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, 2004
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, 2004 were:
_______________
Class A 77,581,484
Class B 184,895,938
_______________
262,477,422
===============
PART 1 - FINANCIAL INFORMATION
Item 1. FINANCIAL STATEMENTS
NIKE, Inc.
UNAUDITED CONDENSED CONSOLIDATED BALANCE SHEETS
August 31, May 31,
2004 2004
________ ________
(in millions)
ASSETS
Current assets:
Cash and equivalents $ 932.1 $ 828.0
Short-term investments 365.4 400.8
Accounts receivable, net 2,175.7 2,120.2
Inventories (Note 2) 1,645.8 1,633.6
Deferred income taxes 137.9 165.0
Prepaid expenses and other current assets 364.2 364.4
________ ________
Total current assets 5,621.1 5,512.0
Property, plant and equipment 3,177.0 3,132.3
Less accumulated depreciation 1,598.2 1,545.4
________ ________
Property, plant and equipment, net 1,578.8 1,586.9
Identifiable intangible assets, net (Note 3) 409.7 366.3
Goodwill (Note 3) 135.4 135.4
Deferred income taxes and other assets 307.9 291.0
________ ________
Total Assets $8,052.9 $7,891.6
======== ========
LIABILITIES AND SHAREHOLDERS' EQUITY
Current liabilities:
Current portion of long-term debt $ 6.1 $ 6.6
Notes payable 97.8 146.0
Accounts payable 688.8 763.8
Accrued liabilities (Note 4) 914.9 974.4
Income taxes payable 200.3 118.2
________ ________
Total current liabilities 1,907.9 2,009.0
Long-term debt 692.4 682.4
Deferred income taxes and other liabilities 430.2 418.2
Commitments and contingencies (Note 9) -- --
Redeemable preferred stock 0.3 0.3
Shareholders' equity:
Common stock at stated value:
Class A convertible-77.6 and
77.6 shares outstanding 0.1 0.1
Class B-184.9 and 185.5 shares
outstanding 2.7 2.7
Capital in excess of stated value 962.9 887.8
Unearned stock compensation (4.5) (5.5)
Accumulated other comprehensive loss (Note 5) (43.1) (86.3)
Retained earnings 4,104.0 3,982.9
________ ________
Total shareholders' equity 5,022.1 4,781.7
________ ________
Total liabilities and shareholders' equity $8,052.9 $7,891.6
======== ========
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
August 31,
____________________
2004 2003
____ ____
(in millions, except per share data)
Revenues $3,561.8 $3,024.9
Cost of sales 1,976.0 1,723.4
_________ _________
Gross Margin 1,585.8 1,301.5
Selling and administrative 1,073.6 869.6
Interest expense, net 4.8 7.5
Other expense, net 1.9 23.8
_________ _________
Income before income taxes 505.5 400.6
Income taxes 178.7 139.4
_________ _________
Net income $ 326.8 $ 261.2
========= =========
Basic earnings per common share (Note 7) $ 1.24 $ 0.99
========= =========
Diluted earnings per common share (Note 7) $ 1.21 $ 0.98
========= =========
Dividends declared per common share $ 0.20 $ 0.14
========= =========
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,
_____________________
2004 2003
____ ____
(in millions)
Cash provided (used) by operations:
Net income $ 326.8 $ 261.2
Income charges not affecting cash:
Depreciation 58.4 61.2
Deferred income taxes 11.6 0.7
Amortization and other 3.2 10.6
Income tax benefit from exercise of stock
options 13.4 2.9
Changes in certain working capital
components, net of the effect of
acquisition of subsidiary:
Increase in accounts receivable (57.8) (52.7)
Decrease (increase) in inventories 25.9 (2.5)
Decrease (increase) in prepaid expenses
and other current assets 1.9 (51.1)
(Decrease) increase in accounts payable, accrued
liabilities and income taxes payable (15.9) 119.7
________ ________
Cash provided by operations 367.5 350.0
________ ________
Cash provided (used) by investing activities:
Purchases of short-term investments (275.4) --
Maturities of short-term investments 310.0 --
Additions to property, plant and
equipment (53.8) (42.0)
Disposals of property, plant and
equipment 1.4 1.6
Increase in other assets (5.2) (1.7)
Decrease in other liabilities (2.2) (0.2)
Acquisition of subsidiary, net of cash
acquired (47.2) --
________ ________
Cash used by investing activities (72.4) (42.3)
________ ________
Cash provided (used) by financing activities:
Proceeds from long-term debt issuance -- 1.8
Reductions in long-term debt
including current portion (4.3) (1.5)
(Decrease) increase in notes payable (48.4) 163.4
Proceeds from exercise of options and
other stock issuances 65.6 19.0
Repurchase of stock (145.8) (95.0)
Dividends on common stock (52.6) (36.9)
________ ________
Cash (used) provided by financing activities (185.5) 50.8
________ ________
Effect of exchange rate changes on cash (5.5) 5.3
________ ________
Net increase in cash and equivalents 104.1 363.8
Cash and equivalents, May 31, 2004 and 2003 828.0 634.0
________ ________
Cash and equivalents, August 31, 2004
and 2003 $ 932.1 $ 997.8
======== ========
The accompanying Notes to Unaudited Condensed Consolidated Financial
Statements are an integral part of this statement.
