UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM 10-Q
FOR QUARTERLY REPORTS UNDER SECTION 13 OR 15(d) OF
THE SECURITIES AND EXCHANGE ACT OF 1934
For the Quarter Ended February 28, 2005
Commission file number - 1-10635
NIKE, Inc.
(Exact name of registrant as specified in its charter)
OREGON 93-0584541
(State or other jurisdiction of (I.R.S. Employer
incorporation or organization) Identification No.)
One Bowerman Drive, Beaverton, Oregon 97005-6453
(Address of principal executive offices) (Zip Code)
Registrant's telephone number, including area code (503) 671-6453
Indicate by check mark whether the registrant is an accelerated filer (as
defined in Rule 12b-2 of the Exchange Act). Yes X No
___ ___
Indicate by check mark whether the registrant (1) has filed all reports
required to be filed by Section 13 or 15 (d) of the Securities Exchange
Act of 1934 during the preceding 12 months (or for such shorter period
that the registrant was required to file such reports), and (2) has been
subject to such filing requirements for the past 90 days
Yes X No .
___ ___
Common Stock shares outstanding as of February 28, 2005 were:
_______________
Class A 71,881,484
Class B 190,647,431
_______________
262,528,915
===============
PART 1 - FINANCIAL INFORMATION
Item 1. FINANCIAL STATEMENTS
NIKE, Inc.
UNAUDITED CONDENSED CONSOLIDATED BALANCE SHEETS
February 28, May 31,
2005 2004
________ ________
(in millions)
ASSETS
Current assets:
Cash and equivalents $1,222.5 $ 828.0
Short-term investments 418.3 400.8
Accounts receivable, net 2,304.9 2,120.2
Inventories (Note 2) 1,727.0 1,633.6
Deferred income taxes 170.5 165.0
Prepaid expenses and other current assets 355.5 364.4
________ ________
Total current assets 6,198.7 5,512.0
Property, plant and equipment 3,305.5 3,183.4
Less accumulated depreciation 1,680.0 1,571.6
________ ________
Property, plant and equipment, net 1,625.5 1,611.8
Identifiable intangible assets, net (Note 3) 403.2 366.3
Goodwill (Note 3) 135.4 135.4
Deferred income taxes and other assets 289.3 266.6
________ ________
Total assets $8,652.1 $7,892.1
======== ========
LIABILITIES AND SHAREHOLDERS' EQUITY
Current liabilities:
Current portion of long-term debt $ 6.4 $ 6.6
Notes payable 101.3 146.0
Accounts payable 684.2 763.8
Accrued liabilities (Note 4) 1,091.4 979.3
Income taxes payable 182.7 118.2
________ ________
Total current liabilities 2,066.0 2,013.9
Long-term debt 691.4 682.4
Deferred income taxes and other liabilities 467.3 413.8
Commitments and contingencies (Note 9) -- --
Redeemable preferred stock 0.3 0.3
Shareholders' equity:
Common stock at stated value:
Class A convertible-71.9 and
77.6 shares outstanding 0.1 0.1
Class B-190.6 and 185.5 shares
outstanding 2.7 2.7
Capital in excess of stated value 1,155.9 887.8
Unearned stock compensation (12.9) (5.5)
Accumulated other comprehensive income
(loss)(Note 5) 18.6 (86.3)
Retained earnings 4,262.7 3,982.9
________ ________
Total shareholders' equity 5,427.1 4,781.7
________ ________
Total liabilities and shareholders' equity $8,652.1 $7,892.1
======== ========
The accompanying Notes to Unaudited Condensed Consolidated Financial
Statements are an integral part of this statement.
NIKE, Inc.
UNAUDITED CONDENSED CONSOLIDATED STATEMENTS OF INCOME
Three Months Ended Nine Months Ended
February 28 and 29 February 28 and 29
____________________ __________________
2005 2004 2005 2004
____ ____ ____ ____
(in millions, except per share data)
Revenues $3,308.2 $2,904.0 $10,018.3 $8,766.0
Cost of sales 1,849.4 1,682.1 5,585.6 5,043.0
_________ _________ __________ _________
Gross margin 1,458.8 1,221.9 4,432.7 3,723.0
Selling and administrative 1,035.7 892.0 3,082.5 2,664.1
Interest (income) expense, net (0.1) 5.5 8.4 21.1
Other expense, net 9.8 17.2 19.9 55.3
_________ _________ __________ _________
Income before income taxes 413.4 307.2 1,321.9 982.5
Income taxes 140.0 106.9 459.8 341.9
_________ _________ __________ _________
Net income $ 273.4 $ 200.3 $ 862.1 $ 640.6
========= ========= ========== =========
Basic earnings per common share (Note 7) $ 1.04 $ 0.76 $ 3.28 $ 2.43
========= ========= ========== =========
Diluted earnings per common share (Note 7) $ 1.01 $ 0.74 $ 3.18 $ 2.38
========= ========= ========== =========
Dividends declared per common share $ 0.25 $ 0.20 $ 0.70 $ 0.54
========= ========= ========== =========
The accompanying Notes to Unaudited Condensed Consolidated Financial Statements
are an integral part of this statement.
NIKE, Inc.
