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UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM 10-Q
FOR QUARTERLY REPORTS UNDER SECTION 13 OR 15(d) OF
THE SECURITIES AND EXCHANGE ACT OF 1934
For the Quarter Ended November 30, 2002
Commission file number - 1-10635
NIKE, Inc.
(Exact name of registrant as specified in its charter)
OREGON 93-0584541
(State or other jurisdiction of (I.R.S. Employer
incorporation or organization) Identification No.)
One Bowerman Drive, Beaverton, Oregon 97005-6453
(Address of principal executive offices) (Zip Code)
Registrant's telephone number, including area code (503) 671-6453
Indicate by check mark whether the registrant (1) has filed all reports
required to be filed by Section 13 or 15 (d) of the Securities Exchange
Act of 1934 during the preceding 12 months (or for such shorter period
that the registrant was required to file such reports), and (2) has been
subject to such filing requirements for the past 90 days
Yes X No .
___ ___
Common Stock shares outstanding as of November 30, 2002 were:
_______________
Class A 98,015,905
Class B 166,439,016
_______________
264,454,921
===============
PART 1 - FINANCIAL INFORMATION
Item 1. FINANCIAL STATEMENTS
NIKE, Inc.
UNAUDITED CONDENSED CONSOLIDATED BALANCE SHEETS
November 30, May 31,
2002 2002
________ _______
(in millions)
ASSETS
Current assets:
Cash and equivalents $ 555.8 $ 575.5
Accounts receivable 1,890.7 1,807.1
Inventories (Note 5) 1,386.9 1,373.8
Deferred income taxes 164.1 140.8
Prepaid expenses and other current assets 214.8 260.5
________ ________
Total current assets 4,212.3 4,157.7
Property, plant and equipment 2,822.9 2,741.7
Less accumulated depreciation 1,221.0 1,127.2
________ ________
1,601.9 1,614.5
Identifiable intangible assets (Note 2) 118.3 206.0
Goodwill (Note 2) 65.6 232.7
Deferred income taxes and other assets 265.3 232.1
________ ________
$6,263.4 $6,443.0
======== ========
LIABILITIES AND SHAREHOLDERS' EQUITY
Current liabilities:
Current portion of long-term debt $ 5.5 $ 55.3
Notes payable 261.7 425.2
Accounts payable 469.5 504.4
Accrued liabilities 810.3 768.3
Income taxes payable 49.7 83.0
________ ________
Total current liabilities 1,596.7 1,836.2
Long-term debt 730.1 625.9
Deferred income taxes and other liabilities 162.8 141.6
Commitments and contingencies (Note 7) -- --
Redeemable preferred stock 0.3 0.3
Shareholders' equity:
Common stock at stated value:
Class A convertible-98.0 and
98.1 shares outstanding 0.2 0.2
Class B-166.4 and 168.0 shares
outstanding 2.6 2.6
Capital in excess of stated value 549.9 538.7
Unearned stock compensation (2.7) (5.1)
Accumulated other comprehensive income (219.8) (192.4)
Retained earnings 3,443.3 3,495.0
________ ________
Total shareholders' equity 3,773.5 3,839.0
________ ________
$6,263.4 $6,443.0
======== ========
The accompanying Notes to Unaudited Condensed Consolidated Financial
Statements are an integral part of this statement.
NIKE, Inc.
UNAUDITED CONDENSED CONSOLIDATED STATEMENTS OF INCOME
Three Months Ended Six Months Ended
November 30, November 30,
___________________ ________________
2002 2001 2002 2001
____ ____ ____ ____
(in millions, except per share data)
Revenues $2,514.7 $2,336.8 $5,311.0 $4,950.5
_________ _________ ________ ________
Costs and expenses:
Cost of sales 1,504.6 1,441.4 3,143.8 3,026.2
Selling and administrative 758.7 677.7 1,557.7 1,374.0
Interest 10.9 12.3 21.4 25.2
Other expense, net 10.9 6.5 24.4 12.0
_________ _________ ________ ________
2,285.1 2,137.9 4,747.3 4,437.4
_________ _________ ________ ________
Income before income taxes and cumulative
effect of accounting change 229.6 198.9 563.7 513.1
Income taxes 77.6 69.6 194.5 179.6
_________ _________ ________ ________
Income before cumulative effect of
accounting change 152.0 129.3 369.2 333.5
Cumulative effect of accounting change,
net of income taxes -- -- 266.1 5.0
_________ _________ _________ ________
Net income $ 152.0 $ 129.3 $ 103.1 $ 328.5
========= ========= ========= ========
Basic earnings per common share (Note 4):
Before accounting change $ 0.57 $ 0.48 $ 1.39 $ 1.24
Cumulative effect of accounting change -- -- (1.00) (0.02)
_________ _________ ________ ________
$ 0.57 $ 0.48 $ 0.39 $ 1.22
========= ========= ======== ========
Diluted earnings per common share (Note 4):
Before accounting change $ 0.57 $ 0.48 $ 1.38 $ 1.23
Cumulative effect of accounting change -- -- (0.99) (0.02)
_________ _________ ________ ________
$ 0.57 $ 0.48 $ 0.39 $ 1.21
========= ========= ======== ========
Dividends declared per common share $ 0.14 $ 0.12 $ 0.26 $ 0.24
========= ========= ======== ========
The accompanying Notes to Unaudited Condensed Consolidated Financial Statements
are an integral part of this statement.
NIKE, Inc.
UNAUDITED CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS
Six Months Ended
November 30,
_________________
2002 2001
____ ____
(in millions)
Cash provided (used) by operations:
Net income $ 103.1 $ 328.5
Income charges (credits) not
affecting cash:
Cumulative effect of accounting change 266.1 5.0
Depreciation 114.4 107.0
Deferred income taxes 0.1 (6.2)
Amortization and other 7.5 17.8
Income tax benefit from exercise of stock
options 2.2 7.2
Changes in other working capital
components (93.4) (12.0)
_______ _______
Cash provided by operations 400.0 447.3
_______ _______
Cash provided (used) by investing activities:
Additions to property, plant and
equipment (86.6) (121.0)
Disposals of property, plant and
equipment 7.2 7.4
(Increase) decrease in other assets (29.3) 7.2
Increase in other liabilities 1.1 0.2
_______ _______
Cash used by investing activities (107.6) (106.2)
_______ _______
Cash provided (used) by financing activities:
Proceeds from long-term debt issuance 90.1 249.3
Reductions in long-term debt
including current portion (52.9) (3.4)
Decrease in notes payable (163.5) (311.7)
Proceeds from exercise of stock options 11.3 10.9
and other stock issuances
Repurchase of stock (97.3) (44.7)
Dividends on common stock (63.8) (64.4)
_______ _______
Cash used by financing activities (276.1) (164.0)
_______ _______
Effect of exchange rate changes on cash (36.0) (21.3)
Net (decrease) increase in cash and equivalents (19.7) 155.8
Cash and equivalents, May 31, 2002 and 2001 575.5 304.0
_______ _______
Cash and equivalents, November 30, 2002
and 2001 $ 555.8 $ 459.8
======== ========
The accompanying Notes to Unaudited Condensed Consolidated Financial
Statements are an integral part of this statement.
NIKE, Inc.
NOTES TO UNAUDITED CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
NOTE 1 - Summary of Significant Accounting Policies:
___________________________________________
Basis of presentation:
The accompanying unaudited condensed consolidated financial statements
reflect all adjustments (consisting of normal recurring accruals) which
are, in the opinion of management, necessary for a fair presentation of
the results of operations for the interim period. The interim financial
information and notes thereto should be read in conjunction with the
Company's latest Annual Report on Form 10-K. The results of operations
for the six (6) months ended November 30, 2002 are not necessarily
indicative of results to be expected for the entire year.
Certain prior year amounts have been reclassified to conform to fiscal
year 2003 presentation. These changes had no impact on previously reported
results of operations or shareholders' equity.
