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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 August 31, 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 August 31, 2003 were:
_______________
Class A 97,816,766
Class B 164,602,344
_______________
262,419,110
===============
PART 1 - FINANCIAL INFORMATION
Item 1. FINANCIAL STATEMENTS
NIKE, Inc.
UNAUDITED CONDENSED CONSOLIDATED BALANCE SHEETS
August 31, May 31,
2003 2003
________ ________
(in millions)
ASSETS
Current assets:
Cash and equivalents $ 997.8 $ 634.0
Accounts receivable 2,085.5 2,101.1
Inventories (Note 2) 1,480.5 1,514.9
Deferred income taxes 175.1 221.8
Prepaid expenses and other current assets 309.3 266.2
________ ________
Total current assets 5,048.2 4,738.0
Property, plant and equipment 2,957.0 2,988.8
Less accumulated depreciation 1,393.1 1,368.0
________ ________
Property, plant and equipment, net 1,563.9 1,620.8
Identifiable intangible assets, net (Note 3) 118.0 118.2
Goodwill (Note 3) 65.6 65.6
Deferred income taxes and other assets 222.9 229.4
________ ________
Total Assets $7,018.6 $6,772.0
======== ========
LIABILITIES AND SHAREHOLDERS' EQUITY
Current liabilities:
Current portion of long-term debt $ 205.6 $ 205.7
Notes payable 237.6 75.4
Accounts payable 520.1 572.7
Accrued liabilities 879.2 1,054.2
Income taxes payable 192.2 107.2
________ ________
Total current liabilities 2,034.7 2,015.2
Long-term debt 532.3 551.6
Deferred income taxes and other liabilities 234.2 214.2
Commitments and contingencies (Note 8) -- --
Redeemable preferred stock 0.3 0.3
Shareholders' equity:
Common stock at stated value:
Class A convertible-97.8 and
97.8 shares outstanding 0.2 0.2
Class B-164.6 and 165.8 shares
outstanding 2.6 2.6
Capital in excess of stated value 612.1 589.0
Unearned stock compensation (7.8) (0.6)
Accumulated other comprehensive income (165.9) (239.7)
Retained earnings 3,775.9 3,639.2
________ ________
Total shareholders' equity 4,217.1 3,990.7
________ ________
Total liabilities and shareholders' equity $7,018.6 $6,772.0
======== ========
The accompanying Notes to Unaudited Condensed Consolidated Financial
Statements are an integral part of this statement.
NIKE, Inc.
UNAUDITED CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS
Three Months Ended
August 31,
___________________
2003 2002
____ ____
(in millions, except per share data)
Revenues $3,024.9 $2,796.3
Cost of sales 1,723.4 1,639.2
_________ _________
Gross margin 1,301.5 1,157.1
Selling and administrative 869.6 804.8
Interest expense, net 7.5 7.2
Other expense, net 23.8 11.0
_________ _________
Income before income taxes and cumulative
effect of accounting change 400.6 334.1
Income taxes 139.4 116.9
_________ _________
Income before cumulative effect of
accounting change 261.2 217.2
Cumulative effect of accounting change,
net of income taxes -- 266.1
_________ _________
Net income/(loss) $ 261.2 $ (48.9)
========= =========
Basic earnings (loss) per common share (Note 6):
Before accounting change $ 0.99 $ 0.82
Cumulative effect of accounting change -- (1.00)
_________ _________
$ 0.99 $ (0.18)
========= =========
Diluted earnings (loss) per common share (Note 6):
Before accounting change $ 0.98 $ 0.81
Cumulative effect of accounting change -- (0.99)
_________ _________
$ 0.98 $ (0.18)
========= =========
Dividends declared per common share $ 0.14 $ 0.12
========= =========
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
Three Months Ended
August 31,
_________________
2003 2002
____ ____
(in millions)
Cash provided (used) by operations:
Net income (loss) $ 261.2 $ (48.9)
Income charges (credits) not
affecting cash:
Cumulative effect of accounting change -- 266.1
Depreciation 61.2 56.4
Deferred income taxes 1.4 --
Amortization and other 10.6 2.1
Income tax benefit from exercise of stock
options 2.9 1.1
Changes in other working capital
components 13.4 (102.7)
________ ________
Cash provided by operations 350.7 174.1
________ ________
Cash provided (used) by investing activities:
Additions to property, plant and
equipment (42.0) (43.7)