NIKE, Inc.
NOTES TO UNAUDITED CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
NOTE 1 - Summary of Significant Accounting Policies:
___________________________________________
Basis of presentation:
The accompanying unaudited condensed consolidated financial statements
reflect all adjustments (consisting of normal recurring accruals) which
are, in the opinion of management, necessary for a fair presentation of
the results of operations for the interim period. The interim financial
information and notes thereto should be read in conjunction with the
Company's latest Annual Report on Form 10-K. The results of operations
for the three (3) months ended August 31, 2004 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 2005 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,
2004 2004
________ ________
(in millions)
Finished goods $1,633.0 $1,609.7
Work-in-progress 6.5 10.6
Raw materials 6.3 13.3
________ ________
$1,645.8 $1,633.6
======== ========
NOTE 3 - Identifiable Intangible Assets and Goodwill:
___________________________________________
The following table summarizes the Company's identifiable intangible
assets and goodwill balances as of August 31, 2004 and May 31, 2004:
August 31, 2004 May 31, 2004
______________________ ______________________
Gross Net Gross Net
Carrying Accumulated Carrying Carrying Accumulated Carrying
Amount Amortization Amount Amount Amortization Amount
________ ____________ ________ ________ ____________ ________
(in millions)
Amortized intangible assets:
Patents $ 28.4 $ (12.3) $ 16.1 $ 27.9 $ (11.9) $ 16.0
Trademarks 53.6 (12.1) 41.5 14.1 (11.5) 2.6
Other 21.9 (11.3) 10.6 17.0 (10.8) 6.2
_________ _________ ________ _________ _________ _________
Total $ 103.9 $ (35.7) $ 68.2 $ 59.0 $ (34.2) $ 24.8
========= ========= ========= =========
Unamortized intangible assets - Trademarks $ 341.5 $ 341.5
_________ _________
Identifiable intangible assets, net $ 409.7 $ 366.3
========= =========
Goodwill $ 135.4 $ 135.4
========= =========
Amortization expense, which is included in selling and administrative
expense, was $1.5 million and $0.9 million for the three-month periods ended
August 31, 2004 and 2003, respectively. The estimated amortization expense
for intangible assets subject to amortization for each of the succeeding years
ended May 31, 2005 through May 31, 2009 are as follows: 2005: $9.3 million;
2006: $8.6 million; 2007: $7.7 million; 2008: $7.2 million; 2009: $6.2
million.
On August 11, 2004, the Company acquired Official Starter LLC and
Official Starter Properties LLC (collectively "Official Starter") for $47.2
million, including acquisition costs, net of cash acquired. The Exeter Brands
Group LLC, a wholly-owned subsidiary of the Company, was formed during the
three-months ended August 31, 2004 to develop the Company's business in retail
channels serving value-conscious consumers and operate the Official Starter
business. As a result of the acquisition, $39.0 million was allocated to
amortized trademarks and $4.6 million was allocated to other amortized
intangible assets. The weighted average amortization period is nine years in
total and approximately 10 years and three years for amortized trademarks and
other amortized intangible assets, respectively. The impact of the
acquisition of Official Starter on the Company's financial position and
results of operations for the three-months ended August 31, 2004 was
immaterial.
