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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 February 28, 2003
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 is an accelerated filer (as
defined in Rule 12b-2 of the Exchange Act). Yes X No
___ ___
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 February 28, 2003 were:
_______________
Class A 97,914,905
Class B 166,070,067
_______________
263,984,972
===============
PART 1 - FINANCIAL INFORMATION
Item 1. FINANCIAL STATEMENTS
NIKE, Inc.
UNAUDITED CONDENSED CONSOLIDATED BALANCE SHEETS
February 28, May 31,
2003 2002
________ _______
(in millions)
ASSETS
Current assets:
Cash and equivalents $ 443.2 $ 575.5
Accounts receivable, net 1,949.4 1,807.1
Inventories (Note 5) 1,519.2 1,373.8
Deferred income taxes 190.8 140.8
Prepaid expenses and other current assets 244.4 260.5
________ ________
Total current assets 4,347.0 4,157.7
Property, plant and equipment 2,906.2 2,741.7
Less accumulated depreciation 1,291.1 1,127.2
________ ________
1,615.1 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 255.0 232.1
________ ________
$6,401.0 $6,443.0
======== ========
LIABILITIES AND SHAREHOLDERS' EQUITY
Current liabilities:
Current portion of long-term debt $ 205.6 $ 55.3
Notes payable 216.6 425.2
Accounts payable 467.5 504.4
Accrued liabilities 910.2 768.3
Income taxes payable 55.3 83.0
________ ________
Total current liabilities 1,855.2 1,836.2
Long-term debt 542.8 625.9
Deferred income taxes and other liabilities 167.5 141.6
Commitments and contingencies (Note 7) -- --
Redeemable preferred stock 0.3 0.3
Shareholders' equity:
Common stock at stated value:
Class A convertible-97.9 and
98.1 shares outstanding 0.2 0.2
Class B-166.1 and 168.0 shares
outstanding 2.6 2.6
Capital in excess of stated value 553.1 538.7
Unearned stock compensation (1.4) (5.1)
Accumulated other comprehensive income (224.4) (192.4)
Retained earnings 3,505.1 3,495.0
________ ________
Total shareholders' equity 3,835.2 3,839.0
________ ________
$6,401.0 $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 Nine Months Ended
February 28, February 28,
___________________ ________________
2003 2002 2003 2002
____ ____ ____ ____
(in millions, except per share data)
Revenues $2,400.9 $2,260.3 $7,711.9 $7,210.8
_________ _________ _________ _________
Costs and expenses:
Cost of sales 1,424.9 1,376.8 4,568.7 4,403.0
Selling and administrative 753.9 682.5 2,311.6 2,056.4
Interest 10.8 12.1 32.2 37.4
Other expense, net 23.9 (0.1) 48.3 11.8
_________ _________ _________ _________
2,213.5 2,071.3 6,960.8 6,508.6
_________ _________ _________ _________
Income before income taxes and cumulative
effect of accounting change 187.4 189.0 751.1 702.2
Income taxes 62.7 62.7 257.2 242.3
_________ _________ _________ _________
Income before cumulative effect of
accounting change 124.7 126.3 493.9 459.9
Cumulative effect of accounting change,
net of income taxes -- -- 266.1 5.0
_________ _________ _________ _________
Net income $ 124.7 $ 126.3 $ 227.8 $ 454.9
========= ========= ========= =========
Basic earnings per common share (Note 4):
Before accounting change $ 0.47 $ 0.47 $ 1.87 $ 1.71
Cumulative effect of accounting change -- -- (1.01) (0.02)
_________ _________ _________ _________
$ 0.47 $ 0.47 $ 0.86 $ 1.69
========= ========= ========= =========
Diluted earnings per common share (Note 4):
Before accounting change $ 0.47 $ 0.46 $ 1.84 $ 1.69
Cumulative effect of accounting change -- -- (0.99) (0.02)
_________ _________ _________ _________
$ 0.47 $ 0.46 $ 0.85 $ 1.67
========= ========= ========= =========
Dividends declared per common share $ 0.14 $ 0.12 $ 0.40 $ 0.36
========= ========= ========= =========
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
Nine Months Ended
February 28,
_________________
2003 2002
____ ____
(in millions)
Cash provided (used) by operations:
Net income $ 227.8 $ 454.9
Income charges (credits) not
affecting cash:
Cumulative effect of accounting change 266.1 5.0
Depreciation 176.5 164.0
Deferred income taxes (1.0) (3.9)
Amortization and other 9.4 26.2
Income tax benefit from exercise of stock
options 2.6 11.3
Net increase in other working capital
components (252.6) (153.4)
________ ________
Cash provided by operations 428.8 504.1
________ ________
Cash provided (used) by investing activities:
Additions to property, plant and
equipment (138.6) (173.2)
Disposals of property, plant and
equipment 9.6 11.8
Increase in other assets (40.3) (37.3)