Disposals of property, plant and
equipment 1.6 4.8
Increase in other assets (1.7) (12.4)
(Decrease) increase in other liabilities (0.2) 1.2
________ ________
Cash used by investing activities (42.3) (50.1)
________ ________
Cash provided (used) by financing activities:
Proceeds from long-term debt issuance 1.8 90.1
Reductions in long-term debt
including current portion (1.5) (51.4)
Increase (decrease) in notes payable 162.1 (207.8)
Proceeds from exercise of options 19.0 4.9
Repurchase of stock (95.0) (53.1)
Dividends on common stock (36.9) (31.9)
________ ________
Cash provided (used) by financing activities 49.5 (249.2)
________ ________
Effect of exchange rate changes on cash 5.9 (20.3)
Net increase (decrease) in cash and equivalents 363.8 (145.5)
Cash and equivalents, May 31, 2003 and 2002 634.0 575.5
________ ________
Cash and equivalents, August 31, 2003
and 2002 $ 997.8 $ 430.0
======== ========
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 three (3) months ended August 31, 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 2004 presentation. These changes had no impact on previously reported
results of operations or shareholders' equity.
NOTE 2 - Inventories:
___________
Inventories by major classification are as follows:
Aug. 31, May 31,
2003 2003
________ ________
(in millions)
Finished goods $1,454.3 $1,484.1
Work-in-progress 11.5 15.2
Raw materials 14.7 15.6
________ ________
$1,480.5 $1,514.9
======== ========
NOTE 3 - Identifiable Intangible Assets and Goodwill:
___________________________________________
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.
The following table summarizes the Company's identifiable intangible
assets and goodwill balances as of August 31, 2003 and May 31, 2003:
August 31, 2003 May 31, 2003
______________________ ______________________
Gross Gross
Carrying Accumulated Carrying Accumulated
Amount Amortization Amount Amortization
________ ____________ ________ ____________
(in millions)
Amortized intangible assets:
Patents $ 25.2 $ (10.8) $ 24.9 $(10.4)
Trademarks 13.1 (10.8) 12.9 (10.6)
Other 7.5 (1.2) 7.5 (1.1)
_________ _________ _________ _________
Total $ 45.8 $ (22.8) $ 45.3 $ (22.1)
========= ========= ========= =========
Unamortized intangible assets:
Goodwill $ 65.6 $ 65.6
Trademarks 95.0 95.0
_________ _________
Total $ 160.6 $ 160.6
========= =========
Amortization expense, which is included in selling and administrative
expense, was $0.9 million and $1.1 million for the three-month periods ended
August 31, 2003 and August 31, 2002, respectively. The estimated
amortization expense for intangible assets subject to amortization for each
of the succeeding years ended May 31, 2004 through May 31, 2008 are as
follows: 2004: $3.1 million; 2005: $2.9 million; 2006: $2.8 million; 2007:
$2.3 million; 2008: $2.1 million.
NOTE 4 - Comprehensive Income (Loss):
___________________________
Comprehensive income (loss), net of taxes, is as follows:
Three Months Ended
August 31,
__________________
2003 2002
____ ____
(in millions)
Net income (loss) $261.2 $(48.9)
Other comprehensive income (loss):
Change in cumulative translation
adjustment and other (59.2) 12.3
Changes due to cash flow hedging
instruments:
Net gain (loss) on hedge derivatives 86.5 (84.2)
Reclassification to net income (loss) of
previously deferred (gains) and losses
related to hedge derivative instruments 46.5 23.0
_______ _______
Other comprehensive income (loss) 73.8 (48.9)
_______ _______
Total comprehensive income (loss) $335.0 $(97.8)
======= =======
NOTE 5 - Stock-Based Compensation:
_________________________
The Company uses the intrinsic value method to account for stock-based
compensation in accordance with Accounting Principles Board (APB) Opinion No.
25, "Accounting for Stock Issued to Employees" as permitted by Statement of
Financial Accounting Standards (SFAS) No. 123 "Accounting for Stock-Based
Compensation" (FAS 123). The Company's policy is to grant stock options with
an exercise price equal to the market value at the date of grant, and
accordingly, no compensation expense is recognized.