Recently Issued Accounting Standards
In October 2001, the Financial Accounting Standards Board (FASB) issued
Statement of Financial Accounting Standards (SFAS) No. 144, "Accounting for
the Impairment or Disposal of Long-Lived Assets" (FAS 144). This statement
supercedes SFAS No. 121, "Accounting for the Impairment of Long-Lived Assets
and for Long-Lived Assets to be Disposed Of" (FAS 121), and amends Accounting
Principles Board Statement No. 30, "Reporting the Effects of Disposal of a
Segment of a Business, and Extraordinary, Unusual and Infrequently Occurring
Events and Transactions" (APB 30). FAS 144 requires that long-lived assets
that are to be disposed of by sale be measured at the lower of book value or
fair value less costs to sell. FAS 144 retains the fundamental provisions of
FAS 121 for (a) recognition and measurement of the impairment of long-lived
assets to be held and used and (b) measurement of long-lived assets to be
disposed of by sale. This statement also retains APB 30's requirement that
companies report discontinued operations separately from continuing
operations. All provisions of FAS 144 were effective for the Company on June
1, 2002. The adoption of FAS 144 did not have an impact on the Company's
consolidated financial position or results of operations, and we do not expect
any impact in the foreseeable future.
In June 2002, the FASB issued SFAS No. 146 "Accounting for Costs
Associated with Exit or Disposal Activities" (FAS 146). This statement
supercedes Emerging Issues Task Force (EITF) Issue No. 94-3 "Liability
Recognition for Certain Employee Termination Benefits and Other Costs to Exit
an Activity (including Certain Costs Incurred in a Restructuring)". FAS 146
requires that a liability for a cost associated with an exit or disposal
activity be recognized when the liability is incurred. Under EITF 94-3, a
liability is recognized at the date an entity commits to an exit plan. FAS
146 also establishes that the liability should initially be measured and
recorded at fair value. The provisions of FAS 146 will be effective for any
exit and disposal activities initiated after December 31, 2002.
In November 2002, the FASB issued FASB Interpretation No. 45,
"Guarantor's Accounting and Disclosure Requirements for Guarantees, Including
Indirect Guarantees of Indebtedness of Others" (FIN 45). FIN 45 requires that
upon issuance of a guarantee, a guarantor must recognize a liability for the
fair value of an obligation assumed under a guarantee. FIN 45 also requires
additional disclosures by a guarantor in its interim and annual financial
statements about the obligations associated with guarantees issued. The
recognition provisions of FIN 45 will be effective for any guarantees that are
issued or modified after December 31, 2002. The disclosure requirements will
be effective for the Company's quarter ended February 28, 2003. The Company is
currently evaluating the effects of FIN 45; however, we do not expect that the
adoption will have a material impact on the Company's results of operations or
financial position.
In December 2002, the FASB issued SFAS No. 148 "Accounting for Stock-
Based Compensation- Transition and Disclosure- an amendment of FASB Statement
No. 123" (FAS 148). This statement amends SFAS No. 123 "Accounting for Stock
Based Compensation" (FAS 123) to provide alternative methods of voluntarily
transitioning to the fair value based method of accounting for stock-based
employee compensation. FAS 148 also amends the disclosure requirements of FAS
123 to require disclosure of the method used to account for stock-based
employee compensation and the effect of the method on reported results in both
annual and interim financial statements. The disclosure provisions will be
effective for the Company beginning with the Company's year ended May 31,
2003. The annual impact of a change to a fair value model has been previously
disclosed in the Company's most recent annual 10-K filing. The Company has
not yet completed the final evaluation of the options presented by FAS 148.
However, within this fiscal year, the Company expects to reach a determination
of whether and, if so, when to change the Company's existing accounting for
stock-based compensation to the fair value method in accordance with the
transition alternatives of FAS 148.
NOTE 2 - Identifiable Intangible Assets and Goodwill:
___________________________________________
Adoption of FAS 142
The Company adopted Statement of Financial Accounting Standards No. 142,
"Goodwill and Other Intangible Assets," (FAS 142) effective June 1, 2002. In
accordance with FAS 142, goodwill and intangible assets with indefinite lives
will no longer be amortized but instead will be measured for impairment at
least annually, or when events indicate that an impairment exists. Intangible
assets that are determined to have definite lives will continue to be
amortized over their useful lives.
As required by FAS 142, the Company performed impairment tests on
goodwill and other intangible assets with indefinite lives, which consisted
only of certain trademarks, as of June 1, 2002. As a result of the impairment
tests, the Company recorded a $266.1 million cumulative effect of accounting
change. Under FAS 142, goodwill impairment exists if the net book value of a
reporting unit exceeds its estimated fair value. The Company estimated the
fair value of its reporting units by using a combination of discounted cash
flow analyses and comparisons with the market values of similar publicly-
traded companies.
Included in the Company's $266.1 million impairment charge was a $178.5
million charge related to the impairment of the goodwill associated with the
Bauer NIKE Hockey ("Bauer") and Cole Haan reporting units. These reporting
units are reflected in the Company's "Other" operating segment. Since the
Company's purchase of Bauer in 1995, the hockey equipment and apparel markets
have not grown as fast as expected and the in-line skate market has contracted
significantly. As a result, we determined that the goodwill acquired at Bauer
had been impaired. The goodwill impairment at Cole Haan reflected the
significantly lower fair value calculated on the basis of reduced operating
income in the year following the September 11, 2001 terrorist attacks.
The remaining $87.6 million of the impairment charge relates to
trademarks associated with Bauer. Under FAS 142, impairment of an indefinite-
lived asset exists if the net book value of the asset exceeds its fair value.
The Company estimated the fair value of trademarks using the relief-from-
royalty approach, which is a standard form of discounted cash flow analysis
typically used for the valuation of trademarks. The impairment of the Bauer
trademarks reflects the same circumstances as described above related to the
Bauer goodwill impairment.
The following table summarizes the Company's identifiable intangible
assets and goodwill balances as of November 30, 2002 and May 31, 2002:
November 30, 2002 May 31, 2002
______________________ ______________________
Gross Gross
Carrying Accumulated Carrying Accumulated
Amount Amortization Amount Amortization
________ ____________ ________ ____________
(in millions)
Intangible assets subject to
amortization:
Patents $ 23.8 $ (9.5) $ 23.1 $ (8.8)
Trademarks 12.6 (10.1) 12.0 (9.8)
Other 7.5 (0.7) 7.5 (0.2)
_________ _________ _________ _________
Total $ 43.9 $ (20.3) $ 42.6 $ (18.8)
========= ========= ========= =========
Carrying Carrying
Amount Amount
________ ________
Intangible assets not subject to
amortization:
Goodwill $ 65.6 $ 232.7
Trademarks 94.7 182.2
_________ _________
Total $ 160.3 $ 414.9
========= =========
Amortization expense, which is included in selling and administrative
expense, was $0.8 million and $1.9 million for the three-month and six-month
periods ended November 30, 2002, respectively. The estimated amortization
expense for intangible assets subject to amortization for each of the
succeeding years ended May 31, 2003 through May 31, 2007 are as follows:
2003: $3.2 million; 2004: $2.8 million; 2005: $2.6 million; 2006: $2.5
million; 2007: $2.0 million.
The results for the three-month and six-month periods ended November 30,
2001 do not reflect the provisions of FAS 142. The reported net income before
cumulative effect of accounting change was $129.3 million and $333.5 million
for the three-month and six-month periods ended November 30, 2001,
respectively. Had the Company adopted FAS 142 on June 1, 2001, for the three-
month period ending November 30, 2002, we would have recorded net income
before cumulative effect of accounting change of $132.6 million as a result of
not recording $2.2 million in goodwill amortization and $1.1 million in
trademark amortization. For the six-month period ended November 30, 2002, net
income before cumulative effect of accounting change would have been $340.2
million as a result of not recording $4.5 million in goodwill amortization and
$2.2 million in trademark amortization. Basic and diluted earnings per common
share before accounting change would have increased $0.01 and $0.02 for the
three-month and six-month periods ended November 30, 2002, respectively.