Increase (decrease) in other liabilities 1.1 (0.3)
________ ________
Cash used by investing activities (168.2) (199.0)
________ ________
Cash provided (used) by financing activities:
Proceeds from long-term debt issuance 90.2 328.0
Reductions in long-term debt
including current portion (54.4) (78.9)
Decrease in notes payable (208.6) (377.5)
Proceeds from exercise of stock options 15.4 32.5
and other stock issuances
Repurchase of stock (125.7) (56.8)
Dividends on common stock (100.8) (96.6)
________ ________
Cash used by financing activities (383.9) (249.3)
________ ________
Effect of exchange rate changes on cash (9.0) (10.2)
Net (decrease) increase in cash and equivalents (132.3) 45.6
Cash and equivalents, May 31, 2002 and 2001 575.5 304.0
________ ________
Cash and equivalents, February 28, 2003
and 2002 $ 443.2 $ 349.6
======== ========
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 nine (9) months ended February 28, 2003 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 June 2001, the Financial Accounting Standards Board (FASB) issued
Statement of Financial Accounting Standards (SFAS) No. 143, "Accounting for
Asset Retirement Obligations" (FAS 143). This statement requires that a
liability for an asset retirement obligation be recognized at fair value in
the period the obligation is incurred and the associated retirement costs be
capitalized as part of the carrying amount of the tangible long-lived asset.
All provisions of this statement will be effective for the Company on June
1, 2003. It is not expected that the adoption of FAS 143 will have a
material impact on the Company's consolidated financial position or results
of operations.
In October 2001, the FASB issued 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, such as property, plant, and equipment, 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 are
effective for any exit and disposal activities initiated after December 31,
2002. We have not entered into any significant exit or disposal activities
since the effective date of this rule. As such, FAS 146 has not had any
impact on the Company's consolidated financial position or results of
operations.
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 are effective for
any guarantees issued or modified after December 31, 2002. The disclosure
requirements of FIN 45 are effective for the current quarter ended February
28, 2003.
In connection with various contracts and agreements, the Company
provides routine indemnifications relating to the enforceability of
intellectual property, coverage for legal issues that arise, and other items
that fall under the scope of FIN 45. Currently, the Company has several such
agreements in place. However, based on the Company's historical experience
and estimated probability of future loss, the Company has determined that
the fair value of such indemnifications is not material. Hence, the
adoption of FIN 45 has not had an impact on the Company's consolidated
financial position or results of operations, and no impact is expected in
the foreseeable future.
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 10-K filing. The annual impact of a
change to the fair value model prescribed by FAS 123 has been disclosed in
the Company's previous annual 10-K filings. At this time, the Company plans
to continue to account for stock-based compensation using the intrinsic
value method prescribed in Accounting Principles Board Opinion No. 25,
"Accounting for Stock Issued to Employees", rather than change to the FAS
123 fair value method.
In January 2003, the FASB issued FASB Interpretation No. 46,
"Consolidation of Variable Interest Entities" (FIN 46). This interpretation
of Accounting Research Bulletin No. 51, "Consolidated Financial Statements",
addresses consolidation of variable interest entities. FIN 46 requires
certain variable interest entities to be consolidated by the primary
beneficiary if the entity does not effectively disperse risks among the
parties involved. The provisions of FIN 46 are effective immediately for
those variable interest entities created after January 31, 2003. The
provisions are effective for the first period beginning after June 15, 2003
for those variable interests held prior to February 1, 2003. The Company
does not currently have any variable interest entities as defined in FIN 46.
Accordingly, the Company does not expect the provisions of FIN 46 to affect
the Company's consolidated financial position or results of operations.