UNAUDITED CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS
Nine Months Ended
February 28 and 29
_____________________
2005 2004
____ ____
(in millions)
Cash provided (used) by operations:
Net income $ 862.1 $ 640.6
Income charges not affecting cash:
Depreciation 188.9 191.2
Deferred income taxes (4.1) 28.5
Amortization and other 30.5 47.6
Income tax benefit from exercise of stock
options 60.3 30.9
Changes in certain working capital
components, net of the effect of
acquisition of subsidiary:
(Increase) decrease in accounts receivable (97.5) 206.0
Decrease (increase) in inventories 2.8 (85.7)
Decrease (increase) in prepaid expenses
and other current assets 39.1 (117.3)
(Decrease) increase in accounts payable,
accrued liabilities and income taxes payable (1.0) 33.6
_________ _________
Cash provided by operations 1,081.1 975.4
_________ _________
Cash provided (used) by investing activities:
Purchases of short-term investments (1,103.9) --
Maturities of short-term investments 1,086.0 --
Additions to property, plant and
equipment (180.5) (144.0)
Disposals of property, plant and
equipment 6.3 3.8
Increase in other assets (18.7) (33.9)
Decrease in other liabilities (5.0) (4.1)
Acquisition of subsidiary, net of cash
acquired (47.2) (289.1)
_________ _________
Cash used by investing activities (263.0) (467.3)
_________ _________
Cash provided (used) by financing activities:
Proceeds from long-term debt issuance -- 138.1
Reductions in long-term debt
including current portion (7.5) (204.9)
(Decrease) increase in notes payable (59.9) 14.6
Proceeds from exercise of options and
other stock issuances 204.7 188.9
Repurchase of stock (390.5) (240.5)
Dividends on common stock (171.2) (126.3)
_________ _________
Cash used by financing activities (424.4) (230.1)
_________ _________
Effect of exchange rate changes on cash 0.8 2.7
_________ _________
Net increase in cash and equivalents 394.5 280.7
Cash and equivalents, May 31, 2004 and 2003 828.0 634.0
_________ _________
Cash and equivalents, February 28 and 29,
2005 and 2004 $1,222.5 $ 914.7
========= =========
The accompanying Notes to Unaudited Condensed Consolidated Financial
Statements are an integral part of this statement.
NIKE, Inc.
NOTES TO UNAUDITED CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
NOTE 1 - Summary of Significant Accounting Policies:
___________________________________________
Basis of presentation:
The accompanying unaudited condensed consolidated financial statements
reflect all adjustments (consisting of normal recurring accruals) which
are, in the opinion of management, necessary for a fair presentation of
the results of operations for the interim period. The interim financial
information and notes thereto should be read in conjunction with the
Company's latest Annual Report on Form 10-K. The results of operations
for the nine (9) months ended February 28, 2005 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.
Recently Issued Accounting Pronouncements:
In November 2004, the Financial Accounting Standards Board (FASB) issued
Statement of Financial Accounting Standards (SFAS) No. 151, "Inventory Costs,
an amendment of ARB No. 43, Chapter 4" (FAS 151). FAS 151 clarifies that
abnormal inventory costs such as costs of idle facilities, excess freight and
handling costs, and wasted materials (spoilage) are required to be recognized
as current period charges. The provisions of FAS 151 are effective for the
fiscal year beginning June 1, 2006. The Company is currently evaluating the
provisions of FAS 151 and does not expect that the adoption will have a
material impact on the Company's consolidated financial position or results of
operations.
In December 2004, the FASB issued SFAS No. 123R "Share-Based Payment"
(FAS 123R). In March 2005, the Securities and Exchange Commission (SEC)
issued Staff Accounting Bulletin No. 107 (SAB 107) regarding the SEC Staff's
interpretation of FAS 123R. See Note 6 for further discussion.
NOTE 2 - Inventories:
___________
Inventories by major classification are as follows:
Feb. 28, May 31,
2005 2004
________ ________
(in millions)
Finished goods $1,721.8 $1,609.7
Work-in-progress 2.5 10.6
Raw materials 2.7 13.3
_________ _________
$1,727.0 $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 February 28, 2005 and May 31, 2004:
February 28, 2005 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 $ 25.2 $ (10.5) $ 14.7 $ 27.9 $ (11.9) $ 16.0
Trademarks 54.4 (15.0) 39.4 14.1 (11.5) 2.6
Other 21.7 (14.1) 7.6 17.0 (10.8) 6.2
_________ _________ _________ _________ _________ _________
Total $ 101.3 $ (39.6) $ 61.7 $ 59.0 $ (34.2) $ 24.8
========= ========= ========= =========
Unamortized intangible assets - Trademarks $ 341.5 $ 341.5
_________ _________
Identifiable intangible assets, net $ 403.2 $ 366.3
========= =========
Goodwill $ 135.4 $ 135.4
========= =========
Amortization expense, which is included in selling and administrative
expense, was $2.7 million and $4.3 million for the three-month periods ended
February 28, 2005 and February 29, 2004 respectively, and $7.0 million and
$10.7 million for the nine-month periods ended February 28, 2005 and February
29, 2004, 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: $9.4 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 soon
thereafter to develop the Company's business in retail channels serving value-
conscious consumers and to 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 results of Official Starter's operations have been
included in the consolidated financial statements since the date of
acquisition as part of the Company's Other operating segment. The pro forma
effect of the acquisition on the combined results of operations was not
significant.