NOTE 3 - Comprehensive Income:
___________________________
Comprehensive income, net of taxes, is as follows:
Three Months Ended Six Months Ended
November 30, November 30,
__________________ ________________
2002 2001 2002 2001
____ ____ ____ ____
(in millions)
Net Income $152.0 $129.3 $103.1 $328.5
Other Comprehensive Income:
Change in cumulative translation
adjustment and other 4.9 (24.8) 17.2 (6.7)
Recognition in net income of previously
deferred unrealized loss on securities,
due to accounting change -- -- -- 3.4
Changes due to cash flow hedging
instruments:
Initial recognition of net deferred gain
as of June 1, 2001 due to accounting
change -- -- -- 53.4
(Loss) Gain on hedge derivatives (8.3) 38.1 (92.5) 1.8
Reclassification to net income of
previously deferred gains and losses
related to hedge derivative instruments 24.9 (3.2) 47.9 (9.8)
_______ _______ ________ _______
Other Comprehensive Income 21.5 10.1 (27.4) 42.1
_______ _______ ________ _______
Total Comprehensive Income $173.5 $139.4 $ 75.7 $370.6
======= ======= ======== =======
NOTE 4 - Earnings Per Common Share:
________________________________
The following represents a reconciliation from basic earnings per
share to diluted earnings per share. Options to purchase 12.0 million
and 7.7 million shares of common stock were outstanding at November 30, 2002
and November 30, 2001, respectively, but were not included in the computation
of diluted earnings per share because the options' exercise prices were
greater than the average market price of common shares and, therefore, the
effect would be antidilutive.
Three Months Ended Six Months Ended
November 30, November 30,
__________________ ________________
2002 2001 2002 2001
____ ____ ____ ____
(in millions, except per share data)
Determination of shares:
Average common shares
outstanding 264.7 268.1 265.0 268.3
Assumed conversion of
dilutive stock options
and awards 2.8 3.5 3.3 3.3
_______ _______ _______ _______
Diluted average common
shares outstanding 267.5 271.6 268.3 271.6
====== ====== ====== ======
Basic earnings per common share:
Before cumulative effect of
accounting change $ 0.57 $ 0.48 $ 1.39 $ 1.24
Cumulative effect of
accounting change -- -- (1.00) (0.02)
_______ _______ _______ ______
$ 0.57 $ 0.48 $ 0.39 $ 1.22
======= ======= ======= ======
Diluted earnings per common share:
Before cumulative effect of
accounting change $ 0.57 $ 0.48 $ 1.38 $ 1.23
Cumulative effect of
accounting change -- -- (0.99) (0.02)
_______ _______ ______ _______
$ 0.57 $ 0.48 $ 0.39 $ 1.21
======= ======= ======= =======
NOTE 5 - Inventories:
___________
Inventories by major classification are as follows:
Nov. 30, May 31,
2002 2002
________ ________
(in millions)
Finished goods $1,361.5 $1,348.2
Work-in-progress 12.3 13.0
Raw materials 13.1 12.6
________ ________
$1,386.9 $1,373.8
======== ========
NOTE 6 - Operating Segments:
__________________
The Company's operating segments are evidence of the structure of the
Company's internal organization. The major segments are defined by geographic
regions with operations participating in NIKE brand sales activity. Each NIKE
brand geographic segment operates predominantly in one industry: the design,
production, marketing and selling of sports and fitness footwear, apparel, and
equipment. The "Other" category shown below represents activities of Cole Haan
Holdings, Inc., Bauer NIKE Hockey, Inc., Hurley International LLC, NIKE Golf,
and NIKE IHM, Inc., which are considered immaterial for individual disclosure.
In prior years, operating activity for NIKE Golf was classified within
each region. Effective June 1, 2002, NIKE Golf revenues and income from the
Company's largest golf markets have been reclassified to the Other category,
which reflects that the Company has begun managing these operations as a
separate business. Certain NIKE Golf inventories, receivables, and property,
plant, and equipment continue to be managed by the regions, and as a result,
no reclassifications for these balances have been made. NIKE Golf information
for the applicable prior year period has been reclassified to conform to the
current year presentation.
Where applicable, "Corporate" represents items necessary to reconcile to
the consolidated financial statements, which generally include corporate
activity and corporate eliminations. Certain miscellaneous operating
activities have been reclassified between Corporate and the applicable
regional operating segment as of June 1, 2002, reflecting a change in the
management of these activities. With respect to these classifications, the
applicable prior year period has been reclassified to conform to the current
year presentation.
Net revenues as shown below represent sales to external customers for
each segment. Intercompany revenues have been eliminated and are immaterial
for separate disclosure. The Company evaluates performance of individual
operating segments based on management pre-tax income. On a consolidated
basis, this amount represents Income before income taxes and cumulative effect
of accounting change as shown in the Unaudited Condensed Consolidated
Statement of Income. Reconciling items for management pre-tax income
represent corporate costs that are not allocated to the operating segments for
management reporting and intercompany eliminations for specific items in the
Unaudited Condensed Consolidated Statement of Income.
Accounts receivable, inventory, and property, plant, and equipment for
operating segments are regularly reviewed and therefore provided below:
Three Months Ended Six Months Ended
November 30, November 30,
__________________ _________________
2002 2001 2002 2001
_____ _____ _____ _____
Net Revenue
USA $1,032.6 $1,124.7 $2,315.2 $2,388.0
EUROPE, MIDDLE EAST, AFRICA 781.2 579.9 1,650.6 1,332.7
ASIA PACIFIC 352.6 309.5 661.1 558.7
AMERICAS 133.5 154.3 275.8 314.4
OTHER 214.8 168.4 408.3 356.7
_________ _________ ________ _______
$2,514.7 $2,336.8 $5,311.0 $4,950.5
========= ========= ========= ========
Management Pre-Tax Income
USA $ 171.6 $ 228.0 $ 454.9 $ 508.0
EUROPE, MIDDLE EAST, AFRICA 124.9 51.7 286.9 183.2
ASIA PACIFIC 84.5 71.6 135.4 116.6
AMERICAS 28.5 27.8 53.6 54.8
OTHER 4.5 (1.1) (3.9) 6.9
CORPORATE (184.4) (179.1) (363.2) (356.4)
_________ _________ _________ ________
$ 229.6 $ 198.9 $ 563.7 $ 513.1
========= ========= ========= ========
Nov. 30, May 31,
2002 2002
_________ _________
Accounts Receivable, net
USA $ 644.5 $ 654.3
EUROPE, MIDDLE EAST, AFRICA 688.9 570.8
ASIA PACIFIC 211.4 189.6
AMERICAS 129.3 125.3
OTHER 201.5 248.3
CORPORATE 15.1 18.8
_________ _________
$1,890.7 $1,807.1
========= =========
Inventories, net
USA $ 651.0 $ 613.5
EUROPE, MIDDLE EAST, AFRICA 305.4 336.5
ASIA PACIFIC 136.5 149.0
AMERICAS 61.4 62.9
OTHER 225.4 201.5
CORPORATE 7.2 10.4
_________ _________
$1,386.9 $1,373.8
========= =========
Property, Plant and Equipment, net
USA $ 227.2 $ 241.2
EUROPE, MIDDLE EAST, AFRICA 213.8 212.2
ASIA PACIFIC 376.1 378.4
AMERICAS 11.2 12.4
OTHER 110.6 113.0
CORPORATE 663.0 657.3
_________ _________
$1,601.9 $1,614.5
========= =========
NOTE 7 - Commitments and Contingencies:
_____________________________
At November 30, 2002, the Company had letters of credit outstanding
totaling $756.9 million. These letters of credit were issued for the
purchase of inventory.