NOTE 2 - Identifiable Intangible Assets and Goodwill:
___________________________________________
Adoption of FAS 142
The Company adopted SFAS 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
impairmenttests, 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 February 28, 2003 and May 31, 2002:
February 28, 2003 May 31, 2002
______________________ ______________________
Gross Gross
Carrying Accumulated Carrying Accumulated
Amount Amortization Amount Amortization
________ ____________ ________ ____________
(in millions)
Intangible assets subject to
amortization:
Patents $ 24.5 $ (9.9) $ 23.1 $ (8.8)
Trademarks 12.7 (10.3) 12.0 (9.8)
Other 7.5 (0.9) 7.5 (0.2)
_________ _________ _________ _________
Total $ 44.7 $ (21.1) $ 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 $0.9 million and $2.7 million for the three-month and nine-month
periods ended February 28, 2003, 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: $3.5 million; 2004: $3.0 million; 2005: $2.8 million; 2006: $2.7
million; 2007: $2.1 million.
The results for the three-month and nine-month periods ended February
28, 2002 do not reflect the provisions of FAS 142. The reported net income
before cumulative effect of accounting change was $126.3 million and $459.9
million for the three-month and nine-month periods ended February 28, 2002,
respectively. Had the Company adopted FAS 142 on June 1, 2001, for the
three-month period ending February 28, 2002, we would have recorded net
income before cumulative effect of accounting change of $129.6 million as a
result of not recording $2.2 million in goodwill amortization and $1.1
million in trademark amortization. For the nine-month period ended February
28, 2002, net income before cumulative effect of accounting change would have
been $470.0 million as a result of not recording $6.7 million in goodwill
amortization and $3.4 million in trademark amortization. Basic and diluted
earnings per common share before accounting change would have increased $0.01
and $0.04 for the three-month and nine-month periods ended February 28, 2002,
respectively.
NOTE 3 - Comprehensive Income:
___________________________
Comprehensive income, net of taxes, is as follows:
Three Months Ended Nine Months Ended
February 28, February 28,
__________________ _________________
2003 2002 2003 2002
____ ____ ____ ____
(in millions)
Net Income $124.7 $126.3 $227.8 $454.9
Other Comprehensive Income:
Change in cumulative translation
adjustment and other 49.4 (35.8) 66.6 (42.5)
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 (85.7) 20.6 (178.2) 22.4
Reclassification to net income of
previously deferred gains and losses
related to hedge derivative instruments 31.7 (5.1) 79.6 (14.9)
_______ _______ _______ _______
Other Comprehensive Income (4.6) (20.3) (32.0) 21.8
_______ _______ _______ _______
Total Comprehensive Income $120.1 $106.0 $195.8 $476.7
======= ======= ======== =======
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 4.5 million shares of common stock were outstanding at February 28, 2003
and February 28, 2002, 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 Nine Months Ended
February 28, February 28,
__________________ ________________
2003 2002 2003 2002
____ ____ ____ ____
(in millions, except per share data)
Determination of shares:
Average common shares
outstanding 263.9 268.4 264.6 268.3
Assumed conversion of
dilutive stock options
and awards 2.8 5.0 3.1 3.9
_________ _________ _________ _________
Diluted average common
shares outstanding 266.7 273.4 267.7 272.2
========= ========= ========= =========
Basic earnings per common share:
Before cumulative effect of
accounting change $ 0.47 $ 0.47 $ 1.87 $ 1.71
Cumulative effect of
accounting change -- -- (1.01) (0.02)
_________ _________ _________ _________
$ 0.47 $ 0.47 $ 0.86 $ 1.69
========= ========= ========= =========
Diluted earnings per common share:
Before cumulative effect of
accounting change $ 0.47 $ 0.46 $ 1.84 $ 1.69
Cumulative effect of
accounting change -- -- (0.99) (0.02)
_________ _________ _________ _________
$ 0.47 $ 0.46 $ 0.85 $ 1.67
========= ========= ========= =========
NOTE 5 - Inventories:
___________
Inventories by major classification are as follows:
February 28, May 31,
2003 2002
________ ________
(in millions)
Finished goods $1,488.3 $1,348.2
Work-in-progress 16.0 13.0
Raw materials 14.9 12.6
________ ________
$1,519.2 $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 Nine Months Ended
February 28, February 28,
__________________ _________________
2003 2002 2003 2002
_____ _____ _____ _____
Revenues
USA $1,127.9 $1,094.3 $3,443.1 $3,482.3
EUROPE, MIDDLE EAST, AFRICA 645.8 600.0 2,296.4 1,932.7