NOTE 4 - Accrued Liabilities
___________________
Accrued liabilities include the following:
August 31, 2004 May 31, 2004
_______________ ____________
(in millions)
Fair value of derivatives $ 81.9 $141.3
Compensation and benefits 263.7 339.0
Accrued taxes 117.6 87.5
Endorser compensation 110.0 86.9
Dividends payable 52.5 52.6
Other1 289.2 267.1
_______ ______
$914.9 $974.4
======= ======
1 Other consists of various accrued expenses and no individual item accounted
for more than $50 million of the balance at August 31, 2004 and May 31, 2004.
NOTE 5 - Comprehensive Income:
___________________________
Comprehensive income, net of taxes, is as follows:
Three Months Ended
August 31,
_____________________
2004 2003
____ ____
(in millions)
Net Income $326.8 $261.2
Other Comprehensive Income:
Change in cumulative translation
adjustment and other (14.1) (59.2)
Changes due to cash flow hedging
instruments:
Net gain on hedge derivatives 6.9 86.5
Reclassification to net income of
previously deferred (gains) and losses
related to hedge derivative instruments 50.4 46.5
_______ _______
Other Comprehensive Income 43.2 73.8
_______ _______
Total Comprehensive Income $370.0 $335.0
======= =======
NOTE 6 - 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. The Company also has an
Employee Stock Purchase Plan (ESPP) that qualifies as a non-compensatory
employee stock purchase plan under Section 423 of the Internal Revenue Code,
and accordingly, no compensation expense is recognized.
If the Company had accounted for stock options and ESPP purchase rights
issued to employees in accordance with FAS 123, the Company's pro forma net
income and pro forma earnings per share would have been reported as follows:
Three Months Ended
August 31,
____________________
2004 2003
____ ____
(in millions, except per share data)
Net Income as reported $326.8 $261.2
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 (14.1) (11.3)
_______ _______
Pro forma net income $312.7 $249.9
======= =======
Earnings per share:
Basic - as reported 1.24 0.99
Basic - pro forma 1.19 0.95
Diluted - as reported 1.21 0.98
Diluted - pro forma 1.17 0.94
The pro forma effects of applying FAS 123 may not be representative of
the effects on reported net income and earnings per share for future periods
since options vest over several years and additional awards are made each
year.
NOTE 7 - Earnings Per Common Share:
_________________________
The following represents a reconciliation from basic earnings per share
to diluted earnings per share. Options to purchase 5.0 million and 3.9
million shares of common stock were outstanding at August 31, 2004 and
August 31, 2003, 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
August 31,
_____________________
2004 2003
____ ____
(in millions, except per share data)
Determination of shares:
Average common shares
outstanding 262.7 262.9
Assumed conversion of
dilutive stock options
and awards 7.1 4.3
_______ _______
Diluted average common
shares outstanding 269.8 267.2
======= =======
Basic earnings per common share $ 1.24 $ 0.99
======= =======
Diluted earnings per common share $ 1.21 $ 0.98
======= =======
NOTE 8 - 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 Incorporated, Bauer NIKE Hockey, Inc., Hurley International LLC, NIKE
Golf, Converse Inc., beginning September 4, 2003, and Exeter Brands Group LLC,
beginning August 11, 2004, that are considered immaterial for individual
disclosure based on the aggregation criteria in SFAS No. 131 "Disclosures
about Segments of an Enterprise and Related Information".
Where applicable, "Corporate" represents items necessary to reconcile to
the consolidated financial statements, which generally include corporate
activity and corporate eliminations.
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 as shown in the Unaudited
Condensed Consolidated Statements of Income. Reconciling items for pre-tax
income represent corporate costs that are not allocated to the operating
segments for management reporting including certain currency exchange rate
gains and losses on transactions and intercompany eliminations for specific
items in the Unaudited Condensed Consolidated Statements of Income.