There have been no other significant subsequent developments
relating to the commitments and contingencies reported on the
Company's most recent Form 10-K.
Item 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF RESULTS OF OPERATIONS AND
FINANCIAL CONDITION
Critical Accounting Policies
_________________________
Our discussion and analysis of our financial condition and results of
operations are based upon our consolidated financial statements, which have
been prepared in accordance with accounting principles generally accepted in
the United States. The preparation of these financial statements requires us
to make estimates and judgments that affect the reported amounts of assets,
liabilities, revenues and expenses, and related disclosure of contingent
assets and liabilities.
We believe that the estimates, assumptions and judgments involved in the
accounting policies described in the "Management's Discussion and Analysis"
section of our most recent Annual Report on Form 10-K have the greatest
potential impact on our financial statements, so we consider these to be our
critical accounting policies. Because of the uncertainty inherent in these
matters, actual results could differ from the estimates we use in applying the
critical accounting policies. Certain of these critical accounting policies
affect working capital account balances, including the policies for revenue
recognition, the reserve for uncollectible accounts receivable, inventory
reserves, and contingent payments under endorsement contracts. These policies
require that we make estimates in the preparation of our financial statements
as of a given date. However, since our business cycle is relatively short,
actual results related to these estimates are generally known within the six-
month period following the financial statement date. Thus, these policies
generally affect only the timing of reported amounts across two to three
quarters.
Within the context of these critical accounting policies, we are not
currently aware of any reasonably likely events or circumstances that would
result in materially different amounts being reported.
As a result of our adoption of Statement of Financial Accounting
Standards No. 142, "Goodwill and Other Intangible Assets" (FAS 142), we have
made changes to our accounting policy for goodwill and intangible assets since
May 31, 2002. The revised policy is described following.
We adopted FAS 142 effective June 1, 2002. In accordance with FAS 142,
goodwill and intangible assets with indefinite lives will no longer be
amortized but instead will be measured for impairment at least annually, or
when events indicate that an impairment exists. As required by FAS 142, in
our impairment tests for goodwill and other indefinite-lived intangible
assets, we compare the estimated fair value of goodwill and other intangible
assets to the carrying value. If the carrying value exceeds our estimate of
fair value, we calculate impairment as the excess of the carrying value over
our estimate of fair value. Our estimates of fair value utilized in goodwill
and other indefinite-lived intangible asset tests may be based upon a number
of factors, including our assumptions about the expected future operating
performance of our reporting units. Our estimates may change in future
periods due to, among other things, technological change, economic conditions,
or changes to our business operations. Such changes may result in impairment
charges recorded in future periods.
As discussed further below, upon adoption of FAS 142 on June 1, 2002, we
recorded an impairment charge related to goodwill and other indefinite-lived
intangible assets of $266.1 million. This charge is shown on our statement of
income as the cumulative effect of accounting change. In future periods, any
goodwill impairment charges would be classified as a separate line item on our
statement of income as part of income from continuing operations. Other
indefinite-lived intangible asset impairment charges would be classified as
other expense, also as part of income from continuing operations.
Intangible assets that are determined to have definite lives will
continue to be amortized over their useful lives and are measured for
impairment only when events or circumstances indicate the carrying value may
be impaired. In these cases, we estimate the future undiscounted cash flows
to be derived from the asset to determine whether or not a potential
impairment exists. If the carrying value exceeds our estimate of future
undiscounted cash flows, we then calculate the impairment as the excess of the
carrying value of the asset over our estimate of its fair value. Any
impairment charges would be classified as other expense.
Operating Results
_________________
Net income for the second quarter of fiscal 2003 increased 18% versus the
second quarter of fiscal 2002. This increase reflected an increase in income
before income taxes, or pre-tax income, of 15%. An 8% increase in revenues, a
1.9 point increase in our gross margin percentage, and slightly lower interest
expense drove the increase. These improvements were partially offset by
increased selling and administrative expense as a percentage of revenues. Net
income for the second quarter of fiscal 2003 increased at a greater rate than
pre-tax income due to a 1.2 point reduction in our effective tax rate.
Diluted earnings per share improved 19%, from $0.48 to $0.57, a slightly
higher rate than net income, due to share repurchases over the past year.
For the first six months of fiscal 2003, net income fell 69% versus
fiscal 2002. In the first quarter of fiscal 2003, we recorded a $266.1
million charge for the cumulative effect of implementing FAS 142. This charge
related to the impairment of goodwill and trademarks associated with our Bauer
NIKE Hockey subsidiary and the goodwill of our Cole Haan subsidiary,
reflecting that the fair values we estimated for these assets were less than
the carrying values. In addition, the adoption of this accounting standard
resulted in a reduction to goodwill and intangible asset amortization of $3.3
million in both the first and second quarters of fiscal 2003 as compared to
fiscal 2002. See the accompanying Notes to Unaudited Condensed Consolidated
Financial Statements for further information.
For the first six months of fiscal 2003, income before cumulative effect
of accounting change increased 11% versus the same period in fiscal 2002.
This increase reflected a 7% increase in revenues, a 1.9 point increase in our
gross margin percentage, lower interest expense, and a 0.5 point reduction in
our effective tax rate. These improvements were partially offset by increased
selling and administrative expense as a percentage of revenues. Diluted
earnings per share before the cumulative effect of accounting change improved
12%, a slightly higher rate than income before the cumulative effect of
accounting change, due to share repurchases over the past year.
Revenue growth in our international regions drove the 8% increase in
consolidated revenues for the second quarter. (Had foreign exchange rates
remained constant with the prior year, the increase in consolidated revenues
for the quarter would have been 6%.) Together, our international regions'
revenues increased 21% (19% in constant dollars) and represented 50% of total
company revenues. Consolidated revenues increased 7% for the first six months
of fiscal 2003 (5% in constant dollars), driven by a 17% reported revenue
increase in our international regions (13% in constant dollars).
The international regions also drove the increase in our pre-tax income
in the second quarter and year-to-date period, as rapid growth in local
currency profits and stronger currencies in Europe and Japan more than
compensated for lower management pre-tax income in the U.S. region. In the
second quarter, management pre-tax income from our international regions
improved 57%. On a year-to-date basis, the international regions' management
pre-tax income growth was 34%. (As discussed further in Note 6-Operating
Segments in the attached Notes to Unaudited Condensed Consolidated Financial
Statements, certain corporate costs are not included in the management pre-tax
income of our regional operating segments.)
The Europe, Middle East, and Africa (EMEA) region led the regional
businesses in revenue growth in the second quarter and first six months of
fiscal 2003. Second quarter reported revenues increased 35%, 25% in constant
dollars, and year-to-date revenues increased 24%, 14% in constant dollars.
The constant dollar growth was achieved in all three business units, footwear,
apparel, and equipment and reflected strong demand for NIKE brand products
across the entire region. The emerging markets in central and eastern Europe
provided significant revenue growth to the region. EMEA's second quarter
growth also reflected the acceleration of a significant amount of third
quarter revenues into the second quarter due to our December supply chain
system implementation. Consistent with our approach to the systems
implementation in the U.S. last year, we closed our European distribution
center from November 27, 2002 to December 6, 2002 to prepare for the new
system implementation. Prior to the shut down period, we accelerated futures
orders and deliveries from December to October and November. In addition, we
aggressively liquidated closeout inventory prior to the shutdown. We estimate
that these operational adjustments moved approximately $66 million of reported
revenue from the third quarter to the second quarter, adding approximately 11
points to the second quarter constant dollar revenue growth and 5 points to
the year-to-date constant dollar growth for the region.
Management pre-tax income for the EMEA region increased from $51.7
million to $124.9 million in the second quarter and from $183.2 million to
$286.9 million in the year-to-date period, driven by rapid revenue growth and
higher gross margins that more than offset incremental selling and
administrative costs. The incremental selling and administrative costs
related to the World Cup 2002 marketing campaign, which was completed in the
first quarter, and costs throughout the year-to-date period associated with
new NIKE-owned retail stores, the conversion of new markets from independent
distributorships to direct Nike control, and incremental overhead costs
related to the supply chain system implementation.