ASIA PACIFIC 335.1 286.0 996.2 844.6
AMERICAS 107.4 112.0 383.2 426.4
OTHER 184.7 168.0 593.0 524.8
__________ __________ __________ __________
$2,400.9 $2,260.3 $7,711.9 $7,210.8
========== ========== ========== ==========
Management Pre-Tax Income
USA $ 210.0 $ 213.6 $ 664.9 $ 721.7
EUROPE, MIDDLE EAST, AFRICA 80.9 106.4 367.8 289.6
ASIA PACIFIC 81.3 55.7 216.7 172.3
AMERICAS 18.2 13.0 71.9 67.8
OTHER (10.0) 2.7 (13.8) 9.5
CORPORATE (193.0) (202.4) (556.4) (558.7)
__________ __________ __________ __________
$ 187.4 $ 189.0 $ 751.1 $ 702.2
========== ========== ========== ==========
Feb. 28, May 31,
2003 2002
_________ _________
Accounts Receivable, net
USA $ 710.1 $ 654.4
EUROPE, MIDDLE EAST, AFRICA 700.5 571.1
ASIA PACIFIC 216.5 189.6
AMERICAS 109.5 125.3
OTHER 189.8 249.5
CORPORATE 23.0 17.2
__________ __________
$1,949.4 $1,807.1
========== ==========
Inventories
USA $ 608.8 $ 613.4
EUROPE, MIDDLE EAST, AFRICA 400.9 336.5
ASIA PACIFIC 149.2 148.0
AMERICAS 79.0 62.9
OTHER 270.1 203.8
CORPORATE 11.2 9.2
__________ __________
$1,519.2 $1,373.8
========== ==========
Property, Plant and Equipment, net
USA $ 220.5 $ 241.9
EUROPE, MIDDLE EAST, AFRICA 223.5 212.2
ASIA PACIFIC 385.6 378.4
AMERICAS 11.5 12.4
OTHER 109.6 113.3
CORPORATE 664.4 656.3
__________ __________
$1,615.1 $1,614.5
========== ==========
NOTE 7 - Commitments and Contingencies:
_____________________________
At February 28, 2003, the Company had letters of credit outstanding
totaling $847.5 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 FINANCIAL CONDITION AND
RESULTS OF OPERATIONS
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 of
Financial Condition and Results of Operations" 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
_________________
Revenue growth in our international regions drove a 6% increase in
consolidated revenues in the third quarter of fiscal 2003 as compared to the
third quarter of fiscal 2002, due in part to the strengthening of the euro
versus the U.S. dollar. Changes in currency exchange rates, primarily the
euro, drove 4% of the consolidated revenue growth. Consolidated revenues
increased 7% in the first nine months of fiscal 2003 as compared to the first
nine months of fiscal 2002, also driven by increased revenues in our
international regions. These year-to-date revenues reflected 3% growth due to
the change in currency exchange rates.
Our largest international region, Europe, Middle East, and Africa (EMEA),
reported 8% revenue growth in the third quarter of fiscal 2003 compared to the
third quarter of fiscal 2002. This growth reflected a 15% improvement due to
translation of sales at a higher euro exchange rate and an 11% reduction due
to changes in shipment timing due to our December 2002 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 revenue from the
third quarter to the second quarter, reducing third quarter fiscal 2003
revenue growth by approximately eleven points. Excluding the benefit from the
change in exchange rates, revenue growth for the region was led by increased
sales in Spain and Portugal. Although year-to-date revenues for the UK market
were essentially the same as the prior year, excluding the benefit of the
change in exchange rates, revenues for the third quarter declined year-over-
year partially as a result of the acceleration of third quarter shipments into
the second quarter.
In the first nine months of fiscal 2003, EMEA reported revenues grew 19%
as compared to the first nine months of fiscal 2002; 12 points of this growth
were due to changes in currency exchange rates. Excluding the benefit of the
change in exchange rates, revenues grew in all three business units (footwear,
apparel, and equipment) and in most countries across the region, especially
the emerging markets in central and eastern Europe.
EMEA management pre-tax income declined from $106.4 million in the third
quarter of fiscal 2002 to $80.9 million in the third quarter of fiscal 2003.
The decline was driven by the shift in third quarter revenues to the second
quarter and incremental selling and administrative costs, partially offset by
an improvement in EMEA's gross margin percentage. In contrast, for the first
nine months of fiscal 2003, EMEA management pre-tax income grew 27%, to $367.8
million from $289.6 million in the first nine months of fiscal 2002. Higher
year-to-date revenues and improved gross margins drove the increase, more than
offsetting incremental selling and administrative costs.
In Asia Pacific, revenues increased 17% in the third quarter of fiscal
2003; 5 points of this growth were due to changes in currency exchange rates.
