. We believe this
revised definition is a more representative measure of our free cash flow,
assists in the comparability of results, and is consistent with how management
reviews performance. The table below includes the recast of prior period
results. Additionally, we will provide updated non-GAAP reconciliations under
this revised definition in future reports for the relevant prior year periods.
We believe Adjusted free cash flow is an important liquidity measure of the cash
that is available after capital expenditures for operational expenses and
investment in our business. We believe Adjusted free cash flow is useful to
investors because it measures our ability to generate or use cash. Once our
business needs and obligations are met, cash can be used to maintain a strong
balance sheet, invest in future growth and return capital to stockholders.
Our use of Adjusted free cash flow has limitations as an analytical tool and
should not be considered in isolation or as a substitute for an analysis of our
results under GAAP. First, Adjusted free cash flow is not a substitute for net
cash flow from operating activities. Second, other companies may calculate
Adjusted free cash flow or similarly titled non-GAAP financial measures
differently or may use other measures to evaluate their performance, all of
which could reduce the usefulness of Adjusted free cash flow as a tool for
comparison. Additionally, the utility of Adjusted free cash flow is further
limited as it does not reflect our future contractual commitments and does not
represent the total increase or decrease in our cash balance for a given period.
Because of these and other limitations, Adjusted free cash flow should be
considered along with net cash flow from operating activities and other
comparable financial measures prepared and presented in accordance with GAAP.
The following table presents a reconciliation of net cash flow from operating
activities, the most directly comparable financial measure calculated in
accordance with GAAP, to Adjusted free cash flow for each of the periods
presented.
Year Ended
November 27, November 28,
2022 2021
(Dollars in millions)
Most comparable GAAP measure:
Net cash provided by operating activities $ 228.1 $ 737.3
Net cash used for investing activities (235.7) (571.8)
Net cash (used for) provided by financing activities (365.4) (840.9)
Non-GAAP measure:
Net cash provided by operating activities $ 228.1 $ 737.3
Purchases of property, plant and equipment (267.1) (166.9)
Adjusted free cash flow $ (39.0) $ 570.4
Constant-Currency:
We report our operating results in accordance with GAAP, as well as on a
constant-currency basis in order to facilitate period-to-period comparisons of
our results without regard to the impact of fluctuating foreign currency
exchange rates. The term foreign currency exchange rates refers to the exchange
rates we use to translate our operating results for all countries where the
functional currency is not the U.S. Dollar into U.S. Dollars. Because we are a
global company, foreign currency exchange rates used for translation may have a
significant effect on our reported results. In general, our reported financial
results are affected positively by a weaker U.S. Dollar and are affected
negatively by a stronger U.S. Dollar as compared to the foreign currencies in
which we conduct our business. References to our operating results on a
constant-currency basis mean our operating results without the impact of foreign
currency translation fluctuations.
We believe disclosure of constant-currency results is helpful to investors
because it facilitates period-to-period comparisons of our results by increasing
the transparency of our underlying performance by excluding the impact of
fluctuating foreign currency exchange rates. However, constant-currency results
are non-GAAP financial measures and are not meant to be
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considered in isolation or as a substitute for comparable measures prepared in accordance with GAAP. Constant-currency results have no standardized meaning prescribed by GAAP, are not prepared under any comprehensive set of accounting rules or principles and should be read in conjunction with our consolidated financial statements prepared in accordance with GAAP. Constant-currency results have limitations in their usefulness to investors and may be calculated differently from, and therefore may not be directly comparable to, similarly titled measures used by other companies. We calculate constant-currency amounts by translating local currency amounts in the prior-year period at actual foreign exchange rates for the current period. Our constant-currency results do not eliminate the transaction currency impact, which primarily include the realized and unrealized gains and losses recognized from the measurement and remeasurement of purchases and sales of products in a currency other than the functional currency and of forward foreign exchange contracts. Additionally, gross margin and Adjusted gross margin are impacted by gains and losses related to the procurement of inventory, primarily products sourced in EUR and USD, by our global sourcing organization on behalf of our foreign subsidiaries.
Constant-Currency Net Revenues:
The table below sets forth the calculation of net revenues for each of our
operating segments on a constant-currency basis for each of the periods
presented.
Year Ended
% Increase
(Decrease)
November 27, November 28, (Over Prior
2022 2021 Year)
(Dollars in millions)
Total revenues
As reported $ 6,168.6 $ 5,763.9 7.0 %
Impact of foreign currency exchange rates - (251.7) *
Constant-currency net revenues $ 6,168.6 $ 5,512.2 11.9 %
Americas
As reported $ 3,187.4 $ 2,934.8 8.6 %
Impact of foreign currency exchange rates - (9.9) *
Constant-currency net revenues - Americas $ 3,187.4 $ 2,924.9 9.0 %
Europe
As reported $ 1,597.2 $ 1,704.0 (6.3) %
Impact of foreign currency exchange rates - (165.7) *
Constant-currency net revenues - Europe $ 1,597.2 $ 1,538.3 3.8 %
Asia
As reported $ 952.1 $ 834.7 14.1 %
Impact of foreign currency exchange rates - (64.4) *
Constant-currency net revenues - Asia $ 952.1 $ 770.3 23.6 %
Other Brands
As reported $ 431.9 $ 290.4 48.7 %
Impact of foreign currency exchange rates - (11.7) *
Constant-currency net revenues - Other Brands $ 431.9 $ 278.7 55.0 %
_____________
* Not meaningful
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Constant-Currency Adjusted EBIT and Constant-Currency Adjusted EBIT Margin:
The table below sets forth the calculation of Adjusted EBIT and Adjusted EBIT margin on a constant-currency basis for each of the periods presented.