If the Company had accounted for stock options issued to employees in
accordance with FAS 123, the Company's pro forma net income (loss) and pro
forma earnings (loss) per share would have been reported as follows:
Three Months Ended
August 31,
__________________
2003 2002
____ ____
(in millions, except per share data)
Net income (loss) as reported $261.2 $(48.9)
Add: Stock-based compensation expense included
in reported net income, net of tax -- --
Deduct: Total stock-based employee compensation
expense under fair value based method for all
awards, net of tax (11.3) (8.6)
_______ _______
Pro forma net income (loss) $249.9 $(57.5)
======= =======
Earnings (loss) per share:
Basic - as reported $ 0.99 $(0.18)
Basic - pro forma $ 0.95 $(0.22)
Diluted - as reported $ 0.98 $(0.18)
Diluted - pro forma $ 0.94 $(0.22)
The pro forma effects of applying FAS 123 may not be representative of
the effects on reported net income (loss) and earnings (loss) per share for
future periods since options vest over several years and additional awards are
made each year.
NOTE 6 - Earnings (Loss) Per Common Share:
________________________________
The following represents a reconciliation from basic earnings (loss) per
share to diluted earnings (loss) per share. Options to purchase 3.9 million
and 4.3 million shares of common stock were outstanding at August 31, 2003 and
August 31, 2002, respectively, but were not included in the computation of
diluted earnings (loss) 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
August 31,
__________________
2003 2002
____ ____
(in millions, except per share data)
Determination of shares:
Average common shares
outstanding 262.9 265.3
Assumed conversion of
dilutive stock options
and awards 4.3 3.8
_______ _______
Diluted average common
shares outstanding 267.2 269.1
======= =======
Basic earnings (loss) per common share:
Before cumulative effect of
accounting change $ 0.99 $ 0.82
Cumulative effect of
accounting change -- (1.00)
_______ _______
$ 0.99 $(0.18)
======= =======
Diluted earnings (loss) per common share:
Before cumulative effect of
accounting change $ 0.98 $ 0.81
Cumulative effect of
accounting change -- (.99)
_______ _______
$ 0.98 $(0.18)
======= =======
NOTE 7 - 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, and NIKE
Golf, which are considered immaterial for individual disclosure.
Where applicable, "Corporate" represents items necessary to reconcile to
the consolidated financial statements, which generally include corporate
activity and corporate eliminations. Effective June 1, 2003 the assets,
liabilities, and operating expenses of NIKE IHM, Inc., which primarily
manufactures NIKE Air components, have been reclassified to the Corporate
category from Other, reflecting current management of these operations. NIKE
IHM, Inc. information for 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 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 Statements
of Operations. Reconciling items for 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 Statements of Operations.
Accounts receivable, inventory, and property, plant, and equipment for
operating segments are regularly reviewed and therefore provided below:
Three Months Ended
August 31,
__________________
2003 2002
____ ____
(in millions)
Net Revenue
USA $1,253.9 $1,282.7
EUROPE, MIDDLE EAST, AFRICA 1,013.5 869.3
ASIA PACIFIC 348.3 307.8
AMERICAS 153.7 142.3
OTHER 255.5 194.2
_________ _________
$3,024.9 $2,796.3
========= =========
Pre-tax Income
USA $ 295.6 $ 283.9
EUROPE, MIDDLE EAST, AFRICA 204.7 162.2
ASIA PACIFIC 76.7 50.7
AMERICAS 24.3 25.2
OTHER (3.2) (11.2)
CORPORATE (197.5) (176.7)
_________ _________
$ 400.6 $ 334.1
========= =========
Aug. 31, May 31,
2003 2003
_________ __________
(in millions)
Accounts Receivable, net
USA $ 625.0 $ 609.5
EUROPE, MIDDLE EAST, AFRICA 834.0 792.6
ASIA PACIFIC 228.0 258.4
AMERICAS 126.7 130.0
OTHER 234.1 269.2
CORPORATE 37.7 41.4
_________ _________
$2,085.5 $2,101.1
========= =========
Inventories, net
USA $ 603.5 $ 640.6
EUROPE, MIDDLE EAST, AFRICA 361.2 383.4
ASIA PACIFIC 133.6 143.5
AMERICAS 90.2 84.2
OTHER 259.5 239.4
CORPORATE 32.5 23.8
_________ _________
$1,480.5 $1,514.9
========= =========
Property, Plant and Equipment, net
USA $ 211.6 $ 215.7
EUROPE, MIDDLE EAST, AFRICA 220.7 241.4
ASIA PACIFIC 374.0 386.3
AMERICAS 10.8 11.0
OTHER 79.9 82.1
CORPORATE 666.9 684.3
_________ _________
$1,563.9 $1,620.8
========= =========
NOTE 8 - Commitments and Contingencies:
_____________________________
At August 31, 2003, the Company had letters of credit outstanding
totaling $461.2 million. These letters of credit were issued primarily 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.