Revenues increased 18% in the first nine months of fiscal 2003; 3 points of
this growth came from changes in currency exchange rates. As in recent
quarters, each of our three business units experienced growth across the
region, and most countries in Asia Pacific reported higher revenues,
particularly China, Korea, and Japan.
Management pre-tax income for the Asia Pacific region increased from
$55.7 million in the third quarter of fiscal 2002 to $81.3 million in the
third quarter of fiscal 2003 and from $172.3 million in the first nine months
of fiscal 2002 to $216.7 million in the first nine months of fiscal 2003.
These increases reflected higher revenues and improved gross margins that more
than offset higher selling and administrative costs incurred to support the
higher level of revenues.
In the Americas region, third quarter fiscal 2003 revenues decreased 4%
compared to the third quarter of fiscal 2002, which reflected a higher level
of sales more than offset by a 15% decline due to weaker currencies in Latin
American markets. Likewise, year-to-date revenues decreased 10%, driven by a
16% decline due to changes in currency exchange rates. Excluding the currency
exchange rate impact, the region experienced sales growth in Latin America
partially offset by weakness in Canada.
Third quarter management pre-tax income for the Americas region grew from
$13.0 million in fiscal 2002 to $18.2 million in fiscal 2003. On a year-to-
date basis, management pre-tax income grew 6% from $67.8 million in fiscal
2002 to $71.9 million in fiscal 2003. For both periods, management pre-tax
income improved despite lower reported revenues primarily due to an improved
gross margin percentage.
In the U.S. region, reported revenues grew 3% in the third quarter of
fiscal 2003 versus the third quarter of last year, but declined 1% in the
first nine months of fiscal 2003 versus the first nine months of last year.
The improved revenue trend in the third quarter was partially due to 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.
We estimate last year's revenue acceleration improved the U.S. third quarter
fiscal 2003 revenue growth rate by four points. This revenue acceleration did
not affect year-to-date revenue growth.
Our U.S. apparel and equipment businesses grew on a quarterly and year-
to-date basis as compared to the same periods last year. However, our U.S.
footwear business experienced declines during the third quarter and year-to-
date period as compared to the same periods last year. Lower sales to our
largest customer, Foot Locker, and a lower average price per pair sold drove
the year-over-year decline in U.S. footwear revenues. We expect U.S. sales to
Foot Locker to be below prior year levels at least through the first half 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.
We are continuing to pursue incremental sales with other retailers in order to
offset the decline in revenues from Foot Locker. Although we do not expect to
fully offset the revenue loss from Foot Locker in the U.S. in the short term,
we believe we will ultimately succeed in realigning distribution of our
products to meet consumer demand and generate profitable revenue growth in the
U.S. footwear business.
The reduction in average price per pair in U.S. footwear between fiscal
2003 and fiscal 2002 reflected a shift in sales mix toward classic footwear
and kids models, which have a lower average price than our more complex adult
performance models. Outstanding futures orders indicate that this trend will
continue in the near term, although we expect the rate of decline versus the
prior year to slow.
U.S. region management pre-tax income declined 2%, from $213.6 million in
the third quarter of fiscal 2002 to $210.0 million in the third quarter of
fiscal 2003 as higher selling and administrative costs more than offset the
increase in revenues and a slight increase in gross margin percentage. On a
year-to-date basis, U.S. management pre-tax income declined 8%, from $721.7
million in the first nine months of fiscal 2002 to $664.9 million in the first
nine months of fiscal 2003, reflecting lower revenues and higher selling and
administrative costs, partially offset by improvement in gross margins.
Other revenues include revenues from Bauer NIKE Hockey, Inc., Cole Haan
Holdings, Inc., Hurley International LLC, and NIKE Golf. 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.
Other revenues grew 10% in the third quarter of fiscal 2003 as compared
to the third quarter of fiscal 2002 and 13% in the first nine months of fiscal
2003 as compared to the first nine months of fiscal 2002. The addition of
revenues from our Hurley business, purchased in the fourth quarter of fiscal
2002, drove the increase in Other revenues in both the third quarter and year-
to-date period. Lower NIKE Golf revenues in the third quarter of fiscal 2003
partially offset the increase from the Hurley business in the third quarter.
(NIKE Golf business further discussed below.)