Year Ended
% Increase
(Decrease)
November 27, November 28, (Over Prior
2022 2021 Year)
(Dollars in millions)
Adjusted EBIT(1) $ 713.0 $ 712.9 - %
Impact of foreign currency exchange rates - (51.2) *
Constant-currency Adjusted EBIT $ 713.0 $ 661.7 7.8 %
Adjusted EBIT margin 11.6 % 12.4 % (6.5) %
Impact of foreign currency exchange rates - (0.4) % * Constant-currency Adjusted EBIT margin(2) 11.6 % 12.0 % (3.3) % _____________
(1)Adjusted EBIT is reconciled from net income which is the most comparable GAAP measure. Refer to Adjusted EBIT and Adjusted EBITDA table for more information.
(2)We define constant-currency Adjusted EBIT margin as constant-currency Adjusted EBIT as a percentage of constant-currency net revenues. Constant-currency Adjusted EBIT margin includes the unfavorable transactional impact of currency, including approximately 40 basis points for fiscal year 2022.
* Not meaningful
Constant-Currency Adjusted Net Income and Adjusted Diluted Earnings per Share:
The table below sets forth the calculation of Adjusted net income and Adjusted
diluted earnings per share on a constant-currency basis for each of the periods
presented.
Year Ended
% Increase
November 27, November 28, (Over Prior
2022 2021 Year)
(Dollars in millions, except per share
amounts)
Adjusted net income(1) $ 603.9 $ 600.9 0.5 %
Impact of foreign currency exchange rates - (46.9) *
Constant-currency Adjusted net income $ 603.9 $ 554.0 9.0 %
Constant-currency Adjusted net income margin(2) 9.8 % 10.0 %
Adjusted diluted earnings per share $ 1.50 $ 1.47 2.0 %
Impact of foreign currency exchange rates - (0.12) *
Constant-currency adjusted diluted earnings per share
$ 1.35 11.1 % _____________
(1)Adjusted net income is reconciled from net income which is the most comparable GAAP measure. Refer to Adjusted net income table for more information.
(2)We define constant-currency Adjusted net income margin as constant-currency Adjusted net income as a percentage of constant-currency net revenues.
* Not meaningful
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Critical Accounting Estimates and Assumptions
The preparation of financial statements in conformity withU.S. GAAP requires management to make estimates and assumptions that affect the amounts reported in the consolidated financial statements and the related notes. Critical accounting estimates refers to those assumptions and approximations that may have a material impact on the amounts reported in the consolidated financial statements and the related notes due to the level of subjectivity involved in developing the estimate. We believe that the following discussion addresses our critical accounting estimates, 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 estimates and assumptions below.
Revenue recognition. Revenue is recorded net of an allowance for estimated returns, discounts and retailer promotions and other similar incentives. We recognize allowances for estimated returns in the period in which the related sale is recorded. These estimates are calculated based on a history of actual returns, estimated future returns and information regarding retailer inventory levels. In addition, allowances for estimated returns may be established for significant future known or anticipated events. The types of known or anticipated events that are considered, and will continue to be considered, include the financial condition of our customers, store closings by retailers, changes in the retail environment and our decision to continue to support new and existing products. 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. These estimates are calculated using the most likely amount method. Under this method, certain forms of variable consideration are based on expected sell-through results, which requires subjective estimates. These estimates are supported by historical results as well as specific customer and product-specific facts and circumstances related to the current period. The determination of sales allowances is considered a critical accounting estimate because significant judgement is required to estimate sales volume and demand. Actual allowances may differ from estimates due to changes in sales volume based on wholesale customer or consumer demand and changes in customer and product-specific circumstances. Inventory valuation. We value inventories at the lower of cost or net realizable value. In determining inventory net realizable value, 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. We record an adjustment to inventory when future estimated selling price is less than cost. The determination of inventory net realizable value is considered a critical accounting estimate because significant judgment is required to evaluate whether there will be future demand for inventories held as well as the prices at which our wholesale customers and retail consumers are willing to pay for these inventories. 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. Upon acquisition, we estimate and record the fair value of purchased intangible assets, which primarily consist of trademarks and customer relationships.Goodwill and certain other intangible assets deemed to have indefinite useful lives, including trademark intangible assets, are not amortized, but are assessed for impairment at least annually. Finite-lived intangible assets are amortized over their respective estimated useful lives and, along with other long-lived assets, are evaluated for impairment periodically whenever events or changes in circumstances indicate that their related carrying values may not be fully recoverable. We review goodwill and indefinite-lived intangible assets for impairment annually, or more frequently as warranted by events or changes in circumstances which indicate that the carrying amount may not be recoverable. Annual testing is performed in the fourth quarter of the fiscal year for all indefinite-lived assets and reporting units except Beyond Yoga, which is performed in the third quarter. When testing goodwill and other indefinite-lived intangible assets for impairment, we have the option of first performing a qualitative assessment to determine