e10vk
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
Form 10-K
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(Mark One) |
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ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE
SECURITIES EXCHANGE ACT OF 1934 |
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For the fiscal year ended May 31, 2005 |
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TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE
SECURITIES EXCHANGE ACT OF 1934 |
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For the transition period
from to . |
Commission File No. 1-10635
NIKE, Inc.
(Exact name of Registrant as specified in its charter)
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Oregon
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93-0584541 |
(State or other jurisdiction
of incorporation) |
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(IRS Employer
Identification No.) |
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One Bowerman Drive
Beaverton, Oregon 97005-6453
(Address of principal executive offices) (Zip Code) |
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(503) 671-6453
(Registrants Telephone Number, Including Area
Code) |
Securities registered pursuant to Section 12(b) of the
Act:
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(Title of Each Class) |
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(Name of Each Exchange on Which Registered) |
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Class B Common Stock
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New York Stock Exchange |
Securities registered pursuant to Section 12(g) of the
Act:
None
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 þ No o
Indicate by check mark if disclosure of delinquent filers
pursuant to Item 405 of Regulation S-K (229.405 of
this chapter) is not contained herein, and will not be contained
to the best of Registrants knowledge, in definitive proxy
or information statements incorporated by reference in
Part III of this Form 10-K or any amendment to this
Form 10-K. þ
Indicate by check mark whether the Registrant is an accelerated
filer (as defined in Rule 12b-2 of the Securities Exchange
Act of
1934. Yes þ No o
As of November 30, 2004, the aggregate market value of the
Registrants Class A Common Stock held by
nonaffiliates of the Registrant was $471,095,424 and the
aggregate market value of the Registrants Class B
Common Stock held by nonaffiliates of the Registrant was
$15,809,818,070.
As of July 25, 2005, the number of shares of the
Registrants Class A Common Stock outstanding was
65,676,484 and the number of shares of the Registrants
Class B Common Stock outstanding was 195,976,930.
DOCUMENTS INCORPORATED BY REFERENCE:
Parts of Registrants Proxy Statement for the annual
meeting of shareholders to be held on September 20, 2005
are incorporated by reference into Part III of this Report.
NIKE, INC.
ANNUAL REPORT ON FORM 10-K
TABLE OF CONTENTS
1
PART I
General
NIKE, Inc. was incorporated in 1968 under the laws of the state
of Oregon. As used in this report, the terms we,
us, NIKE and the Company
refer to NIKE, Inc. and its predecessors, subsidiaries and
affiliates, unless the context indicates otherwise. Our Internet
address is www.nike.com. On our NIKE Corporate web site,
located at www.nikebiz.com, we post the following filings
as soon as reasonably practicable after they are electronically
filed with or furnished to the Securities and Exchange
Commission: our annual report on Form 10-K, our quarterly
reports on Form 10-Q, our current reports on Form 8-K
and any amendments to those reports filed or furnished pursuant
to Section 13(a) or 15(d) of the Securities and Exchange
Act of 1934. All such filings on our NIKE Corporate web site are
available free of charge. Also available on the NIKE Corporate
web site are the charters of the committees of our board of
directors, as well as our corporate governance guidelines and
code of ethics; copies of any of these documents will be
provided in print to any shareholder who submits a request in
writing to NIKE Investor Relations, One Bowerman Drive,
Beaverton, Oregon 97005-6453.
Our principal business activity is the design, development and
worldwide marketing of high quality footwear, apparel,
equipment, and accessory products. NIKE is the largest seller of
athletic footwear and athletic apparel in the world. We sell our
products to retail accounts, through NIKE-owned retail stores,
and through a mix of independent distributors and licensees, in
over 160 countries around the world. Virtually all of our
products are manufactured by independent contractors. Virtually
all footwear and apparel products are produced outside the
United States, while equipment products are produced both in the
United States and abroad.
Products
NIKEs athletic footwear products are designed primarily
for specific athletic use, although a large percentage of the
products are worn for casual or leisure purposes. We place
considerable emphasis on high quality construction and
innovation in products designed for men, women and children.
Running, cross-training, basketball, soccer, sport-inspired
urban shoes, and childrens shoes are currently our
top-selling product categories and we expect them to continue to
lead in product sales in the near future. We also market shoes
designed for tennis, golf, baseball, football, bicycling,
volleyball, wrestling, cheerleading, aquatic activities, hiking,
outdoor activities and other athletic and recreational uses.