Other management pre-tax income declined from income of $2.7 million in
the third quarter of fiscal 2002 to a loss of $10.0 million in the third
quarter of fiscal 2003, and declined from income of $9.5 million in the first
nine months of fiscal 2002 to a loss of $13.8 million in the first nine months
of fiscal 2003. Reduced NIKE Golf profits drove these declines. The reduced
NIKE Golf profits resulted from weaker demand in the U.S. golf market in the
current year and start-up issues we experienced at a third-party distribution
facility. We expect that demand for golf products throughout the industry and
for our business may remain weak in the near term due to the current slowdown
of the U.S. economy. In addition, while we are actively working to resolve
the startup issues at our new distribution facility, those issues may continue
to affect our NIKE Golf revenues and profitability during the fourth quarter
of fiscal 2003.
The breakdown of revenues follows:
Three Months Ended Nine Months Ended
February 28, February 28
___________________ __________________
% %
2003 2002 change 2003 2002 change
______ _______ _______ _______ _______ ______
(in millions)
U.S.A. REGION
FOOTWEAR $ 761.4 $ 769.0 -1% $2,222.5 $2,313.5 -4%
APPAREL 307.1 273.2 12% 1,005.3 957.0 5%
EQUIPMENT AND OTHER 59.4 52.1 14% 215.3 211.8 2%
________ ________ ________ ________
TOTAL U.S.A. 1,127.9 1,094.3 3% 3,443.1 3,482.3 -1%
EMEA REGION
FOOTWEAR 363.1 338.7 7% 1,292.5 1,079.0 20%
APPAREL 239.4 225.5 6% 845.1 725.9 16%
EQUIPMENT AND OTHER 43.3 35.8 21% 158.8 127.8 24%
________ ________ ________ ________
TOTAL EMEA 645.8 600.0 8% 2,296.4 1,932.7 19%
ASIA PACIFIC REGION
FOOTWEAR 186.1 159.4 17% 537.7 482.5 11%
APPAREL 116.0 99.9 16% 366.3 287.1 28%
EQUIPMENT AND OTHER 33.0 26.7 24% 92.2 75.0 23%
________ ________ ________ ________
TOTAL ASIA PACIFIC 335.1 286.0 17% 996.2 844.6 18%
AMERICAS REGION
FOOTWEAR 69.1 70.3 -2% 245.1 267.7 -8%
APPAREL 29.8 33.9 -12% 108.9 129.3 -16%
EQUIPMENT AND OTHER 8.5 7.8 9% 29.2 29.4 -1%
________ ________ ________ ________
TOTAL AMERICAS 107.4 112.0 -4% 383.2 426.4 -10%
________ ________ ________ ________
2,216.2 2,092.3 6% 7,118.9 6,686.0 6%
OTHER 184.7 168.0 10% 593.0 524.8 13%
________ ________ ________ ________
TOTAL REVENUES $2,400.9 $2,260.3 6% $7,711.9 $7,210.8 7%
======== ======== ======== ========
The previous discussion includes disclosure of "management pre-tax
income" for our operating segments. We have reported management pre-tax
income in accordance with Statement of Financial Accounting Standard No. 131,
"Disclosures about Segments of an Enterprise and Related Information". As
discussed 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 operating segments.
Worldwide futures and advance orders for our footwear and apparel
scheduled for delivery from March 2003 to July 2003 were 5.8% 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 the third quarter of fiscal 2003, our quarterly gross margin
percentage improved 1.6 points as compared to the third quarter of fiscal
2002, continuing the trend of quarter-on-quarter increases over the previous
four quarters. Likewise, for the first nine months of fiscal 2003 compared to
the first nine months of fiscal 2002, our gross margin percentage improved 1.9
points. The primary driver of the consolidated gross margin improvement was
higher in-line apparel margins, reflecting our global initiatives to lower
sourcing and distribution costs. The apparel improvement was partially offset
by apparel sourcing issues related to production scheduling and factory
deliveries we have experienced in the U.S. region throughout fiscal 2003.
Lower pricing of NIKE Golf products as a result of the market conditions
discussed above also had a negative impact on margins during the third quarter
of fiscal 2003.
Third quarter selling and administrative expense increased as a
percentage of revenues from 30.2% in fiscal 2002 to 31.4% in fiscal 2003.
Year-to-date selling and administrative expense increased as a percentage of
revenues from 28.5% in fiscal 2002 to 30.0% in fiscal 2003. Both demand
creation and operating overhead expense increased as a percentage of revenues
in the third quarter and year-to-date period. Third quarter demand creation
expense grew from $242.1 million to $271.7 million while year-to-date demand
creation expense increased from $734.2 million to $867.6 million. Higher
costs incurred in the EMEA region drove the growth in demand creation expense,
reflecting, 1) a stronger euro currency exchange rate compared to the U.S.
dollar, which resulted in higher U.S. dollar expenses for costs that are euro-
denominated, 2) our new endorsement agreement with the Manchester United
soccer team that became effective in August 2002, and 3) a comparison to
relatively low spending in the third quarter of the prior year as we shifted
resources to the World Cup marketing campaign beginning in late fiscal 2002.