NOTE 9 - Subsequent Event:
________________
On September 4, 2003, the Company completed the acquisition of 100
percent of the equity shares of Converse Inc. for $305 million cash. Converse
Inc. is based in Massachusetts and designs, distributes, and markets high
performance and casual athletic footwear and apparel.
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.
Operating Results
_________________
- Revenues for the first quarter of fiscal 2004 increased 8% to $3.0
billion versus $2.8 billion for the first quarter of fiscal 2003.
- Gross margin increased as a percentage of revenues for the first
quarter of fiscal 2004 to 43.0% from 41.4% for the first quarter of
the prior year.
- Selling and administrative remained relatively consistent as a
percentage of revenues at 28.7% versus 28.8% for the first quarter of
the prior year.
- Income increased 20% for the quarter to $261.2 million from $217.2
million for the prior year, before the cumulative effect of accounting
change in the first quarter of the prior year. After the effect of
the accounting change, the first quarter of fiscal 2003 had a net loss
of $48.9 million.
- Diluted earnings per share for the quarter increased 21% to $0.98 from
$0.81 in the prior year before the cumulative effect of accounting
change. After the effect of the accounting change, the first quarter
of fiscal 2003 had a loss of $0.18 per diluted share.
A 15% increase in revenue from our international regions drove a majority
of the 8% increase in consolidated revenues. Changes in currency exchange
rates, primarily the euro, contributed approximately six and one-half
percentage points of the consolidated revenue growth. See further discussion
of revenues in the regional commentary below.
In the first quarter of fiscal 2004, our consolidated gross margin
percentage improved 160 basis points versus the prior year, from 41.4% to
43.0%, our highest quarterly gross margin percentage in our history as a
public company. Factors contributing to the improved gross margin percentage
in the quarter were as follows:
(1) Higher pricing margins for in-line products, which represents
current product offerings, resulted from lower product costs due
to manufacturing efficiencies, reduced material costs, and lower
air freight as well as a higher mix of sales of classic footwear
models.
(2) A reduced level of closeout sales as a percentage of total sales
and improved margins on those sales.
(3) Changes in currency exchange rates, primarily the Euro.
Selling and administrative expense, comprised of demand creation and
operating overhead, grew 8% versus the prior year quarter, and as a percentage
of revenue, remained relatively consistent with the prior year. Demand
creation expense grew 1% to $324.1 million in the first quarter of fiscal 2004
from $321.8 million in fiscal 2003, reflecting a six percentage point increase
due to changes in currency exchange rates. Excluding the impact of currency,
demand creation spending declined versus the first quarter of fiscal 2003
mainly due to costs of our World Cup marketing campaign incurred in the first
quarter of last year.
Operating overhead increased 13% to $545.5 million in the first quarter
of fiscal 2004 from $483.0 million in fiscal 2003. Currency exchange rates
contributed five percentage points of the increase. Excluding the effects of
currency, operating overhead increases were attributed to higher reserves for
bad debts in our Europe, Middle East and Africa (EMEA) region, operating
costs of new factory outlet stores outside the U.S., costs related to our on-
going development of systems and processes supporting our worldwide supply
chain initiative and increased costs to support the growth of our NIKE Golf,
Cole Haan and Hurley businesses.