Accounts receivable, inventories, and property, plant and equipment for
operating segments are regularly reviewed and therefore provided below.
Three Months Ended
August 31,
_____________________
2004 2003
_____ _____
Net Revenue
U.S. $1,401.7 $1,249.0
EUROPE, MIDDLE EAST, AFRICA 1,157.9 1,011.6
ASIA PACIFIC 406.0 348.0
AMERICAS 161.7 151.1
OTHER 434.5 265.2
_________ _________
$3,561.8 $3,024.9
========= =========
Pre-Tax Income
U.S. $ 321.9 $ 293.4
EUROPE, MIDDLE EAST, AFRICA 246.4 202.8
ASIA PACIFIC 63.4 76.4
AMERICAS 20.7 24.3
OTHER 40.3 (4.3)
CORPORATE (187.2) (192.0)
_________ _________
$ 505.5 $ 400.6
========= =========
Aug. 31, May 31,
2004 2004
_________ _________
Accounts Receivable, net
U.S. $ 680.8 $ 616.6
EUROPE, MIDDLE EAST, AFRICA 792.7 724.1
ASIA PACIFIC 198.4 272.9
AMERICAS 133.0 132.1
OTHER 319.6 327.8
CORPORATE 51.2 46.7
_________ _________
$2,175.7 $2,120.2
========= =========
Inventories
U.S. $ 545.1 $ 570.6
EUROPE, MIDDLE EAST, AFRICA 466.1 477.9
ASIA PACIFIC 205.7 163.9
AMERICAS 83.9 78.3
OTHER 301.9 305.5
CORPORATE 43.1 37.4
_________ _________
$1,645.8 $1,633.6
========= =========
Property, Plant and Equipment, net
U.S. $ 194.5 $ 193.0
EUROPE, MIDDLE EAST, AFRICA 226.1 232.0
ASIA PACIFIC 382.5 379.7
AMERICAS 13.4 12.7
OTHER 87.5 86.9
CORPORATE 674.8 682.6
_________ _________
$1,578.8 $1,586.9
========= =========
NOTE 9 - Commitments and Contingencies:
_____________________________
At August 31, 2004, the Company had letters of credit outstanding
totaling $443.3 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.
Item 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND
RESULTS OF OPERATIONS
Overview
In the first quarter of fiscal 2005, revenues, net income and earnings
per share were the highest achieved in any quarter of our history as a public
company. Our revenues grew 18% to $3.6 billion, net income grew 25% to $326.8
million and we delivered diluted earnings per share of $1.21, a 23% increase
versus the first quarter of fiscal 2004. In addition to growth in our U.S. and
international regions, both the acquisition of Converse and foreign currency
exchange rates added to our overall growth. During the quarter, we also
increased our return on invested capital and increased the level of share
repurchases and dividends as compared to the first quarter of fiscal 2004.
Results of Operations
Three Months Ended
August 31,
___________________
%
2004 2003 change
______ ______ ________
(in millions, except per share data)
Revenues $3,561.8 $3,024.9 18%
Cost of sales 1,976.0 1,723.4 15%
Gross Margin 1,585.8 1,301.5 22%
44.5% 43.0%
Selling and administrative 1,073.6 869.6 23%
30.1% 28.7%
Net Income 326.8 261.2 25%
Diluted Earnings per share 1.21 0.98 23%
Consolidated Operating Results
In the first quarter of fiscal 2005, consolidated revenues grew 18%; 3
percentage points of this growth were attributable to changes in currency
exchange rates, primarily the stronger euro. Excluding the impact of changes
in foreign currency, revenue growth in our international regions contributed 5
percentage points to the consolidated revenue growth as all three of our
international regions posted higher revenues. The U.S. Region contributed 5
percentage points of the consolidated revenue growth. Sales in our Other
businesses drove the balance of the improvement with Converse, which was
acquired during the second quarter of fiscal 2004, contributing 4 percentage
points to the overall revenue growth.