whether it is more-likely-than-not that the fair value of a reporting unit is less than its carrying amount as a basis for determining whether it is necessary to perform a quantitative impairment test. If necessary, we can perform a single step quantitative goodwill impairment test by comparing the fair value of a reporting unit with its carrying amount and record an impairment charge for the amount that the carrying amount exceeds the fair value, up to the total amount of goodwill allocated to that reporting unit. For fiscal 2022, we elected to perform the qualitative assessment for the goodwill in certain of our reporting units and certain indefinite-lived intangible assets. This qualitative assessment included the review of certain macroeconomic factors and entity-specific qualitative factors, as of the test date, to determine if it was more-likely-than-not that the fair values of our reporting units were below carrying value. 65
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For our other reporting units and other indefinite-lived intangible assets, including Beyond Yoga, a quantitative assessment was performed. Determination of the fair value of a reporting unit and intangible asset is based on management's assessment, using industry accepted valuation models. Third-party valuation specialists are engaged when necessary. This determination is judgmental in nature and often involves the use of significant estimates and assumptions, which may include revenue growth rates and profit margins, terminal value, a royalty rate and a discount rate. These estimates and assumptions could have a significant impact on whether or not an impairment charge is recognized and the amount of any such charge. Furthermore, estimating the fair value of individual reporting units requires us to make assumptions and estimates regarding not only our future plans, but industry and other market conditions outside of our control. Given the uncertainty of global economic conditions, those estimates could be significantly different than future performance. The Beyond Yoga reporting unit assets and liabilities, including the intangible assets, were established in the fourth quarter of 2021 at the fair value on the acquisition date. Based on the annual assessment in 2022, the fair values of the reporting unit and the intangible assets have modestly increased and exceed their respective carrying values. If our long-term strategies change, planned business performance expectations are not met over time, or specific valuation factors outside of our control, such as discount rates, change significantly, then the estimated fair values of the reporting unit, the intangible assets, or both might decline and lead to impairment charges in the future. Several factors could impact the Beyond Yoga brand's ability to achieve expected future cash flows, including the success of retail store and international expansion, store and e-commerce productivity, the impact of promotional activity, continued economic volatility and potential operational challenges related to the macroeconomic factors and other strategic initiatives to drive increased profitability. Given the relatively small excess fair value over carrying value, if profitability trends decline over time from those that are expected, it is possible that an interim test, or our annual impairment test, could result in an impairment of the related assets. Our other reporting units and intangible assets, primarily related to the 1985 acquisition of the Company byLevi Strauss Associates Inc. , had substantial fair value in excess of carrying value.
For further discussion of the methods used and factors considered in our
estimates as part of the impairment testing for
Income tax. Significant judgment is required in determining our global income tax provision. The determination of our income tax provision is considered a critical accounting estimate. In the ordinary course of a global business, there are many transactions and calculations where the ultimate tax outcome is uncertain. Some of these uncertainties arise from examinations in various jurisdictions and assumptions and estimates used in evaluating the need for a valuation allowance. We are subject to income taxes inthe 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 deferred tax assets. In assessing the need for a valuation allowance, we evaluate all significant available positive and negative evidence, including historical operating results, estimates of future taxable income and the existence of prudent and feasible tax planning strategies. Changes in the expectations regarding the realization of deferred tax assets could materially impact income tax expense in future periods. We continuously review issues raised in connection with all ongoing examinations and open tax years to evaluate the adequacy of our tax liabilities. We evaluate uncertain tax positions under a two-step approach. The first step is to evaluate the uncertain tax position for recognition by determining if the weight of available evidence indicates that it is more likely than not that the position will be sustained upon examination based on its technical merits. The second step is, for those positions that meet the recognition criteria, to measure the tax benefit as the largest amount that is more than fifty percent likely of being realized. We believe our recorded tax liabilities are adequate to cover all open tax years based on our assessment. This assessment relies on estimates and assumptions and involves significant judgments about future events. To the extent that our view as to the outcome of these matters changes, we will adjust income tax expense in the period in which such determination is made. We classify interest and penalties related to income taxes as income tax expense.
Recently Issued Accounting Standards
See Note 1 to our audited consolidated financial statements included in this
report for recently issued accounting standards, including the expected dates of
adoption and expected impact to our consolidated financial statements upon
adoption.
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