NOTE 4 - Accrued Liabilities:
____________________
Accrued liabilities include the following:
February 28, 2005 May 31, 2004
_________________ _______________
(in millions)
Compensation and benefits $ 332.0 $ 339.0
Fair value of derivatives 148.5 141.3
Accrued taxes 93.6 87.5
Endorser compensation 86.9 86.9
Dividends payable 65.6 52.6
Other1 364.8 272.0
_________ _________
$1,091.4 $ 979.3
========= =========
1 Other consists of various accrued expenses and no individual item
accounted for more than $60 million of the balance at February 28, 2005 and
May 31, 2004.
NOTE 5 - Comprehensive Income:
_____________________
Comprehensive income, net of taxes, is as follows:
Three Months Ended Nine Months Ended
February 28 and 29 February 28 and 29
_____________________ __________________
2005 2004 2005 2004
____ ____ ____ ____
(in millions)
Net income $273.4 $200.3 $862.1 $640.6
Other comprehensive income:
Change in cumulative translation
adjustment and other (6.1) 33.7 110.5 50.2
Changes due to cash flow hedging
instruments:
Net loss on hedge derivatives (3.4) (72.2) (112.0) (89.9)
Reclassification to net income of
previously deferred (gains) and losses
related to hedge derivative instruments 30.7 58.3 106.4 139.6
_______ _______ _______ _______
Other comprehensive income 21.2 19.8 104.9 99.9
_______ _______ _______ _______
Total comprehensive income $294.6 $220.1 $967.0 $740.5
======= ======= ======= =======
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 Nine Months Ended
February 28 and 29 February 28 and 29
____________________ __________________
2005 2004 2005 2004
____ ____ ____ ____
(in millions, except per share data)
Net income as reported $273.4 $200.3 $862.1 $640.6
Add: Stock-based compensation expense included
in reported net income, net of tax 0.2 -- 0.5 --
Deduct: Total stock-based employee compensation
expense under fair value based method for all
awards, net of tax (16.4) (11.8) (47.8) (35.2)
_______ _______ _______ _______
Pro forma net income $257.2 $188.5 $814.8 $605.4
======= ======= ======= =======
Earnings per share:
Basic - as reported $ 1.04 $ 0.76 $ 3.28 $ 2.43
Basic - pro forma 0.98 0.72 3.10 2.30
Diluted - as reported 1.01 0.74 3.18 2.38
Diluted - pro forma 0.96 0.70 3.04 2.28
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.
On December 16, 2004, the FASB finalized FAS 123R "Share-Based
Payment," which will be effective for the first interim or annual reporting
periods beginning after June 15, 2005. The new standard will require the
Company to record compensation expense for stock options using a fair value
method. On March 29, 2005, the SEC issued SAB 107, which provides the Staff's
views regarding interactions between FAS 123R and certain SEC rules and
regulations and provides interpretations of the valuation of share-based
payments for public companies.
The Company is currently evaluating FAS 123R and SAB 107 to determine the
fair value method to measure compensation expense, the appropriate assumptions
to include in the fair value model, the transition method to use upon adoption
and the period in which to adopt the provisions of FAS 123R. The impact of
the adoption of FAS 123R cannot be reasonably estimated at this time due to
the factors discussed above as well as the unknown level of share-based
payments granted in future years. The effect of expensing stock options on
the Company's results of operations using the Black-Scholes model is presented
in the table above.
NOTE 7 - Earnings Per Common Share:
_________________________
The following represents a reconciliation from basic earnings per share
to diluted earnings per share. Options to purchase 0.2 million and 0.1
million shares of common stock were outstanding at February 28, 2005 and
February 29, 2004, respectively, but were not included in the computation of
diluted earnings per share because the options' exercise prices were greater
than the average market price of common shares and, therefore, the effect
would be antidilutive.
Three Months Ended Nine Months Ended
February 28 and 29 February 28 and 29
_____________________ ___________________
2005 2004 2005 2004
____ ____ ____ ____
(in millions, except per share data)
Determination of shares:
Average common shares
outstanding 263.3 263.5 263.1 263.2
Assumed conversion of
dilutive stock options
and awards 8.4 7.6 7.8 6.1
_______ _______ _______ _______
Diluted average common
shares outstanding 271.7 271.1 270.9 269.3
======= ======= ======= =======
Basic earnings per common share $ 1.04 $ 0.76 $ 3.28 $ 2.43
======= ======= ======= =======
Diluted earnings per common share $ 1.01 $ 0.74 $ 3.18 $ 2.38
======= ======= ======= =======
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.
Certain NIKE Golf receivables, inventories and property, plant and equipment
are managed by the geographic regions and as a result, are included in the
geographic region's balances.