In Asia Pacific, reported revenues increased 14% (12% growth in constant
dollars) in the second quarter of fiscal 2003 and increased 18% (17% in
constant dollars) in the first six months of fiscal 2003, reflecting a
continuing trend of strong growth across this region. As in recent quarters,
each of our three business units experienced growth across most countries in
Asia Pacific, particularly in China, Korea, and Japan.
Management pre-tax income for the Asia Pacific region increased from
$71.6 million to $84.5 million in the second quarter and from $116.6 million
to $135.4 million in the year-to-date period, reflecting higher revenues and
slightly improved gross margins that more than offset incremental selling and
administrative costs.
In the Americas region, second quarter revenues in constant dollars
increased 7%, but reported revenues decreased 13%. Likewise, year-to-date
constant dollar revenues increased 5% while reported revenues decreased 12%.
Weaker currencies in Latin American markets drove the reported revenue
declines. The region's constant dollar growth reflected strength in Latin
America partially offset by weakness in Canada. Management pre-tax income for
the region grew 3% in the quarter from $27.8 million to $28.5 million and
decreased 2% for the year-to-date period from $54.8 million to $53.6 million.
These pre-tax income results reflected the lower reported revenue amounts
partially offset by improved gross margins.
U.S. region revenues decreased 8% in the second quarter of fiscal 2003
and 3% in the year-to-date period. We estimate that last year's acceleration
of deliveries from the third quarter to the second quarter in advance of the
U.S. supply chain system implementation in December 2001 reduced second
quarter revenue growth by approximately 4 points and year-to-date revenue
growth by approximately 2 points. The U.S. region also experienced footwear
and apparel delivery delays in the second quarter of fiscal 2003 due to the
labor dispute in the west coast ports and apparel sourcing issues related to
production scheduling and factory deliveries. We estimate these delays
reduced second quarter revenue growth by approximately 2 points and year-to-
date revenue growth by approximately 1 point. The second quarter and year-to-
date decreases in U.S region revenues also reflected a lower average price per
pair sold for our footwear in fiscal 2003 versus fiscal 2002. This reduction
in average price reflected a shift in sales mix toward classic footwear and
kids models, due to the growing consumer demand for these products, which have
a lower price than our more complex adult performance models. Futures orders
for the second half of the year indicate that this trend will continue, at
least for the remainder of our fiscal year. Finally, our second quarter
revenues from Foot Locker, Inc. ("Foot Locker") were approximately 40% lower
than the second quarter of fiscal 2002.
U.S. region management pre-tax income declined 25%, from $228.0 million
to $171.6 million in the second quarter and declined 10%, from $508.0 million
to $454.9 million in the year-to-date period. These declines were the result
of lower revenues and higher demand creation expense, partially offset by a
higher gross margin percentage versus last year.
As previously disclosed, we expect U.S. sales to Foot Locker to be below
prior year levels at least through the first quarter of fiscal 2004. This is a
result of both lower orders from Foot Locker and limitations we have imposed
on this customer's purchase of certain products. Although we do not yet have
visibility to orders beyond May 2003, we believe this trend will likely
continue at least until we begin to compare our results to lower prior year
Foot Locker orders beginning in the second quarter of fiscal 2004. We do
expect that Foot Locker will continue to be a significant business partner but
will no longer be a primary distribution point for our high-end, innovative
footwear products in the U.S. Foot Locker will no longer distribute U.S.
elite and statement level products and will not participate in our key U.S.
footwear product launches after February 2003. We will continue to pursue
incremental sales with other retailers, in order to offset the decline in
revenues from Foot Locker. Our second quarter results do not reflect the full
impact of this distribution realignment, as it was not in place in time to
have a significant effect on sales in the second quarter. Although we do not
expect to fully offset the revenue loss from Foot Locker in the short term in
the U.S., we believe we will ultimately succeed in realigning distribution of
our products to meet consumer demand and generate profitable revenue growth.
The breakdown of revenues follows. "Other" as shown below includes
revenues from Bauer NIKE Hockey, Inc., Cole Haan Holdings, Inc., Hurley
International LLC, and NIKE Golf. Revenues from these operating units grew 28%
as compared to the second quarter of fiscal 2002 and 14% as compared to the
first six months of fiscal 2002. Beginning in the first quarter of fiscal
2003, the revenues from NIKE Golf operations in our largest golf markets have
been excluded from the revenues of the regions and reported in the Other
category, reflecting that we have begun managing these operations as a
separate business. This NIKE Golf information for the prior year period has
been reclassified to conform to the current year presentation. A 37% and 16%
increase in NIKE Golf revenues in the second quarter and year-to-date period,
respectively, driven largely by the launch of golf clubs, as well as the
addition of revenues from our newly-acquired Hurley business, drove the
increases in Other revenues for the second quarter and year-to-date period.
Three Months Ended Six Months Ended
November 30, November 30
___________________ ____________________
% %
2002 2001 change 2002 2001 change
______ _______ _______ _______ _______ ______
(in millions)
U.S.A. REGION
FOOTWEAR $ 596.1 $681.6 -13% $1,461.1 $1,544.5 -5%
APPAREL 369.5 373.2 -1% 698.2 683.8 2%
EQUIPMENT AND OTHER 67.0 69.9 -4% 155.9 159.7 -2%
_______ _______ ________ _______
TOTAL U.S.A. 1,032.6 1,124.7 -8% 2,315.2 2,388.0 -3%
EMEA REGION
FOOTWEAR 436.7 314.8 39% 929.4 740.3 26%
APPAREL 294.9 227.8 29% 605.7 500.5 21%
EQUIPMENT AND OTHER 49.6 37.3 33% 115.5 91.9 26%
_______ _______ _______ _______
TOTAL EMEA 781.2 579.9 35% 1,650.6 1,332.7 24%
ASIA PACIFIC REGION
FOOTWEAR 170.9 161.0 6% 351.6 323.2 9%
APPAREL 151.3 122.9 23% 250.3 187.2 34%
EQUIPMENT AND OTHER 30.4 25.6 19% 59.2 48.3 23%
_______ _______ ________ _______
TOTAL ASIA PACIFIC 352.6 309.5 14% 661.1 558.7 18%
AMERICAS REGION
FOOTWEAR 83.0 99.1 -16% 176.0 197.3 -11%
APPAREL 40.5 45.7 -11% 79.1 95.4 -17%
EQUIPMENT AND OTHER 10.0 9.5 5% 20.7 21.7 -5%
_______ _______ ________ _______
TOTAL AMERICAS 133.5 154.3 -13% 275.8 314.4 -12%
_______ _______ ________ _______
2,299.9 2,168.4 6% 4,902.7 4,593.8 7%
OTHER 214.8 168.4 28% 408.3 356.7 14%
_______ _______ ________ _______
TOTAL REVENUES $2,514.7 $2,336.8 8% $5,311.0 $4,950.5 7%
======== ======== ======== ========
Worldwide futures and advance orders for our footwear and apparel
scheduled for delivery from December 2002 to April 2003 were 2.4% higher than
such orders booked in the comparable period of fiscal 2002. The percentage
growth in these orders is not necessarily indicative of our expectation of
revenue growth in subsequent periods. This is because the mix of orders can
shift between advance/futures and at-once orders. In addition, exchange rate
fluctuations as well as differing levels of order cancellations can cause
differences in the comparisons between future orders and actual revenues.
Moreover, a significant portion of our revenues is not derived from futures
orders, including wholesale sales of equipment, U.S. licensed team apparel,
Bauer NIKE Hockey, Cole Haan, NIKE Golf, Hurley, and retail sales across all
brands.