In the first quarter of fiscal 2005, our consolidated gross margin
percentage improved 150 basis points versus the prior year, from 43.0% to
44.5%. The primary factor in the improved gross margin percentage was the
change in currency hedge rates, primarily the euro, which contributed 130
basis points of the year-over-year improvement for the first quarter. As a
majority of product purchases for fiscal 2005 have been hedged, we expect a
positive impact on our gross margin percentage throughout fiscal 2005 due to
improved year-over-year hedge rates, primarily for the euro.
First quarter selling and administrative expense, comprised of demand
creation and operating overhead, grew 23% versus the prior year quarter.
Demand creation (advertising and promotion) expense grew 44% to $466.6 million
in the first quarter of fiscal 2005. Three percentage points of the increase
in demand creation for the first quarter period were due to changes in
currency exchange rates. Excluding the impact of currency, the increase in
demand creation spending for the first quarter was attributable to increased
spending primarily in the U.S., Europe, Middle East and Africa (EMEA) and Asia
Pacific regions for advertising around the summer's global sporting events
including the integrated NIKE "Speed" campaign (21 percentage point impact),
higher spending on endorsement contracts (9 percentage point impact), and
incremental investment in retail development programs (6 percentage point
impact). The addition of Converse also had a 3 percentage point impact on
demand creation for the quarter.
Operating overhead for the first quarter of fiscal 2005 was $607.0
million, an 11% increase over the first quarter of fiscal 2004. Currency
exchange rates contributed 2 percentage points of this increase, and the
addition of Converse accounted for 3 percentage points of growth. Excluding
the effects of currency and Converse, operating overhead increases for the
quarter were mainly attributable to: (a) normal wage increases and increased
headcount (3 percentage points); (b) investment in the supply chain systems
implementation in Japan and Southeast Asia (1 percentage point); and (c)
investments in NIKE-owned retail stores (1 percentage point).
Other expense, net, was $1.9 million for the first quarter of fiscal
2005, down from $23.8 million in the first quarter of fiscal 2004. The most
significant components of other expense, net, are foreign currency losses
(primarily hedge losses on intercompany charges to a European subsidiary,
whose functional currency is the euro), and hedge losses from that
subsidiary's investments in U.S. Dollar denominated debt securities classified
as available-for-sale. These losses are reflected in the Corporate line in our
segment presentation of pre-tax income in Notes to Condensed Consolidated
Financial Statements (Note 8 - Operating Segments). The year-over-year
improvement in other expense, net, was mainly due to lower foreign currency
hedge losses. Also included in other expense, net, in the first quarter of
fiscal 2004 were net losses on asset disposals, including a loss of $5.3
million for our basis in undeveloped land gifted to the NIKE Foundation.
In the first quarter of fiscal 2005, net foreign currency losses in other
expense, net, were more than offset by favorable translation of foreign
currency denominated profits, most significantly in EMEA. Our estimate of the
net impact of these losses and the favorable translation is a $22 million
addition to consolidated income before income taxes compared to the first
quarter of the prior year. Consistent with our Risk Management Program, we
have also hedged a portion of anticipated intercompany charges and investments
in U.S. Dollar denominated debt securities classified as available-for-sale
for the balance of fiscal 2005. 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 2005 consolidated net income, although at a
significantly lower level than the benefit realized throughout fiscal 2004.
See further discussion in our Annual Report on Form 10-K as of May 31, 2004.
Our effective tax rate for the first quarter of fiscal 2005 was
35.4%, which is higher than the 34.8% rate reported for the first quarter and
full year of fiscal 2004. This increase compared to fiscal 2004 is largely
due to lower research tax credits as a percentage of pre-tax income and the
expiration of research tax credit legislation. Should the proposed research
tax credits be renewed, we would include the benefit of that renewal in
subsequent periods.
Worldwide futures and advance orders for our footwear and apparel
scheduled for delivery from September 2004 through January 2005 were 9.9%
higher than such orders reported for the comparable period of fiscal 2004.
One point of this reported increase was due to changes in currency exchange
rates versus the same period last year. Excluding this currency impact, higher
average selling prices driven by footwear across all regions contributed 2
points of the growth in overall futures and advance orders. The remaining
increase was due to volume increases for both footwear and apparel. 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 revenue is not derived from
futures orders, including wholesale sales of equipment, U.S. licensed team
apparel, Bauer NIKE Hockey, Cole Haan, Converse, NIKE Golf, Hurley, Exeter
Brands and retail sales across all brands.