For the year-to-date period, the increase in demand creation expense also
reflected significant first quarter costs for our World Cup 2002 campaign. In
addition, we increased demand creation spending in the U.S. region despite
lower revenues, in order to drive continued consumer demand while we undergo
the realignment of product distribution discussed above.
Operating overhead increased between the third quarter of fiscal 2003 and
the third quarter of fiscal 2002, from $440.4 million to $482.2 million, and
increased between the first nine months of fiscal 2003 and the first nine
months of fiscal 2002, from $1,322.2 million to $1,444.0 million. Major
drivers of these increases were the stronger euro, costs related to the supply
chain systems implementation in EMEA, investments in our NIKE Golf business
infrastructure, and overhead costs associated with our recently acquired
Hurley business.
Third quarter interest expense decreased from $12.1 million in fiscal
2002 to $10.8 million in fiscal 2003, a decline of 11%. Year-to-date interest
expense decreased from $37.4 million in fiscal 2002 to $32.2 million in 2003,
a decline of 14%. 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 income/expense was a net expense of $23.9 million compared to net
income for the same quarter of last year of $0.1 million. Year-to-date, other
income/expense was a net expense of $48.3 million compared to a net expense of
$11.8 million in the prior year. Significant amounts included in other
income/expense were interest income, profit sharing expense, goodwill
amortization (fiscal 2002 only), and certain foreign currency gains and
losses.
An increase in net foreign currency losses drove the increase in other
expense versus the third quarter and first nine months of last year. These
foreign currency losses were primarily due to hedge losses on intercompany
charges to a European subsidiary, whose functional currency is the euro. The
hedge losses reflected that the euro has strengthened considerably since we
entered into the related hedge contracts. These losses were offset by
favorable translation of foreign-currency denominated profits. Therefore, the
net year-over-year effect of these hedge losses and favorable translation of
foreign currency-denominated profits is not material to our consolidated net
income for either the third quarter or the year-to-date period. We expect
these hedge losses will continue in the fourth quarter of fiscal 2003 and will
continue to largely offset the positive translation impact of stronger foreign
currencies on consolidated net income.
In the third quarter, we adjusted our year-to-date tax rate to 34.2%, our
estimate of our full year effective tax rate. 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 credits as compared to fiscal 2002.
Included in net income for the first nine months of fiscal 2003 is 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 each quarter of fiscal 2003 as compared to fiscal 2002 ($10.1
million over the year-to-date period). See the accompanying Notes to
Unaudited Condensed Consolidated Financial Statements for further information.
Current world events, including the conflict in Iraq, have created
uncertainty about the future prospects for the U.S. and world economies.
Although to date we do not believe these events have had a material impact on
our business, the overall effect these events will ultimately have on the
demand for NIKE products around the world and our cost of doing business is
unclear. In the face of this uncertainty, we are monitoring each of our
markets closely to ensure that we respond quickly to changes in local
economies and consumer trends. As of the current date, these world events
have not caused us to revise our revenue and profit growth goals for the
remainder of fiscal 2003.
Recently Issued Accounting Standards
____________________________________
In June 2001, the Financial Accounting Standards Board (FASB) issued
Statement of Financial Accounting Standards (SFAS) No. 143, "Accounting for
Asset Retirement Obligations" (FAS 143). This statement requires that a
liability for an asset retirement obligation be recognized at fair value in
the period the obligation is incurred and the associated retirement costs be
capitalized as part of the carrying amount of the tangible long-lived asset.
All provisions of this statement will be effective for the Company on June 1,
2003. We do not expect that the adoption of FAS 143 will have a material
impact on our consolidated financial position or results of operations.
In October 2001, the FASB issued 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
such as property, plant, and equipment, 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 are effective for any exit
and disposal activities initiated after December 31, 2002. We have not
entered into any significant exit or disposal activities since the effective
date of this rule. As such, FAS 146 has not had any impact on our
consolidated financial position or results of operations.
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 are effective for any guarantees issued or
modified after December 31, 2002. The disclosure requirements of FIN 45 are
effective for our third quarter of fiscal 2003.