Other expense, net was $23.8 million for the first quarter of fiscal 2004
compared to $11.0 million in the first quarter of fiscal 2003. Beginning this
fiscal year, interest income and profit sharing expense previously included in
other expense, net, are included in interest expense, net and selling and
administrative, respectively. The presentation of prior year amounts has been
adjusted to conform to the current classification. The majority of the
increase over the prior year is due to loss on disposal of land gifted to the
NIKE Foundation and legal settlement costs. The largest component of other
expense, net, comprising approximately half of this year's net expense, is
foreign currency losses primarily due to hedge losses on intercompany charges
to a European subsidiary, whose functional currency is the euro. These losses
are comparable to last year and are reflected in the Corporate line in our
segment presentation of pre-tax income in Note 7 - Operating Segments. The
hedge losses reflected that the euro has strengthened considerably since we
entered into these hedge contracts.
In the first quarter of fiscal 2004, net foreign currency losses in other
expense, net were more than offset by favorable translation of foreign
currency denominated profits, which resulted in higher translated earnings in
our foreign operations, most significantly in EMEA. Our estimate of the net
impact of these losses and the favorable translation is a $34 million addition
to consolidated income before income taxes compared to the prior year period.
Consistent with our existing policies, we have also hedged a portion of
anticipated intercompany charges for the balance of fiscal 2004. As the euro
has strengthened since these hedge contracts were executed, we expect to
continue to incur some hedge losses for the balance of fiscal 2004. However,
at current exchange rates, we expect the net impact of the hedge losses and
the offsetting positive translation impact will result in a net benefit to
fiscal 2004 consolidated net income versus the prior year.
Our effective tax rate in the first quarter of fiscal 2004 was 34.8%,
relatively consistent with the first quarter of fiscal 2003 rate of 35.0%, but
higher than the full year rate for fiscal 2003 of 34.1%. This increase
compared to fiscal 2003 anticipates higher taxes on foreign earnings.
Included in the first quarter of fiscal 2003 net income was a $266.1
million charge for the cumulative effect of implementing Statement of
Financial Accounting Standard No. 142, "Goodwill and Other Intangible Assets,"
(FAS 142). This charge related to the impairment of goodwill and trademarks
associated with Bauer NIKE Hockey and the goodwill of Cole Haan, reflecting
that the fair values we estimated for these assets were less than the carrying
values. See the Notes to Consolidated Financial Statements (Note 4 -
Identifiable Intangible Assets and Goodwill) in our Annual Report on Form 10-K
as of May 31, 2003 for further information.
Our largest international region, EMEA, reported 17% revenue growth in
the first quarter of fiscal 2004 compared to fiscal 2003. This growth
reflected a 19 percentage point improvement due to changes in currency
exchange rates. Excluding the effect from changes in currency exchange rates
apparel revenues were down due to the mix of product sold. Key drivers of the
change in mix were a shift in the timing of the launch of the Manchester
United away jersey from the first quarter into the second quarter, and
increased sales of lower priced spring and summer products as the region
experienced unseasonably warm summer weather. Both the footwear and equipment
business units in EMEA delivered revenue growth versus the prior year.
EMEA pre-tax income grew 26% to $204.7 million in the first quarter of
fiscal 2004 up from $162.2 million in the first quarter of fiscal 2003. Higher
revenues and improved gross margins drove the increase, more than offsetting
incremental selling and administrative costs. The improved gross margins were
primarily the result of changes in currency exchange rates and higher in-line
pricing margins in footwear.
In the Asia Pacific region, revenues increased 13% in the first quarter
of fiscal 2004 compared to fiscal 2003. Four percentage points of this growth
were due to changes in currency exchange rates. Excluding the benefit from
changes in currency exchange rates, sales in each Asia Pacific business unit
grew, as did sales in almost every country of the region. The region's growth
was led by significant increases in China and Korea, driven by expansion of
retail distribution and consumers' acceptance of our products, as well as
continued growth experienced in Japan.
Pre-tax income for the Asia Pacific region increased to $76.7 million in
the first quarter of fiscal 2004 up from $50.7 million in the first quarter of
fiscal 2003. This increase reflected higher revenues, improved gross margins
and lower selling and administrative costs. The improved gross margins were
the result of higher in-line margins across footwear, apparel and equipment.