Operating Segments
The breakdown of revenues follows:
Three Months Ended
August 31,
___________________
%
2004 2003 change
______ ______ _______
(in millions)
U.S. REGION
FOOTWEAR $ 921.4 $ 822.4 12%
APPAREL 391.3 346.5 13%
EQUIPMENT 89.0 80.1 11%
________ ________
TOTAL U.S. 1,401.7 1,249.0 12%
EMEA REGION
FOOTWEAR 663.3 590.0 12%
APPAREL 409.7 341.9 20%
EQUIPMENT 84.9 79.7 7%
________ ________
TOTAL EMEA 1,157.9 1,011.6 14%
ASIA PACIFIC REGION
FOOTWEAR 218.6 202.8 8%
APPAREL 148.8 113.3 31%
EQUIPMENT 38.6 31.9 21%
________ ________
TOTAL ASIA PACIFIC 406.0 348.0 17%
AMERICAS REGION
FOOTWEAR 114.8 102.9 12%
APPAREL 35.5 38.6 -8%
EQUIPMENT 11.4 9.6 19%
________ ________
TOTAL AMERICAS 161.7 151.1 7%
________ ________
3,127.3 2,759.7 13%
OTHER 434.5 265.2 64%
________ ________
TOTAL REVENUES $3,561.8 $3,024.9 18%
======== ========
The discussion following 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 8 - Operating Segments in the accompanying Notes to
Unaudited Condensed Consolidated Financial Statements, certain corporate costs
are not included in pre-tax income of our operating segments.
For our largest international region, EMEA, changes in currency exchange
rates accounted for 5 percentage points of the reported revenue growth for the
first quarter of fiscal 2005. If we remove the effects of currency, first
quarter revenue for the EMEA Region would have grown approximately 9
percentage points. The increase over the prior year was primarily driven by
increased unit sales of footwear (led by soccer, followed by training
products) and apparel (led by soccer products). Excluding the effect of
changes in foreign currency, revenue growth was led by sales increases in
Italy, the UK and the emerging markets in Central Europe, Turkey, Russia and
Greece, partially offset by weaker results in France and Germany versus the
same period last year.
For the EMEA Region, futures orders scheduled for delivery from September
2004 through January 2005 were 6 percentage points higher than such orders for
the comparable period of fiscal 2004. Changes in currency exchange rates
contributed 3 percentage points of this growth. Excluding the changes in
currency exchange rates, the growth was driven by a slight increase in the
region's footwear average selling price per pair and an increase in wholesale
footwear and apparel unit orders.
EMEA pre-tax income for the first quarter of fiscal 2005 was $246.4
million, up 21% versus the prior year quarter. For the quarter, higher
revenues and gross margin improvements drove the increase, more than
offsetting increased selling and administrative costs, primarily demand
creation. The improved gross margins, which contributed 60 basis points of
growth to the consolidated gross margin percentage, were primarily the result
of improved year-over-year hedge rates, partially offset by investments in
product costs.
In the Asia Pacific Region, revenues increased 17% in the first quarter
of fiscal 2005 compared to the first quarter of fiscal 2004. Five percentage
points of growth for the first quarter were due to changes in currency
exchange rates. Excluding the benefit from changes in currency exchange rates,
sales in each Asia Pacific business unit (footwear, apparel and equipment)
grew versus the same period last year. Excluding the effect of changes in
foreign currency, significant revenue increases in China (driven by expansion
of retail distribution and strong consumer demand) and continued growth in
Japan were key growth drivers for the quarter.
In the first quarter of fiscal 2005, pre-tax income for the Asia Pacific
Region decreased 17% versus the first quarter of fiscal 2004, to $63.4
million. For the quarter, higher revenues and gross margin improvements were
more than offset by increased selling and administrative costs, primarily due
to additional demand creation spending for the Athens Olympics and expansion
of market coverage in China, and investments in operating overhead due to the
implementation of new supply chain systems in Japan and Southeast Asia.