In both the second quarter and first six months of fiscal 2003, our
quarterly gross margin percentage improved 1.9 points as compared to the prior
year period, continuing the trend of quarter-on-quarter increases over the
previous three quarters. Each of our regional businesses achieved a higher
gross margin percentage than the prior year quarter and year-to-date period.
On a global basis, we achieved higher gross margin percentages for both
footwear and apparel in the quarter and year-to-date period. Improvements in
footwear and apparel gross margins reflected our initiatives to lower sourcing
and distribution costs. In addition, the higher gross margin percentage for
footwear resulted in part from a higher mix of sales of classic and kids
models that are generally more profitable than our more complex adult
performance models. Finally, margins at our Cole Haan subsidiary increased in
the second quarter of fiscal 2003, reflecting last year's high level of
discounting, inventory obsolescence, and returns that occurred in the wake of
the terrorist attacks of September 11, 2001.
Second quarter selling and administrative expense increased as a
percentage of revenues from 29.0% to 30.2% in fiscal 2003 versus fiscal 2002.
Year-to-date selling and administrative expense increased as a percentage of
revenues from 27.8% to 29.3%. Both demand creation and operating overhead
expense increased as a percentage of revenues in the second quarter and year-
to-date period. Second quarter demand creation expense grew from $235.1
million to $273.8 million while year-to-date demand creation expense increased
from $492.2 million to $595.9 million. The primary driver of the growth of
second quarter demand creation expense was increased spending in the U.S., to
drive consumer demand as we realign our retail distribution. In addition, our
new endorsement agreement with the Manchester United soccer team became
effective in August 2002, driving higher demand creation spending in the EMEA
region. For the year-to-date period, the increase in demand creation expense
also reflected significant first quarter costs for our World Cup 2002
campaign. The percentage growth in demand creation expense also reflected the
relatively low amount of spending in the first six months of last year, as we
shifted resources to the World Cup campaign beginning late in fiscal 2002.
Operating overhead increased between the second quarter of fiscal 2003
and the second quarter of fiscal 2002, from $442.6 million to $484.9 million,
and increased between the first six months of fiscal 2003 and the first six
months of fiscal 2002, from $881.8 million to $961.7 million. Major drivers
of these increases were overhead costs associated with new NIKE-owned retail
stores outside the U.S., the conversion of independent distributorships to
NIKE-owned businesses in certain emerging markets in the EMEA region,
investments in our NIKE Golf business infrastructure, and overhead costs
associated with our recently acquired Hurley business. Stronger currencies in
Europe and Japan also drove a portion of the reported growth in US dollars.
Second quarter interest expense decreased from $12.3 million in fiscal
2002 to $10.9 million in fiscal 2003, a decline of 11%. Year-to-date interest
expense decreased from $25.2 million in fiscal 2002 to $21.4 million in 2003,
a decline of 15%. The decrease reflected both lower interest rates and lower
average debt levels, as we have continued to use operating free cash flow to
reduce total debt.
Other expense, net, for the second quarter of fiscal 2003 was $10.9
million compared to $6.5 million for the same quarter of last year. Other
expense, net, for the current year-to-date period of fiscal 2003 was $24.4
million compared to $12.0 million for the same period of fiscal 2002.
Significant amounts included in other expense, net, were interest income,
profit sharing expense, and certain foreign currency gains and losses.
In the second quarter of fiscal 2003, we adjusted our year-to-date
effective tax rate to 34.5%, our estimate of our effective rate for all of
fiscal 2003. This rate is relatively consistent with the effective rate for
all of fiscal 2002 of 34.3%. This reflects that we expect higher taxes on
foreign earnings due to increased taxable income at a foreign tax jurisdiction
with a relatively high tax rate, offset by additional research tax credits as
compared to fiscal 2002.
Recently Issued Accounting Standards
________________________________
In October 2001, the Financial Accounting Standards Board (FASB) issued
Statement of Financial Accounting Standards (SFAS) No. 144, "Accounting for
the Impairment or Disposal of Long-Lived Assets" (FAS 144). This statement
supercedes SFAS No. 121, "Accounting for the Impairment of Long-Lived Assets
and for Long-Lived Assets to be Disposed Of" (FAS 121), and amends Accounting
Principles Board Statement No. 30, "Reporting the Effects of Disposal of a
Segment of a Business, and Extraordinary, Unusual and Infrequently Occurring
Events and Transactions" (APB 30). FAS 144 requires that long-lived assets
that are to be disposed of by sale be measured at the lower of book value or
fair value less costs to sell. FAS 144 retains the fundamental provisions of
FAS 121 for (a) recognition and measurement of the impairment of long-lived
assets to be held and used and (b) measurement of long-lived assets to be
disposed of by sale. This statement also retains APB 30's requirement that
companies report discontinued operations separately from continuing
operations. All provisions of FAS 144 were effective for us on June 1, 2002.
The adoption of FAS 144 did not have an impact on our consolidated financial
position or results of operations, and we do not expect any impact in the
foreseeable future.
In June 2002, the FASB issued SFAS No. 146 "Accounting for Costs
Associated with Exit or Disposal Activities" (FAS 146). This statement
supercedes Emerging Issues Task Force (EITF) Issue No. 94-3 "Liability
Recognition for Certain Employee Termination Benefits and Other Costs to Exit
an Activity (including Certain Costs Incurred in a Restructuring)". FAS 146
requires that a liability for a cost associated with an exit or disposal
activity be recognized when the liability is incurred. Under EITF 94-3, a
liability is recognized at the date an entity commits to an exit plan. FAS
146 also establishes that the liability should initially be measured and
recorded at fair value. The provisions of FAS 146 will be effective for any
exit and disposal activities initiated after December 31, 2002.
In November 2002, the FASB issued FASB Interpretation No. 45,
"Guarantor's Accounting and Disclosure Requirements for Guarantees, Including
Indirect Guarantees of Indebtedness of Others" (FIN 45). FIN 45 requires that
upon issuance of a guarantee, a guarantor must recognize a liability for the
fair value of an obligation assumed under a guarantee. FIN 45 also requires
additional disclosures by a guarantor in its interim and annual financial
statements about the obligations associated with guarantees issued. The
recognition provisions of FIN 45 will be effective for any guarantees that are
issued or modified after December 31, 2002. The disclosure requirements will
be effective for our third quarter of fiscal 2003. We are currently evaluating
the effects of FIN 45; however, we do not expect that the adoption will have a
material impact on our results of operations or financial position.
In December 2002, the FASB issued SFAS No. 148 "Accounting for Stock-
Based Compensation- Transition and Disclosure- an amendment of FASB Statement
No. 123" (FAS 148). This statement amends SFAS No. 123 "Accounting for Stock
Based Compensation" (FAS 123) to provide alternative methods of voluntarily
transitioning to the fair value based method of accounting for stock-based
employee compensation. FAS 148 also amends the disclosure requirements of FAS
123 to require disclosure of the method used to account for stock-based
employee compensation and the effect of the method on reported results in both
annual and interim financial statements. The disclosure provisions will be
effective for us beginning with our fiscal 2003 10-K filing. The annual
impact of a change to a fair value model has been previously disclosed in our
most recent annual 10-K filing. We have not yet completed our final
evaluation of the options presented by FAS 148. However, within this fiscal
year, we expect to reach a determination of whether and, if so, when to change
our existing accounting for stock-based compensation to the fair value method
in accordance with the transition alternatives of FAS 148.
Liquidity and Capital Resources
_______________________________
Cash provided by operations was $400.0 million in the first six months of
fiscal 2003, which compared to $447.3 million in the first six months of
fiscal 2002. Our primary source of operating cash flow in the current period
was income before accounting change of $369.2 million. Cash provided by
operations was less than that of last year due to a greater increase in
working capital during the current period.
Total cash used by investing activities during the first six months of
fiscal 2003 was $107.6 million, compared to $106.2 million in the prior year
period. These amounts are comprised primarily of capital expenditures. The
most significant capital expenditures in both periods were for computer
equipment and software related to our supply chain initiative, and continued
investment in NIKE-owned retail stores, primarily outside the U.S.