Lower selling and administrative costs were driven mainly by a reduction in
demand creation spending compared to the expenses incurred in the prior year
relating to the 2002 World Cup.
In the Americas region, revenues increased 8% for the quarter, with two
percentage points of the growth due to changes in currency exchange rates.
Excluding the effects from changes in currency exchange rates, the revenue
growth was driven by stronger consumer demand in South and Central America,
while sales in Mexico were essentially flat and down in Canada due to lower
consumer demand. Excluding the currency exchange rate impact, the region
experienced sales growth in the footwear and equipment business units slightly
offset by a small percentage decrease in the apparel business unit.
In the first quarter of fiscal 2004, pre-tax income for the Americas
region declined slightly versus the prior year quarter, to $24.3 million. The
decline in pre-tax income was attributable to reduced gross margins due to
less favorable hedge rates on product purchases in Mexico, combined with
market pressure on product pricing in that market.
In the U.S. Region, revenues were down 2% in the first quarter of fiscal
2004 compared to the first quarter of fiscal 2003. U.S. footwear revenues were
down 5% and equipment revenues were down 4%, more than offsetting sales growth
in U.S. apparel. The increase in U.S. apparel sales of 5% was primarily driven
by increased consumer demand for team licensed apparel. Lower footwear
revenues were due to reduced sales to our largest customer, Foot Locker,
partially offset by increased sales to other accounts, which resulted from the
significant changes in our U.S. footwear distribution that began in fiscal
2003. These changes were previously disclosed in our Annual Report on Form
10-K as of May 31, 2003.
A portion of the footwear revenue decline for the first quarter was
attributable to a lower average price per pair reflecting a higher percentage
of sales of classic footwear and kids' models, which have lower average prices
than our complex adult performance models. However, U.S. footwear futures
orders scheduled for delivery from September 2003 to January 2004 reflect
increases in both total amount and average price per pair versus the
comparable year-ago period.
U.S. region pre-tax income increased to $295.6 million in the first
quarter of fiscal 2004 from $283.9 million in the first quarter of fiscal
2003. Pre-tax income improved, despite lower revenues and slightly higher
selling and administrative expense, due to improved gross margins across all
business units, most significantly footwear. The improved gross margins were
mainly due to higher in-line pricing margins and a reduced level of close out
sales with improved margins on those sales.
Other revenues and pre-tax income include results from Bauer NIKE Hockey,
Inc., Cole Haan Holdings, Inc., Hurley International LLC, and NIKE Golf.
Other revenues grew 32% in the first quarter of fiscal 2004 compared to fiscal
2003 due to growth in each of these businesses, most significantly NIKE Golf.
Other pre-tax income improved to a loss of $3.2 million in the first
quarter of fiscal 2004 from a loss of $11.2 million in fiscal 2003. Improved
results of NIKE Golf drove the year-over-year improvement.
The breakdown of revenues follows:
Three Months Ended
August 31,
__________________
%
2003 2002 change
______ ______ ______
(in millions)
U.S.A. REGION
FOOTWEAR $ 822.4 $ 865.1 -5%
APPAREL 346.5 328.7 5%
EQUIPMENT 85.0 88.9 -4%
________ ________
TOTAL U.S.A. 1,253.9 1,282.7 -2%
EMEA REGION
FOOTWEAR 590.0 492.7 20%
APPAREL 341.9 310.7 10%
EQUIPMENT 81.6 65.9 24%
________ ________
TOTAL EMEA 1,013.5 869.3 17%
ASIA PACIFIC REGION
FOOTWEAR 202.8 180.5 12%
APPAREL 113.3 98.9 15%
EQUIPMENT 32.2 28.4 13%
________ ________
TOTAL ASIA PACIFIC 348.3 307.8 13%
AMERICAS REGION
FOOTWEAR 103.1 93.0 11%
APPAREL 39.4 38.6 2%
EQUIPMENT 11.2 10.7 5%
________ ________
TOTAL AMERICAS 153.7 142.3 8%
________ ________
2,769.4 2,602.1 6%
OTHER 255.5 194.2 32%
________ ________
TOTAL REVENUES $3,024.9 $2,796.3 8%
======== ========
The previous discussion includes disclosure of "pre-tax income" for our
operating segments. We have reported pre-tax income for each of our operating
segments in accordance with Statement of Financial Accounting Standard No.