The higher gross margins, which contributed 30 basis points of growth to the
consolidated gross margin percentage, were primarily attributable to the
benefit of better year-over-year hedge rates and a slight improvement for in-
line pricing margins (net revenue for current product offerings minus landed
product cost).
In the Americas Region, revenues increased 7% for the first quarter of
fiscal 2005, including a 3 percentage point decline due to changes in currency
exchange rates. Excluding the currency effects, revenue growth for the quarter
was driven primarily by stronger consumer demand in South America and Mexico.
Excluding the currency exchange rate impact, the region experienced sales
growth in the footwear and equipment business units, partially offset by
declines in apparel.
In the first quarter of fiscal 2005, pre-tax income for the Americas
Region decreased 15% from the prior year quarter, to $20.7 million. The
decrease in pre-tax income was attributable to higher revenues more than
offset by a reduced gross margin percentage and higher selling and
administrative costs, primarily due to increased demand creation spending.
The reduced gross margin percentage negatively impacted the consolidated gross
margin percentage by 10 basis points.
In the U.S. Region, revenues for the first quarter of fiscal 2005 grew
12% versus the first quarter of fiscal 2004 with growth in all three business
units. The increase in apparel sales for the first quarter was primarily
driven by growth in sport performance product and team licensed apparel.
The increase in footwear revenue for the first quarter of fiscal 2005 was
due to an increase in wholesale and NIKE-owned retail unit sales (8 percentage
points of U.S. footwear growth) and an increase in average selling price per
pair driven by wholesale (4 percentage points of U.S. footwear growth). The
increase in wholesale and NIKE-owned retail unit sales is due to increased
consumer demand for performance products across categories. The increase in
average wholesale selling price per pair was primarily due to a larger
percentage of sales of products with a suggested retail price over $100 versus
sales of products under $100.
For the U.S. Region, futures orders scheduled for delivery from September
2004 through January 2005 increased 11% versus the same period of the prior
year. Futures orders increased due to increases in wholesale footwear average
selling price per pair consistent with that realized during the quarter and
increased unit orders for both wholesale footwear and apparel.
For the first quarter, U.S. Region pre-tax income was $321.9 million, a
10% increase versus the first quarter of fiscal 2004. For the quarter, higher
revenues and gross margins drove the increase, more than offsetting higher
selling and administrative costs, primarily demand creation. The improved
gross margins, which contributed 20 basis points of growth to the consolidated
gross margin percentage, were primarily the result of a lower level of close-
out sales as a percentage of total sales and improved close-out pricing
margins.
Other revenues and pre-tax income for the first quarter of fiscal 2005
include results from Bauer NIKE Hockey, Inc., Cole Haan Holdings Incorporated,
Converse Inc., Hurley International LLC, NIKE Golf, and Exeter Brands Group
LLC. The Exeter Brands Group LLC is a wholly owned subsidiary of NIKE, Inc.,
formed in the first quarter of fiscal 2005 to develop the Company's business
in retail channels serving value-conscious consumers and operate the business
obtained in the acquisition of Official Starter Properties LLC and Official
Starter LLC (collectively "Official Starter"). Other revenues grew 64% in the
first quarter of fiscal 2005 compared to fiscal 2004. The addition of
Converse, which occurred in the second quarter of fiscal 2004, contributed 50
percentage points of the Other revenue increase for the quarter. The remaining
14 percentage point increase was due to growth in most of the Other
businesses, most significantly Cole Haan which increased 30% year-over-year.
The impact of the acquisition of Official Starter on the Company's results for
the first quarter was immaterial.
Other pre-tax income improved to $40.3 million in the first quarter of
fiscal 2005 from a loss of $4.3 million in fiscal 2004. The addition of
Converse, which contributed $36.9 million of pre-tax income (9 percentage
points to consolidated pre-tax income growth), combined with improved results
from most of the Other businesses drove the year-over-year improvement. Gross
margin improvements in our Other businesses contributed 20 basis points of
growth to the consolidated gross margin percentage for the quarter.
Liquidity and Capital Resources
Cash Flow Activity
Cash provided by operations was $367.5 million in the first three months
of fiscal 2005, compared to $350.0 million in the first three months of fiscal
2004. Our primary source of operating cash flow in the current period was net
income of $326.8 million compared to $261.2 million in the first quarter of
last year, partially offset by a net increase in our investment in working
capital.