Three Months Ended Nine Months Ended
February 28 and 29 February 28 and 29
__________________ __________________
2005 2004 2005 2004
_____ _____ _____ _____
Net Revenue
U.S. $1,268.2 $1,167.0 $ 3,801.9 $3,499.0
EUROPE, MIDDLE EAST, AFRICA 1,033.9 878.6 3,152.9 2,738.0
ASIA PACIFIC 472.8 402.2 1,362.3 1,162.2
AMERICAS 143.7 131.1 494.7 436.5
OTHER 389.6 325.1 1,206.5 930.3
_________ _________ __________ _________
$3,308.2 $2,904.0 $10,018.3 $8,766.0
========= ========= ========== =========
Pre-tax Income
U.S. $ 259.5 $ 236.2 $ 814.0 $ 722.0
EUROPE, MIDDLE EAST, AFRICA 219.3 171.4 663.3 512.4
ASIA PACIFIC 100.4 86.7 275.8 261.2
AMERICAS 23.2 15.6 88.4 71.1
OTHER 23.9 2.9 85.0 5.3
CORPORATE (212.9) (205.6) (604.6) (589.5)
_________ _________ __________ _________
$ 413.4 $ 307.2 $ 1,321.9 $ 982.5
========= ========= ========== =========
Feb. 28, May 31,
2005 2004
_________ _________
Accounts Receivable, net
U.S. $ 748.4 $ 616.6
EUROPE, MIDDLE EAST, AFRICA 775.9 724.1
ASIA PACIFIC 304.8 272.9
AMERICAS 139.1 132.1
OTHER 295.4 327.8
CORPORATE 41.3 46.7
_________ _________
$2,304.9 $2,120.2
========= =========
Inventories, net
U.S. $ 549.2 $ 570.6
EUROPE, MIDDLE EAST, AFRICA 481.4 477.9
ASIA PACIFIC 222.6 163.9
AMERICAS 96.9 78.3
OTHER 343.5 305.5
CORPORATE 33.4 37.4
_________ _________
$1,727.0 $1,633.6
========= =========
Property, Plant and Equipment, net
U.S. $ 209.6 $ 213.0
EUROPE, MIDDLE EAST, AFRICA 241.3 232.0
ASIA PACIFIC 395.8 379.7
AMERICAS 15.5 12.7
OTHER 92.7 91.8
CORPORATE 670.6 682.6
_________ _________
$1,625.5 $1,611.8
========= =========
NOTE 9 - Commitments and Contingencies:
_____________________________
At February 28, 2005, the Company had letters of credit outstanding
totaling $525.7 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 10 - Income Taxes:
____________
The American Jobs Creation Act (the "Act") was signed into law by the
President on October 22, 2004. The Act creates a temporary incentive for U.S.
multinational corporations to repatriate accumulated income earned outside the
U.S. by providing an 85% dividend received deduction for certain dividends
from controlled foreign corporations. According to the Act, the amount of
eligible repatriation is limited to $500 million or the amount described as
permanently reinvested earnings outside the U.S. in the most recent audited
financial statements filed with the Securities and Exchange Commission on or
before June 30, 2003. The Company is in the process of evaluating whether it
will repatriate foreign earnings under the repatriation provisions of the Act,
and if so, the amount that will be repatriated. The range of reasonably
possible amounts that the Company is considering for repatriation, which would
be eligible for the temporary deduction, is zero to $500 million. The Company
is awaiting the issuance of further regulatory guidance and passage of
statutory technical corrections with respect to certain provisions in the Act
prior to determining the amount it will repatriate. Accordingly, the Company
is not yet in a position to determine the income tax effects of a qualifying
repatriation should it choose to make one. At this time, the Company has not
made any changes to its position on reinvestment of certain foreign earnings.
Item 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND
RESULTS OF OPERATIONS
Overview
In the third quarter of fiscal 2005, our revenues grew 14% to $3.3
billion, net income grew 36% to $273.4 million and we delivered diluted
earnings per share of $1.01, a 36% increase versus the third quarter of fiscal
2004. For the quarter, our consolidated gross margin percentage increased 200
basis points to 44.1%. The international regions accounted for approximately
two-thirds of the gross margin improvement, driven primarily by foreign
currency transaction benefits. This benefit was partially offset by strategies
to improve product value in Europe and Asia and the impact of increased levels
of closeout sales and lower closeout pricing margins in Europe, the result of
higher footwear and apparel closeout inventories. Favorable foreign currency
translation also added to our overall profitability in the third quarter.
Results of Operations
Three Months Ended Nine Months Ended
February 28 and 29, February 28 and 29,
___________________ __________________
% %
2005 2004 change 2005 2004 change
______ ______ ________ ______ ______ ________
(in millions, except per share data)
Revenues $3,308.2 $2,904.0 14% $10,018.3 $8,766.0 14%
Cost of sales 1,849.4 1,682.1 10% 5,585.6 5,043.0 11%
Gross margin 1,458.8 1,221.9 19% 4,432.7 3,723.0 19%
44.1% 42.1% 44.2% 42.5%
Selling and administrative 1,035.7 892.0 16% 3,082.5 2,664.1 16%
31.3% 30.7% 30.8% 30.4%
Net income 273.4 200.3 36% 862.1 640.6 35%
Diluted earnings per share 1.01 0.74 36% 3.18 2.38 34%
Consolidated Operating Results
Three percentage points of our consolidated third quarter and nine-month
revenue 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 of the consolidated revenue growth for the third quarter and first nine
months of fiscal 2005, as all three of our international regions posted higher
revenues. The U.S. Region contributed 3 percentage points of the consolidated
revenue growth for the third quarter and first nine months of fiscal 2005.
Sales in our Other businesses drove the balance of the improvement for the
quarter and year-to-date periods. Converse, a component of the Other
businesses, was acquired at the beginning of the second quarter of fiscal 2004
and contributed 2 percentage points to the overall revenue growth for the
first nine months of fiscal 2005.