Net cash used by financing activities for the first six months of fiscal
2003 was $276.1 million, up from $164.0 million in the same period in fiscal
2002. In both years, these amounts included cash used to reduce short-term
debt, repay current maturities of long-term debt, pay dividends to
shareholders, and repurchase shares of company stock. These uses of cash were
partially offset by proceeds from long-term debt issuances and the exercise of
employee stock options.
The share repurchases were part of a $1 billion, four year, share
repurchase program that began in fiscal 2001. In the current quarter, we
purchased 1.0 million shares of NIKE's Class B common stock for $43.9
million, and in the year-to-date period we purchased 2.0 million shares for
$88.4 million To date under the program, we have purchased 10.3 million
shares for $483.1 million. We expect to fund this program from operating free
cash flow. The timing and the amount of shares purchased will be dictated by
our capital needs and stock market conditions.
In October 2001, we filed a shelf registration statement with the
Securities and Exchange Commission (SEC) for $1.0 billion. In May 2002, we
commenced a medium-term note program under the shelf registration that allows
us to issue up to $500.0 million in medium-term notes, as our capital needs
dictate. As described in our most recent Form 10-K, during the first quarter
of fiscal 2003, we issued a total of $90.0 million in notes under this
program. The notes have coupon rates that range from 4.80% to 5.66%. The
maturities range from July 9, 2007 to August 7, 2012. For each of the notes,
we have entered into an interest rate swap agreement whereby we receive fixed
interest payments at the same rate as the notes and pay variable interest
payments based on the six-month London Inter Bank Offering Rate (LIBOR) plus a
spread. Each swap has the same notional amount and maturity date as its
respective note. After issuance of these notes, $410.0 million remains
available to be issued under our medium-term note program, and another $500.0
million remains available to be issued under the remainder of the shelf
registration. We may issue additional notes under the shelf registration in
the near future depending on working capital and general corporate needs.
As disclosed in our Form 10-K as of May 31, 2002, as of that date, we had
two committed credit facilities in place, a $600.0 million, 364-day credit
facility and a $500.0 million, multi-year facility with a group of banks. The
364-day facility matured in November 2002, and at that time we renewed and
reduced the facility to $500.0 million. Thus, a total of $1.0 billion is
available under the two facilities. No borrowings are currently outstanding
under these facilities. No other terms for these facilities have changed from
those described in our Form 10-K as of May 31, 2002. We are currently in full
compliance with each of the covenants contained in these credit agreements and
believe it is unlikely we will fail to meet any of these covenants in the
foreseeable future.
Liquidity is also provided by our commercial paper program, under which
there was $132.9 million and $338.3 million outstanding at November 30, 2002
and May 31, 2002, respectively.
Our long-term unsecured debt ratings remain at A and A2 from Standard and
Poor's Corporation ("S&P") and Moody's Investor Services ("Moody's"),
respectively. Our short-term debt ratings remain at A1 and P1 from S&P and
Moody's, respectively.
We currently believe that cash generated by operations, together with
access to external sources of funds as described above, will be sufficient to
meet our operating and capital needs in the foreseeable future.
Dividends declared per share of common stock for the second quarter of
fiscal 2003 were $.14 per share, which reflected a $.02 increase compared to
the previous quarterly dividend.
Item 3. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK
There have been no material changes from the information previously
reported under Item 7A of our most recent Annual Report on Form 10-K.
Item 4. CONTROLS AND PROCEDURES
a) Within the 90-day period prior to the date of this report, the
Company carried out an evaluation, under the supervision and with the
participation of the Company's management, including the Company's
Chief Executive Officer and Chief Financial Officer, of the
effectiveness of the design and operation of the Company's disclosure
controls and procedures pursuant to Rule 13a-14 of the
Securities Exchange Act of 1934 (the "Exchange Act"). Based
upon that evaluation, the Chief Executive Officer and Chief Financial
Officer concluded that the Company's disclosure controls and
procedures are effective in timely alerting them to material
information relating to the Company (including its consolidated
subsidiaries) required to be included in the Company's Exchange Act
filings.
b) There have been no significant changes in the Company's internal
controls or in other factors which could significantly affect
internal controls subsequent to the date the Company carried out its
internal control evaluation.
Special Note Regarding Forward-Looking Statements
and Analyst Reports
Certain written and oral statements, other than purely historical
information including estimates, projections, statements relating to NIKE's
business plans, objectives and expected operating results, and the assumptions
upon which those statements are based, made or incorporated by reference from
time to time by NIKE or its representatives in this report, other reports,
filings with the Securities and Exchange Commission, press releases,
conferences, or otherwise, are "forward-looking statements" within the meaning
of the Private Securities Litigation Reform Act of 1995 and Section 21E of the
Securities Exchange Act of 1934. Forward-looking statements include, without
limitation, any statement that may predict, forecast, indicate, or imply
future results, performance, or achievements, and may contain the words
"believe," "anticipate," "expect," "estimate," "project," "will be," "will
continue," "will likely result," or words or phrases of similar meaning.
Forward-looking statements involve risks and uncertainties which may cause
actual results to differ materially from the forward-looking statements. The
risks and uncertainties are detailed from time to time in reports filed by
NIKE with the S.E.C., including Forms 8-K, 10-Q, and 10-K, and include, among
others, the following: international, national and local general economic and
market conditions; the size and growth of the overall athletic footwear,
apparel, and equipment markets; intense competition among designers,
marketers, distributors and sellers of athletic footwear, apparel, and
equipment for consumers and endorsers; demographic changes; changes in
consumer preferences; popularity of particular designs, categories of
products, and sports; seasonal and geographic demand for NIKE products;
difficulties in anticipating or forecasting changes in consumer preferences,
consumer demand for NIKE products, and the various market factors described
above; difficulties in implementing, operating, and maintaining NIKE's
increasingly complex information systems and controls, including, without
limitation, the systems related to demand and supply planning, and inventory
control; fluctuations and difficulty in forecasting operating results,
including, without limitation, the fact that advance "futures" orders may not
be indicative of future revenues due to the changing mix of futures and at-
once orders; and that futures ordering periods may varyamong products and
regions; the ability of NIKE to sustain, manage or forecast its growth and
inventories; the size, timing and mix of purchases of NIKE's products; new
product development and introduction; the ability to secure and protect
trademarks, patents, and other intellectual property; performance and
reliability of products; customer service; adverse publicity; the loss of
significant customers or suppliers; dependence on distributors; business
disruptions; increased costs of freight and transportation to meet delivery
deadlines; changes in business strategy or development plans; general risks
associated with doing business outside the United States, including, without
limitation, exchange rate fluctuations, import duties, tariffs, quotas and
political and economic instability; changes in government regulations;
liability and other claims asserted against NIKE; the ability to attract and
retain qualified personnel; and other factors referenced or incorporated by
reference in this report and other reports.
The risks included here are not exhaustive. Other sections of this report
may include additional factors which could adversely affect NIKE's business
and financial performance. Moreover, NIKE operates in a very competitive and
rapidly changing environment. New risk factors emerge from time to time and it
is not possible for management to predict all such risk factors, nor can it
assess the impact of all such risk factors on NIKE's business or the extent to
which any factor, or combination of factors, may cause actual results to
differ materially from those contained in any forward-looking statements.
Given these risks and uncertainties, investors should not place undue reliance
on forward-looking statements as a prediction of actual results.
Investors should also be aware that while NIKE does, from time to time,
communicate with securities analysts, it is against NIKE's policy to disclose
to them any material non-public information or other confidential commercial
information. Accordingly, shareholders should not assume that NIKE agrees with
any statement or report issued by any analyst irrespective of the content of
the statement or report. Furthermore, NIKE has a policy against issuing or
confirming financial forecasts or projections issued by others. Thus, to the
extent that reports issued by securities analysts contain any projections,
forecasts or opinions, such reports are not the responsibility of NIKE.