Total cash used by investing activities during the first three months of
fiscal 2005 was $72.4 million, compared to $42.3 million in the prior year
period. The purchase of short-term investments and acquisition of Official
Starter to form Exeter Brands Group LLC were the most significant uses of cash
during the period, partially offset by the maturation of short-term
investments. The remaining investing activities were consistent with the
prior year and primarily reflected capital expenditures on computer equipment
and software (to support both normal business operations and our supply chain
systems upgrade), continued investment in NIKE-owned retail stores, and
warehouse improvements.
Cash used by financing activities during the first three months of fiscal
2005 was $185.5 million, compared to cash provided by financing activities of
$50.8 million in the same period of the prior year. The principal uses of cash
for financing activities were share repurchases, dividends, and repayments of
short-term and long-term debt, offset by proceeds from the exercise of stock
options. Cash provided by financing activities was higher in the first quarter
of fiscal 2004 primarily due to the issuance of short-term debt in that
period.
The share repurchases were part of a $1.5 billion share repurchase
program that was approved by the Board of Directors in June 2004. In the
first quarter and to date under the program, we purchased approximately
2.1 million shares of NIKE's Class B common stock for $155.2 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.
Dividends declared per share of common stock in the first quarter of
fiscal 2005 were $0.20 per share.
Capital Resources
No amounts are currently outstanding under our committed credit facility.
The terms of our facility have not changed from those described in our Annual
Report on Form 10-K as of May 31, 2004.
Our long-term senior unsecured debt ratings remain at A and A2 from
Standard and Poor's Corporation and Moody's Investor Services, respectively.
Liquidity is also provided by our commercial paper program, under which
there was no amount outstanding at August 31, 2004 or May 31, 2004. We
currently have short-term debt ratings of A1 and P1 from Standard and Poor's
Corporation and Moody's Investor Services, respectively.
We currently believe that cash generated by operations, together with
access to external sources of funds as described above and in our Annual Report
on Form 10-K as of May 31, 2004, will be sufficient to meet our operating and
capital needs in the foreseeable future.
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.
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, 2004.
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 Company's 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, 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 as of August 31, 2004.
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
There have been no other significant developments 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, 2004.
Item 2. Changes in Securities, Use of Proceeds and Issuer Purchases of Equity
Securities
The following table presents a summary of share repurchases made by NIKE
during the quarter ended August 31, 2004 under the four-year $1.5 billion
share repurchase program authorized by our Board of Directors and announced in
June 2004.
Total Number of Maximum Dollar Value
Shares Purchased as of Shares that May
Total Number Average Part of Publicly Yet Be Purchased
Of Shares Price Paid Announced Plans Under the Plans
Period Purchased Per Share or Programs or Programs
______ ____________ __________ ___________________ ____________________
(in millions)
June 1 - 30, 2004 --- --- --- $ 1,500.0
July 1 - 31, 2004 1,037,200 $ 72.62 1,037,200 $ 1,424.7
August 1 - 31, 2004 1,105,400 $ 72.22 1,105,400 $ 1,344.8
_________ _______ _________
Total 2,142,600 $ 72.41 2,142,600
========= ======= =========
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.
4.1 Restated Articles of Incorporation, as amended (see Exhibit
3.1).
4.2 Third Restated Bylaws, as amended (see Exhibit 3.2).
10.1 NIKE, Inc. 1990 Stock Incentive Plan.*
12.1 Computation of Ratio of Earnings to Fixed 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, 2004:
June 24, 2004: Item 7. Financial Statements and Exhibits. Item 12.
Results of Operations and Financial Condition. Fourth Quarter Earnings Release.
June 28, 2004: Item 7. Financial Statements and Exhibits. Item 12.
Results of Operations and Financial Condition. Transcript of Earnings
Conference Call.
August 2, 2004: Item 9. Regulation FD Disclosure.
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
/s/ Donald W. Blair
________________________
Donald W. Blair
Chief Financial Officer
DATED: September 30, 2004