131, "Disclosures about Segments of an Enterprise and Related Information." As
discussed in Note 7 - Operating Segments in the attached Notes to Consolidated
Financial Statements, certain corporate costs are not included in pre-tax
income of our operating segments.
Worldwide futures and advance orders for our footwear and apparel
scheduled for delivery from September 2003 to January 2004 were 10.5% higher
than such orders reported in the comparable period of fiscal 2003. Three
points of this reported increase were due to changes in currency exchange
rates versus the same period last year. In addition, approximately four to
five points of this growth can be attributed to an earlier start of the spring
season for footwear sales in Europe. As always, the reported futures orders
growth is not necessarily indicative of our expectation of revenue growth
during this period. 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 futures 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.
Liquidity and Capital Resources
_______________________________
Cash provided by operations was $350.7 million in the first quarter of
fiscal 2004, compared to $174.1 million in the first quarter of fiscal 2003.
Our primary source of operating cash flow in the current quarter was net
income of $261.2 million. The year-over-year increase in cash provided by
operations was due primarily to changes in our investment in working capital.
In the first quarter of fiscal 2003, our net investment in working capital
increased by $102.7 million, reducing cash flow from operations for that
quarter. In the first quarter of fiscal 2004, our net investment in working
capital decreased by $13.4 million, increasing cash flow for the quarter.
Total cash used by investing activities during the current quarter was
$42.3 million, compared to $50.1 million in the prior year period. Investing
activities are consistent with the prior year and primarily reflect capital
expenditures in computer equipment and software to support both normal business
operations as well as our supply chain initiative, and continued investment in
NIKE-owned retail stores.
Net cash provided by financing activities for the first quarter was $49.5
million versus net cash used of $249.2 million in the first quarter of fiscal
2003. During the current quarter, the principal drivers of cash provided by
financing activities were an increase in notes payable from the issuance of
commercial paper, partially offset by share repurchases. In the prior year,
decreases in notes payable, and share repurchases were the major uses of cash
for financing activities.
The share repurchases were part of a $1 billion share repurchase program
that began in fiscal 2001. In the current quarter, we purchased approximately
1.7 million shares of NIKE's Class B common stock for $89.5 million. To date
under the program, we have purchased 14.0 million shares for $675.2 million.
We expect to continue to fund this program from operating cash flow. The
timing and the amount of shares purchased will be dictated by our capital
needs and stock market conditions.
As a result of the above, our cash balance increased by $363.8 million
during the quarter as we prepared to fund our acquisition of Converse Inc.,
which was completed on September 4, 2003 for approximately $305 million.
No amounts are currently outstanding under our committed credit
facilities. The terms of our facilities have not changed from those described
in our Form 10-K as of May 31, 2003.
Liquidity is also provided by our commercial paper program, under which
there was $124.8 million outstanding at August 31, 2003 and no amount
outstanding at May 31, 2003.
Our long-term senior 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 first quarter of
fiscal 2004 were $0.14 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 the Company's Annual Report on Form 10-K for the
fiscal year ended May 31, 2003.
Item 4. CONTROLS AND PROCEDURES
The Company maintains disclosure controls and procedures that are
designed to ensure that information required to be disclosed in the Company's
Exchange Act reports is recorded, processed, summarized and reported within
the time periods specified in the Securities and Exchange Commission's rules
and forms and that such information is accumulated and communicated to the
Company's management, including its Chief Executive Officer and Chief
Financial Officer, as appropriate, to allow for timely decisions regarding
required disclosure. In designing and evaluating the disclosure controls and
procedures, management recognizes that any controls and procedures, no matter
how well designed and operated, can provide only reasonable assurance of
achieving the desired control objectives, and management is required to apply
its judgment in evaluating the cost-benefit relationship of possible controls
and procedures.
The Company carries out a variety of on-going procedures, under the
supervision and with the participation of the Company's management, including
the Chief Executive Officer and the Company's Chief Financial Officer, to
evaluate the effectiveness of the design and operation of the Company's
disclosure controls and procedures. Based on the foregoing, as of August 31,
2003 the Company's Chief Executive Officer and Chief Financial Officer
concluded that the Company's disclosure controls and procedures were effective
at the reasonable assurance level.