In the third quarter of fiscal 2005, our consolidated gross margin
percentage improved 200 basis points compared to the prior year's third
quarter, from 42.1% to 44.1%. For the first nine months of fiscal 2005, our
consolidated gross margin percentage improved 170 basis points, from 42.5% to
44.2%. The primary factors contributing to the improved gross margin
percentages for the third quarter and year-to-date periods were as follows:
(1) Higher gross margins in our international regions, accounted for 140
basis points of the overall margin improvement in the third quarter
and 120 basis points year-to-date. This improvement was driven by
changes in currency hedge rates, primarily the euro, partially
offset by the impact of lower in-line pricing margins (net revenue
for current product offerings minus product costs) in our Europe,
Middle East and Africa (EMEA) and Asia Pacific regions and higher
footwear and apparel closeout inventories (non-current product
offerings) in EMEA (as discussed below):
(a) For the quarter and year-to-date periods, year-over-year hedge
rate improvements contributed approximately 240 basis points
and 160 basis points, respectively, to our consolidated gross
margin percentage. As a majority of product purchases for the
remainder of fiscal 2005 and fiscal 2006 have been hedged at
more favorable rates than the prior year, we expect a positive
impact on our gross margin percentage will continue for the
fourth quarter of fiscal 2005 and into the first half of
fiscal 2006 with no significant impact expected for the second
half of fiscal 2006.
(b) Lower in-line pricing margins in EMEA and Asia were due to
both strategies to improve the product value and a higher
level of discounts, reflecting increased sales to high volume
accounts specifically in EMEA. In addition, increased levels
of closeout sales and lower closeout pricing margins in EMEA,
the result of higher footwear and apparel closeout inventories
this year, reduced the overall gross margin percentage
improvement in the EMEA Region. Together, these factors
resulted in a reduction in the gross margin percentage for the
quarter and year-to-date periods of about 90 basis points and
20 basis points, respectively.
(2) Higher gross margins in the U.S. Region accounted for about 10 and
20 basis points of the consolidated gross margin improvement for the
third quarter and first nine months, respectively. For the quarter
the gross margin improvement was due to an increase in the
proportion of revenues from Nike-owned Retail, partially offset by
gross margin percentage declines in our wholesale business. The
wholesale gross margin percentage declined primarily due to higher
discounts (again the result of increased sales to high volume
accounts), and higher product costs and air freight incurred to meet
strong footwear demand. For the nine-month period gross margins also
benefited from fewer, more profitable closeout sales.
(3) Improved gross margin percentages in our Other businesses
represented 40 basis points of improvement for the quarter and 20
basis points of improvement year-to-date. The addition of Exeter
Brands and Converse drove the majority of the gross margin
improvement. Both Exeter Brands and the international portion of
Converse's business operate on a licensing model, which carries
higher gross margins and lower operating expenses than the balance
of our Other businesses.
Selling and administrative expense, comprised of demand creation
(advertising and promotion) and operating overhead, grew 16% for the third
quarter and year-to-date periods as compared to the prior year. Three
percentage points of the increase for the third quarter and year-to-date
periods were due to changes in currency exchange rates.
Demand creation expense grew 21% to $371.6 million in the third quarter
and 22% to $1,188.8 million for the first nine months of fiscal 2005. Four
percentage points of the increase in demand creation for the third quarter and
three percentage points of the increase for the year-to-date period were due
to changes in currency exchange rates. Excluding the impact of changes in
foreign currency:
- Increased spending for sports marketing endorsement contracts, primarily
in the U.S., EMEA and Asia Pacific regions, and events contributed 7
percentage points of the growth for the quarter and 6 percentage points
for the year-to-date period;
- Incremental investment in retail development programs contributed 5
percentage points of the growth for both the quarter and year-to-date
periods;
- Increased spending for advertising contributed 3 percentage points of the
increase in demand creation spending for the third quarter and 6
percentage points of the increase for the first nine months of fiscal
2005. The increase in third quarter spending was primarily due to a
women's fitness campaign in the EMEA Region, while higher spending
worldwide around global sporting events in the summer of 2004 drove
additional growth year-to-date.
Operating overhead for the third quarter of fiscal 2005 grew 14% to
$664.1 million, while operating overhead for the first nine months grew 12% to
$1,893.7 million. Changes in currency exchange rates contributed 3 percentage
points of the increase for the third quarter and 2 percentage points of the
increase for the first nine months. Excluding the effects of currency,
operating overhead increases for the quarter and year-to-date periods were
mainly attributable to higher personnel costs due to increased headcount,
higher wages and benefits, and incentive-based compensation (4 percentage
points for the quarter and 3 percentage points for the year-to-date period),
increased costs due to the timing of sales and leadership meetings (2
percentage points for the quarter and 1 percentage point for the first nine
months), investments in emerging markets (such as Russia and China) and our
Other Businesses (2 percentage points for the quarter and 3 percentage points
for the first nine months) and investments in NIKE-owned retail stores (1
percentage point for both the quarter and year-to-date periods).
Other expense, net, was $9.8 million for the third quarter of fiscal
2005, down from $17.2 million in the third quarter of fiscal 2004. Other
expense, net, for the first nine months of fiscal 2005 was $19.9 million
compared to $55.3 million for the same period of fiscal 2004. The most
significant component of other expense, net, was net 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 investment 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 Unaudited Condensed
Consolidated Financial Statements (Note 8 - Operating Segments). The year-
over-year improvement in other expense, net, for the third quarter and first
nine months was mainly due to lower net losses on asset disposals and lower
foreign currency losses compared to those recorded in the third quarter and
first nine months of fiscal 2004.