In connection with various contracts and agreements, we provide routine
indemnifications relating to the enforceability of intellectual property,
coverage for legal issues that arise, and other items that fall under the
scope of FIN 45. Currently, we have several such agreements in place. However
based on our historical experience and estimated probability of future loss,
we have determined that the fair value of such indemnifications is not
material. Hence, the adoption of FIN 45 has not had an impact on our
consolidated financial position or results of operations, and no impact is
expected in the foreseeable future.
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 the fair value model prescribed by FAS 123 has been
disclosed in our previous annual 10-K filings. At this time, we plan to
continue to account for stock-based compensation using the intrinsic method
prescribed in Accounting Principles Board Opinion No. 25, "Accounting for
Stock Issued to Employees", rather than change to the FAS 123 fair value
method.
In January 2003, the FASB issued FASB Interpretation No. 46,
"Consolidation of Variable Interest Entities" (FIN 46). This interpretation
of Accounting Research Bulletin No. 51, "Consolidated Financial Statements",
addresses consolidation of variable interest entities. FIN 46 requires
certain variable interest entities to be consolidated by the primary
beneficiary if the entity does not effectively disperse risks among the
parties involved. The provisions of FIN 46 are effective immediately for
those variable interest entities created after January 31, 2003. The
provisions are effective for the first period beginning after June 15, 2003
for those variable interests held prior to February 1, 2003. We do not
currently have any variable interest entities as defined in FIN 46.
Accordingly, we do not expect the provisions of FIN 46 to affect our
consolidated financial position or results of operations.
Liquidity and Capital Resources
_______________________________
Cash provided by operations was $428.8 million in the first nine months
of fiscal 2003, compared to $504.1 million in the first nine months of fiscal
2002. Our primary source of operating cash flow in the current period was
Income before accounting change of $493.9 million. Cash provided by
operations was less than that of last year primarily due to a greater increase
in working capital during the current period.
Cash used by investing activities during the first nine months of fiscal
2003 was $168.2 million, compared to $199.0 million in the same period last
year. These amounts were 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, the spending
for which declined in fiscal 2003 as compared to fiscal 2002. In addition,
during both fiscal 2003 and fiscal 2002, we continued investment in NIKE-owned
retail stores, primarily outside the U.S. Finally, we incurred costs in
various distribution center projects, the most significant of which is the
construction of a new storage building in Japan during the current fiscal
year, with scheduled opening in the second half of fiscal 2004.
Cash used by financing activities for the first nine months of fiscal
2003 was $383.9 million, up from $249.3 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 (discussed further
below) and the exercise of employee stock options and other stock issuances.
The share repurchases were part of a $1 billion, four-year, share
repurchase program that began in fiscal 2001. In the third quarter of fiscal
2003, we purchased 0.6 million shares of NIKE's Class B common stock for $26.6
million, and in the first nine months of fiscal 2003, we purchased 2.6 million
shares for $115.0 million. To date under the program, we have purchased 10.9
million shares for $509.7 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 $106.9 million and $338.3 million outstanding at February 28, 2003
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 in the third quarter of
fiscal 2003 were $.14 per share.
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 vary among 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:
NIKE settled the securities class action lawsuits that were 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 settlement was
approved by the court on February 24, 2003. We paid $8.9 million in cash,
funded by the Company's directors and officers liability insurance. In the
settlement, 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
received a full release of all claims asserted in the litigation.
In a related shareholder derivative lawsuit, Metivier v. Denunzio, et
al., 0104-04339, in the Multnomah County Circuit Court of the State of Oregon,
the defendants, including the Company and certain directors and officers,
filed a motion to dismiss the complaint on March 31, 2003. A decision on the
motion is expected in the next several months.
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 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).
4.3 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).
4.4 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).
4.3 Second Amendment to Credit Agreement dated as of November 15, 2002.
(incorporated by reference from Exhibit 10.3 to the Company's Quarterly
Report on Form 10-Q for the fiscal quarter ended November 30, 2002).
10.1 NIKE, Inc. Foreign Subsidiary Employee Stock Purchase Plan dated as of
February 14, 2003.
10.2 NIKE, Inc. Deferred Compensation Plan dated as of January 1, 2003. *
12.1 Computation of Ratio of Earnings to Charges.
99 Certifications of Chief Executive Officer and Chief Financial Officer
furnished pursuant to 18 U.S.C. 1350.
* 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
February 28, 2003:
None
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: April 14, 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: April 14, 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: April 14, 2003
____________________
/s/ Donald W. Blair
____________________
Donald W. Blair
Chief Financial Officer