There has been no change in the Company's internal controls over
financial reporting during the Company's most recent fiscal quarter that has
materially affected, or is reasonable likely to materially affect, the
Company's internal controls over financial reporting.
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; 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
Except as described below, there have been no material changes from the
information previously reported under Item 4 of the Company's Annual Report on
Form 10-K for the fiscal year ended May 31, 2003.
On September 12, 2003 the Company settled the lawsuit, Kasky v. NIKE,
Inc. et al., No. 994446, filed in 1998 in San Francisco County Superior Court.
As part of the settlement, we agreed to make an additional contribution of
$1.5 million to the Washington, D.C. based Fair Labor Association for program
operations and worker development programs focused on education and economic
opportunity over the next three years. We also agreed to maintain existing
funding of our after-hours worker education programs in footwear facilities
and micro-loan programs at a minimum of $500,000 over the next two years. The
case has been dismissed with prejudice (which means the plaintiff cannot
refile the action).
Item 4.
Submission of Matters to a Vote of Security Holders
The Company's annual meeting of shareholders was held on September 22,
2003. The shareholders elected for the ensuing year all of management's
nominees for the Board of Directors, approved the amendment to the NIKE, Inc.
1990 Stock Incentive Plan, and ratified the appointment of
PricewaterhouseCoopers LLP as independent accountants for fiscal 2004.
The voting results are as follows:
Election of Directors
Votes Cast
For Withheld Broker
Non-Votes
Directors
Elected by holders of
Class A Common Stock:
Thomas E. Clarke 97,386,687 3 -0-
Ralph D. DeNunzio 97,386,687 3 -0-
Richard K. Donahue 97,186,687 200,003 -0-
Delbert J. Hayes 97,386,687 3 -0-
Douglas G. Houser 97,386,687 3 -0-
Jeanne P. Jackson 97,386,687 3 -0-
Philip H. Knight 97,386,687 3 -0-
Charles W. Robinson 97,386,687 3 -0-
John R. Thompson, Jr. 97,186, 687 200,003 -0-
Elected by holders of
Class B Common Stock:
Jill K. Conway 138,066,352 3,482,703 -0-
Alan B. Graf, Jr. 124,178,601 17,370,454 -0-
John E. Jaqua 132,097,292 9,451,763 -0-
A. Michael Spence 124,113,224 17,435,831 -0-
Broker
For Against Abstain Non-Votes
Proposal 2 -
Approval of the amendments
to the NIKE, Inc. 1990
Stock Incentive Plan:
Class A and Class B
Common Stock Voting
Together 153,849,747 65,362,232 1,376,452 -0-
Proposal 3 -
Ratify the appointment
of PricewaterhouseCoopers LLP
as independent accountants:
Class A and Class B
Common Stock Voting
Together 218,820,704 20,047,516 1,241,948 -0-
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).
4.5 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).
12.1 Computation of Ratio of Earnings to Charges.
31.1 Rule 13(a)-14(a) Certification of Chief Executive Officer.
31.2 Rule 13(a)-14(a) Certification of Chief Financial Officer.
32.1 Section 1350 Certificate of Chief Executive Officer.
32.2 Section 1350 Certificate of Chief Financial Officer.
* Management contract or compensatory plan or arrangement.
(b) Reports on Form 8-K:
The following reports on Form 8-K were furnished during the fiscal quarter
ending August 31, 2003:
June 26, 2003: Item 7. Financial Statements and Exhibits. Item. 9 Regulation
FD Disclosure (Information provided under Item 12. Results of Operations and
Financial Condition). Fourth Quarter Earnings Release.
June 26, 2003: Item 7. Financial Statements and Exhibits. Item. 9 Regulation
FD Disclosure (Information provided under Item 12. Results of Operations and
Financial Condition). Transcript of Earnings Conference Call.
The following reports on Form 8-K were filed during the fiscal quarter ending
August 31, 2003:
July 9, 2003: Item 5. Other Events. Press Release: NIKE, Inc. to Acquire
Converse Inc.
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: October 10, 2003