In the third quarter and first nine months 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. We estimate that the net impact of these losses and the favorable
translation was a year-over-year increase in consolidated income before income
taxes of $20 million and $59 million for the quarter and nine month periods,
respectively. Consistent with our Financial 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 and into fiscal 2006. If current exchange rates
remain constant, we would expect the net impact of the foreign currency losses
and the offsetting positive translation impact to result in a net benefit to
consolidated income before income taxes for the fourth quarter of fiscal 2005
and into fiscal 2006. See further discussion in our Annual Report on Form
10-K as of May 31, 2004.
Income tax expense increased $33.1 million for the third quarter of
fiscal 2005 and $117.9 million for the year-to-date period as compared to the
prior year primarily due to higher levels of pre-tax income. The effective
tax rate for the third quarter decreased 90 basis points to 33.9% as compared
to the prior year mainly due to the favorable resolution of contingent
exposures, resulting in the release of previously accrued tax liabilities. The
year-to-date effective tax rate of 34.8% is consistent with the rate reported
for the third quarter and full year of fiscal 2004.
Our effective tax rate was not affected by the American Jobs Creation Act
(the "Act"), which was signed into law by the President on October 22, 2004.
The Act creates a temporary incentive for U.S. multinational corporations to
repatriate accumulated income earned outside the U.S. by providing an 85%
dividend received deduction for certain dividends from controlled foreign
corporations. According to the Act, the amount of eligible repatriation is
limited to $500 million or the amount described as permanently reinvested
earnings outside the U.S. in the most recent audited financial statements
filed with the Securities and Exchange Commission on or before June 30, 2003.
We are in the process of evaluating whether we will repatriate foreign
earnings under the repatriation provisions of the Act, and if so, the amount
that will be repatriated. The range of reasonably possible amounts that we
are considering for repatriation, which would be eligible for the temporary
deduction, is zero to $500 million. We are awaiting the issuance of further
regulatory guidance and passage of statutory technical corrections with
respect to certain provision in the Act prior to determining the amount we
will repatriate. Accordingly, we are not yet in a position to determine the
income tax effects of a qualifying repatriation should we choose to make one.
At this time, we have not made any changes to our position on reinvestment of
certain foreign earnings.
Worldwide futures and advance orders for our footwear and apparel
scheduled for delivery from March through July 2005 were 9.6% higher than such
orders reported for the comparable period of fiscal 2004. Approximately 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 for footwear 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 at-once and closeout sales of NIKE footwear and apparel, 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 Nine Months Ended
February 28 and 29, February 28 and 29,
___________________ ____________________
% %
2005 2004 change 2005 2004 change
______ ______ _______ ______ ______ ______
(in millions)
U.S. REGION
FOOTWEAR $ 849.6 $ 772.8 10% $ 2,451.0 $2,219.2 10%
APPAREL 345.8 329.3 5% 1,121.8 1,074.1 4%
EQUIPMENT 72.8 64.9 12% 229.1 205.7 11%
________ ________ _________ ________
TOTAL U.S. 1,268.2 1,167.0 9% 3,801.9 3,499.0 9%
EMEA REGION
FOOTWEAR 615.3 537.7 14% 1,810.4 1,600.2 13%
APPAREL 351.3 284.1 24% 1,131.0 950.9 19%
EQUIPMENT 67.3 56.8 18% 211.5 186.9 13%
________ ________ _________ ________
TOTAL EMEA 1,033.9 878.6 18% 3,152.9 2,738.0 15%
ASIA PACIFIC REGION
FOOTWEAR 237.9 214.2 11% 693.1 622.6 11%
APPAREL 188.3 150.1 25% 544.9 437.9 24%
EQUIPMENT 46.6 37.9 23% 124.3 101.7 22%
________ ________ _________ ________
TOTAL ASIA PACIFIC 472.8 402.2 18% 1,362.3 1,162.2 17%
AMERICAS REGION
FOOTWEAR 99.6 88.0 13% 344.2 294.5 17%
APPAREL 33.5 35.2 (5%) 115.9 115.1 1%
EQUIPMENT 10.6 7.9 34% 34.6 26.9 29%
________ ________ _________ ________
TOTAL AMERICAS 143.7 131.1 10% 494.7 436.5 13%
________ ________ _________ ________
2,918.6 2,578.9 13% 8,811.8 7,835.7 12%
OTHER 389.6 325.1 20% 1,206.5 930.3 30%
________ ________ _________ ________
TOTAL REVENUES $3,308.2 $2,904.0 14% $10,018.3 $8,766.0 14%
======== ======== ========= ========
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 9 and 7 percentage points of the reported
revenue growth for the third quarter and first nine months of fiscal 2005,
respectively. Excluding the effects of foreign currency, the EMEA Region
revenues grew approximately 9% for the third quarter and approximately 8%
year-to-date. Excluding the impact of changes in foreign currency, the
increase over the prior year quarter and year-to-date periods was primarily
driven by:
- Increased unit sales of footwear, apparel and equipment.
- Sales increases in Italy, the UK and the emerging markets in Central
Europe, Turkey and Russia. These increases were partially offset by
lower sales in France, Germany and Northern Europe for the quarter
and first nine months versus the same period last year.
For the EMEA Region, futures orders scheduled for delivery from March
through July 2005 were 7 percentage points higher than such orders for the
comparable period of fiscal 2004. Changes in currency exchange rates
contributed 2 percentage points of this growth. Excluding the changes in
currency exchange rates, the growth was driven by an increase in the
region's footwear unit orders and average selling price per pair. These
increases were partially offset by decreases in the region's apparel unit
orders and average selling price, primarily due to the significant amount of
prior year orders related to the European Football Championships.