Part II - Other Information
Item 1. Legal Proceedings:
On October 25, 2002, we announced that NIKE reached an agreement to
settle the securities class action lawsuits that have been consolidated under
the caption IN RE NIKE, INC. SECURITIES LITIGATION, CV-01-332-KI, in the
United States District Court for the District of Oregon. The agreement is
reflected in a memorandum of understanding, and must be incorporated into more
complete settlement documentation and approved by the court. We will pay $8.9
million in cash, which will be funded by the Company's directors and officers
liability insurance. In the agreement, NIKE and the officers and directors
named in the lawsuits do not admit, and continue to deny, any and all
allegations of wrongdoing, and they will receive a full release of all claims
asserted in the litigation.
In the lawsuit captioned KASKY V. NIKE, INC. ET AL., No. 99446, in the
San Francisco County Superior Court, which is described under Item 3 of our
Annual Report on Form 10-K for the fiscal year ended May 31, 2002, the United
States Supreme Court has granted certiorari and agreed to hear our appeal of
the case.
There have been no other material changes from the information previously
reported under Item 3 of the Company's Annual Report on Form 10-K for the
fiscal year ended May 31, 2002.
Item 4. Submission of Matters to a Vote of Security Holders:
Reference is made to Item 4 of Part II of our Quarterly Report on Form
10-Q for the fiscal quarter ended August 31, 2002, with respect to the results
of the Company's annual meeting of shareholders, held on September 18, 2002.
Item 6. Exhibits and Reports on Form 8-K:
(a) EXHIBITS:
3.1 Restated Articles of Incorporation, as amended (incorporated by
reference from Exhibit 3.1 to the Company's Quarterly Report on Form
10-Q for the fiscal quarter ended August 31, 1995).
3.2 Third Restated Bylaws, as amended (incorporated by reference from
Exhibit 3.2 to the Company's Quarterly Report on Form 10-Q for the
fiscal quarter ended August 31, 1995).
4.1 Restated Articles of Incorporation, as amended (see Exhibit 3.1).
4.2 Third Restated Bylaws, as amended (see Exhibit 3.2).
10.1 Credit Agreement dated as of November 17, 2000 among NIKE, Inc., Bank
of America, N.A., individually and as Agent, and the other banks party
thereto (incorporated by reference from Exhibit 10.1 to the Company's
Quarterly Report on Form 10-Q for the fiscal quarter ended November
30, 2000).
10.2 First Amendment to Credit Agreement dated as of November 16, 2001
(incorporated by reference from Exhibit 10.2 to the Company's
Quarterly Report on Form 10-Q for the fiscal quarter ended November
30, 2001).
10.3 Second Amendment to Credit Agreement dated as of November 15, 2002.
10.4 NIKE, Inc. Long-Term Incentive Plan (incorporated by reference from
the Company's definitive proxy statement filed in connection with its
annual meeting of shareholders held on September 18, 2002).*
12.1 Computation of Ratio of Earnings to Charges.
* Management contract or compensatory plan or arrangement.
(b) Reports on Form 8-K:
The following reports on Form 8-K were filed during the fiscal quarter ending
November 30, 2002:
October 25, 2002: Item 5. OTHER EVENTS. Press release regarding
agreement to settle securities class action lawsuit.
SIGNATURES
Pursuant to the requirements of the Securities Exchange Act of 1934,
the registrant has duly caused this report to be signed on its behalf by
the undersigned thereunto duly authorized.
NIKE, Inc.
An Oregon Corporation
BY:/s/ Donald W. Blair
________________________
Donald W. Blair
Chief Financial Officer
DATED: January 10, 2003
CERTIFICATIONS
I, Philip H. Knight, certify that:
1. I have reviewed this quarterly report on Form 10-Q of NIKE, Inc.;
2. Based on my knowledge, this quarterly report does not contain any untrue
statement of a material fact or omit to state a material fact necessary to
make the statements made, in light of the circumstances under which such
statements were made, not misleading with respect to the period covered by
this quarterly report;
3. Based on my knowledge, the financial statements, and other financial
information included in this quarterly report, fairly present in all material
respects the financial condition, results of operations and cash flows of the
registrant as of, and for, the periods presented in this quarterly report;
4. The registrant's other certifying officers and I are responsible for
establishing and maintaining disclosure controls and procedures (as defined in
Exchange Act Rules 13a-14 and 15d-14) for the registrant and we have:
a) designed such disclosure controls and procedures to ensure that
material information relating to the registrant, including its
consolidated subsidiaries, is made known to us by others within those
entities, particularly during the period in which this quarterly
report is being prepared;
b) evaluated the effectiveness of the registrant's disclosure controls
and procedures as of a date within 90 days prior to the filing date of
this quarterly report (the "Evaluation Date"); and
c) presented in this quarterly report our conclusions about the
effectiveness of the disclosure controls and procedures based on our
evaluation as of the Evaluation Date;
5. The registrant's other certifying officers and I have disclosed, based
on our most recent evaluation, to the registrant's auditors and the audit
committee of registrant's board of directors (or persons performing the
equivalent function):
a) all significant deficiencies in the design or operation of internal
controls which could adversely affect the registrant's ability to
record, process, summarize and report financial data and have
identified for the registrant's auditors any material weaknesses in
internal controls; and
b) any fraud, whether or not material, that involves management or other
employees who have a significant role in the registrant's internal
controls; and
6. The registrant's other certifying officers and I have indicated in this
quarterly report whether or not there were significant changes in internal
controls or in other factors that could significantly affect internal controls
subsequent to the date of our most recent evaluation, including any corrective
actions with regard to significant deficiencies and material weaknesses.
Date: January 10, 2003
____________________
/s/ Philip H. Knight
____________________
Philip H. Knight
Chief Executive Officer
I, Donald W. Blair, certify that:
1. I have reviewed this quarterly report on Form 10-Q of NIKE, Inc.;
2. Based on my knowledge, this quarterly report does not contain any untrue
statement of a material fact or omit to state a material fact necessary to
make the statements made, in light of the circumstances under which such
statements were made, not misleading with respect to the period covered by
this quarterly report;
3. Based on my knowledge, the financial statements, and other financial
information included in this quarterly report, fairly present in all material
respects the financial condition, results of operations and cash flows of the
registrant as of, and for, the periods presented in this quarterly report;
4. The registrant's other certifying officers and I are responsible for
establishing and maintaining disclosure controls and procedures (as defined in
Exchange Act Rules 13a-14 and 15d-14) for the registrant and we have:
a) designed such disclosure controls and procedures to ensure that
material information relating to the registrant, including its
consolidated subsidiaries, is made known to us by others within those
entities, particularly during the period in which this quarterly
report is being prepared;
b) evaluated the effectiveness of the registrant's disclosure controls
and procedures as of a date within 90 days prior to the filing date of
this quarterly report (the "Evaluation Date"); and
c) presented in this quarterly report our conclusions about the
effectiveness of the disclosure controls and procedures based on our
evaluation as of the Evaluation Date;
5. The registrant's other certifying officers and I have disclosed, based
on our most recent evaluation, to the registrant's auditors and the audit
committee of registrant's board of directors (or persons performing the
equivalent function):
a) all significant deficiencies in the design or operation of internal
controls which could adversely affect the registrant's ability to
record, process, summarize and report financial data and have
identified for the registrant's auditors any material weaknesses in
internal controls; and
b) any fraud, whether or not material, that involves management or other
employees who have a significant role in the registrant's internal
controls; and
6. The registrant's other certifying officers and I have indicated in this
quarterly report whether or not there were significant changes in internal
controls or in other factors that could significantly affect internal controls
subsequent to the date of our most recent evaluation, including any corrective
actions with regard to significant deficiencies and material weaknesses.
Date: January 10, 2003
____________________
/s/ Donald W. Blair
____________________
Donald W. Blair
Chief Financial Officer