EMEA pre-tax income for the third quarter of fiscal 2005 was $219.3
million, up 28% versus the prior year quarter. For the first nine months of
fiscal 2005, pre-tax income grew 29% to $663.3 million. For the quarter and
nine-month periods, higher revenues and gross margin improvements drove the
increase, more than offsetting increased selling and administrative costs.
The improved gross margins, which contributed 150 basis points and 100 basis
points of growth to the third quarter and year-to-date consolidated gross
margin percentage, respectively, were primarily the result of improved year-
over-year currency hedge rates partially offset by reduced in-line pricing
margins, and higher, less profitable closeout sales.
In the Asia Pacific Region, 5 and 4 percentage points of revenue growth
for the third quarter and first nine months of fiscal 2005, respectively,
were due to changes in currency exchange rates. The following discussion
excludes the impact of changes in foreign currency. Sales in each Asia
Pacific business unit (footwear, apparel and equipment) grew versus last
year's quarter and year-to-date periods. Significant revenue increase in
China (driven by expansion of retail distribution and strong consumer
demand) was the key growth driver for the quarter, partially offset by a
slight revenue decline in Japan and lower sales in Australia. For the year-
to-date period, significant growth in China and more modest increases in
Japan and Taiwan were the key growth drivers, partially offset by lower
sales in Korea and Australia.
Pre-tax income for the Asia Pacific Region increased 16% versus the
third quarter of fiscal 2004 to $100.4 million, and increased 6% to $275.8
million for the year-to-date period. For the quarter, higher revenues were
partially offset by a reduction in the gross margin percentage and increased
selling and administrative costs. For the first nine months of fiscal 2005,
gross margin percentage improvements contributed to the increased
profitability. The reduced gross margin percentage for the third quarter,
which reduced the consolidated gross margin percentage improvement by 20
basis points, was primarily due to lower in-line pricing margins. The higher
year-to-date gross margin percentage (which contributed 10 basis points to
the consolidated gross margin percentage) was primarily due to the benefit
of better year-over-year currency hedge rates, partially offset by lower
profitability on in-line products.
In the Americas Region, 3 percentage points of the revenue growth for
the third quarter was due to changes in currency exchange rates. For the
first nine months of fiscal 2005, changes in currency exchanges rates did
not have a net impact on the revenue growth versus the same period last
year. Excluding the currency exchange rate impact, sales in footwear and
equipment were partially offset by declines in apparel sales in the third
quarter, although sales in each Americas business unit grew for the year-to-
date period. Excluding the currency effects, revenue growth for the quarter
was driven by higher sales in South America, partially offset by lower sales
in Canada. For the first nine months of fiscal 2005, higher sales in Mexico
also contributed to the region's overall growth.
In the third quarter of fiscal 2005, pre-tax income for the Americas
Region increased 49% from the prior year quarter, to $23.2 million. Year-to-
date fiscal 2005 pre-tax income increased 24% to $88.4 million. The increase
in pre-tax income for the third quarter and year-to-date periods was
attributable to higher revenues and an improved gross margin percentage,
partially offset by higher selling and administrative costs. As investments
in demand creation for the region were focused in the first quarter, pre-tax
profitability for the third quarter grew at a rate significantly higher than
that of the year-to-date period. The improved gross margin percentage
contributed 10 basis points to the growth of the consolidated gross margin
percentage for the third quarter and year-to-date periods.
In the U.S. Region, the increase in footwear revenue was due to an
increase in unit sales, accounting for 8 and 6 percentage points of the U.S.
footwear growth for the third quarter and first nine months of fiscal 2005,
respectively, and an increase in the average selling price per pair
contributing 2 and 4 percentage points for the third quarter and nine-month
periods, respectively. The increase in unit sales is due to increased
consumer demand for performance product across categories. The increase in
average selling price per pair for the third quarter and first nine months
of fiscal 2005 was primarily due to a larger percentage of sales from
performance products with a suggested retail price over $100.
The increase in apparel sales for the third quarter and year-to-date
periods was driven by increases in sales of branded apparel partially offset
by declines in revenues generated by licensed apparel (due to the expiration
of our license agreement with the NBA and a shift in consumer preference
towards branded apparel). For the remainder of fiscal 2005, we expect
revenues generated by licensed apparel to continue to be below prior year
levels.
For the U.S. Region, futures orders scheduled for delivery from March
through July 2005 increased 9% versus the same period of the prior year.
Futures orders increased due to both increased unit orders and average
selling price per unit for wholesale footwear and apparel. As discussed
above, these reported futures do not cover all components of our overall
revenues, such as U.S. licensed apparel (expected to decrease as noted
above), equipment, closeouts, at-once orders and retail sales. As a result,
revenue growth for the fourth quarter of fiscal 2005 is expected to be below
the reported futures growth.
For the third quarter, U.S. Region pre-tax income was $259.5 million, a
10% increase versus the third quarter of fiscal 2004. Pre-tax income for the
first nine months of fiscal 2005 increased 13% to $814.0 million. For the
quarter and year-to-date periods, higher revenues and the improved gross
margin percentage were partially offset by higher selling and administrative
costs. The improved gross margins contributed 10 basis points and 20 basis
of growth to the consolidated gross margin percentage for the third quarter
and first nine months of fiscal 2005, respectively. The third quarter gross
margin percentage improvement was primarily the result of a higher
proportion of retail business within the total region revenues, partially
offset by lower in-line pricing margins for the wholesale business. For the
first nine months, gross margins also benefited from fewer, more profitable
closeout sales.
Revenues and pre-tax income for Other businesses in the third quarter
and first nine months 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. 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 to operate the business obtained in the acquisition
of Official Starter Properties LLC and Official Starter LLC (collectively
"Official Starter"). For the third quarter and year-to-date, the increase in
Other revenues was primarily driven by growth at Cole Haan, Converse and
NIKE Golf.
Pre-tax income from the Other businesses improved to $23.9 million in
the third quarter of fiscal 2005 versus $2.9 million in fiscal 2004 and
improved to $85.0 million in the year-to-date period versus $5.3 million in
the same period of last year. For the third quarter, improved profitability
from each of the Other businesses contributed to the year-over-year
improvement. The addition of Converse in the second quarter of fiscal 2004,
which contributed 6 percentage points to the year-to-date growth in
consolidated pre-tax income, combined with improved results from most of the
Other businesses to drive the year-over-year improvement for the first nine
months of fiscal 2005.
Liquidity and Capital Resources
Cash Flow Activity
Cash provided by operations was $1,081.1 million for the first nine
months of fiscal 2005, compared to $975.4 million for the first nine months
of fiscal 2004. Net income provided $862.1 million of cash flow over the
first nine months of the current year, compared to $640.6 million in the
first nine months of last year. This was partially offset by a current year
use of cash to fund increases in working capital, versus cash provided by
decreases in working capital in the prior year.
In the current quarter, we purchased approximately 2.3 million shares
of NIKE's Class B common stock for $199.8 million, bringing purchases for
the first nine months of fiscal 2005 and to date under the program to 5.1
million shares for $403.5 million. The share repurchases were part of a $1.5
billion share repurchase program that was approved by the Board of Directors
in June 2004. 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 in the third quarter of fiscal 2005 were $0.25 per
share of common stock.
Capital Resources
The Company maintains a $750 million multi-year revolving credit
facility with a group of banks. The maturity date is November 20, 2008 and
the company can seek to have the facility extended for one additional year
on the anniversary date. On the most recent anniversary date, the company
elected not to extend the facility for one additional year, effectively
changing the term to 4 years. All other terms and conditions are unchanged
from those described in our Annual Report on Form 10-K for the fiscal year
ended May 31, 2004. No amounts are currently outstanding under the facility.
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 February 28, 2005 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 for the fiscal year ended May 31, 2004, will be
sufficient to meet our operating and capital needs in the foreseeable
future.
Recently Issued Accounting Standards
In November 2004, the Financial Accounting Standards Board (FASB)
issued Statement of Financial Accounting Standards (SFAS) No. 151,
"Inventory Costs, an amendment of ARB No. 43, Chapter 4" (FAS 151). FAS 151
clarifies that abnormal inventory costs such as costs of idle facilities,
excess freight and handling costs, and wasted materials (spoilage) are
required to be recognized as current period charges. The provisions of SFAS
No. 151 are effective for our fiscal year beginning June 1, 2006. We are
currently evaluating the provisions of FAS 151 and do not expect that the
adoption will have a material impact on our consolidated financial position
or results of operations.
On December 16, 2004, the FASB finalized FAS No. 123R "Share Based
Payment," (FAS 123R) which will be effective for the first interim or annual
reporting periods beginning after June 15, 2005. The new standard will
require us to record compensation expense for stock options using a fair
value method. On March 29, 2005, the Securities and Exchange Commission
(SEC) issued Staff Accounting Bulletin No. 107 (SAB 107), which provides the
Staff's views regarding interactions between FAS 123R and certain SEC rules
and regulations and provides interpretations of the valuation of share-based
payments for public companies.
We are currently evaluating FAS 123R and SAB 107 to determine the fair
value method to measure compensation expense, the appropriate assumptions to
include in the fair value model, the transition method to use upon adoption
and the period in which to adopt the provisions of FAS 123R. The impact of
the adoption of FAS 123R cannot be reasonably estimated at this time due to
the factors discussed above as well as the unknown level of share-based
payments granted in future years. The effect of expensing stock options on
our results of operations using the Black-Scholes model is presented in the
accompanying Notes to Unaudited Condensed Consolidated Financial Statements
Note 6 - Stock-Based Compensation).
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 February 28, 2005.
There has been no change in the Company's internal control 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 control 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 significant developments from the information
previously reported under Item 3 of the Company's Annual Report on Form 10-K
for the fiscal year ended May 31, 2004.
Item 2. Unregistered Sales of Equity Securities and Use of Proceeds
The following table presents a summary of share repurchases made by NIKE
during the quarter ended February 28, 2005 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)
December 1 - 31, 2004 176,000 $ 91.12 176,000 $ 1,280.3
January 1 - 31, 2005 996,000 $ 87.66 996,000 $ 1,193.0
February 1 - 28, 2005 1,130,000 $ 85.34 1,130,000 $ 1,096.5
_________ _______ _________
Total 2,302,000 $ 86.79 2,302,000
========= ======= =========
Item 6. 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 Current Report on Form 8-K
filed November 18, 2004).
4.1 Restated Articles of Incorporation, as amended (see Exhibit
3.1).
4.2 Third Restated Bylaws, as amended (see Exhibit 3.2).
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.
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
________________________
Donald W. Blair
Chief Financial Officer
DATED: April 6, 2005