We sell sports apparel covering most of the above categories,
sports inspired lifestyle apparel, as well as athletic bags and
accessory items. NIKE apparel and accessories are designed to
complement our athletic footwear products, feature the same
trademarks and are sold through the same marketing and
distribution channels. We often market footwear, apparel and
accessories in collections of similar design or for
specific purposes. We also market apparel with licensed college
and professional team and league logos.
We sell a line of performance equipment under the NIKE®
brand name, including golf clubs, sport balls, eyewear,
timepieces, electronic media devices, skates, bats, gloves, and
other equipment designed for sports activities. We also have
agreements for licensees to produce and sell NIKE brand
swimwear, cycling apparel, childrens clothing, school
supplies and eyewear. We also sell small amounts of various
plastic products to other manufacturers through our wholly-owned
subsidiary, NIKE IHM, Inc.
Our wholly-owned subsidiary Converse Inc., headquartered in
North Andover, Massachusetts, designs and distributes athletic
and casual footwear, apparel and accessories under the
Converse®, Chuck Taylor®, All Star®, One
Star® and Jack Purcell® trademarks.
We sell a line of dress and casual footwear, apparel and
accessories for men and women under the brand names Cole
Haan®, g Series© and Bragano© through our
wholly-owned subsidiary, Cole Haan Holdings Incorporated,
headquartered in Yarmouth, Maine.
2
Our wholly-owned subsidiary Hurley International LLC,
headquartered in Costa Mesa, California, designs and distributes
a line of action sports apparel for surfing, skateboarding, and
snowboarding, and youth lifestyle apparel and footwear under the
Hurley® brand name.
Our wholly-owned subsidiary, Bauer NIKE Hockey Inc.,
headquartered in Greenland, New Hampshire, manufactures and
distributes ice skates, skate blades, protective gear, hockey
sticks, licensed apparel and accessories under the Bauer®
and NIKE® brand names. Bauer also offers a full selection
of products for street and roller hockey.
In the fiscal quarter ended August 31, 2004 the Company
formed Exeter Brands Group LLC, a wholly-owned subsidiary of the
Company, to develop the Companys athletic footwear and
apparel business in retail channels for value-conscious
consumers, and to market and license athletic footwear and
apparel under the Starter®, Shaq® and Asphalt®
brand names, which we purchased during that quarter.
Sales and Marketing
Financial information about geographic and segment operations
appears in Note 17 of the consolidated financial statements
on page 60.
We experience moderate fluctuations in aggregate sales volume
during the year. Historically, revenues in the first and fourth
fiscal quarters have slightly exceeded those in the second and
third quarters. However, the mix of product sales may vary
considerably from time to time as a result of changes in
seasonal and geographic demand for particular types of footwear,
apparel and equipment.
Because NIKE is a consumer products company, the relative
popularity of various sports and fitness activities and changing
design trends affect the demand for our products. We must
therefore respond to trends and shifts in consumer preferences
by adjusting the mix of existing product offerings, developing
new products, styles and categories, and influencing sports and
fitness preferences through aggressive marketing. This is a
continuing risk. Failure to respond in a timely and adequate
manner could have a material adverse effect on our sales and
profitability.
United States Market
In fiscal 2005, sales in the United States (including
U.S. sales of Bauer NIKE Hockey, Cole Haan, Converse,
Exeter Brands Group, Hurley and NIKE Golf) accounted for
approximately 46 percent of total revenues, compared to
47 percent in fiscal 2004 and 49 percent in fiscal
2003. We sell to approximately 22,000 retail accounts in the
United States. The NIKE brand domestic retail account base
includes a mix of footwear stores, sporting goods stores,
athletic specialty stores, department stores, skate, tennis and
golf shops, and other retail accounts. During fiscal year 2005,
our three largest customers accounted for approximately
31 percent of NIKE brand sales in the United States
excluding sales from NIKE Golf and Bauer NIKE Hockey, and
26 percent of total sales in the United States.
We make substantial use of our futures ordering
program, which allows retailers to order five to six months in
advance of delivery with the commitment that 90 percent of
their orders will be delivered within a set time period at a
fixed price. In fiscal year 2005, 91 percent of our
U.S. wholesale footwear shipments (excluding Bauer NIKE
Hockey, Cole Haan, Converse, Exeter Brands Group, Hurley and
NIKE Golf) were made under the futures program, compared to
90 percent in fiscal 2004 and 91 percent in fiscal
2003. In fiscal 2005 and 2004, 71 percent of our
U.S. wholesale apparel shipments (excluding
U.S. licensed team apparel, Bauer NIKE Hockey, Cole Haan,
Converse, Exeter Brands Group, Hurley and NIKE Golf) were made
under the futures program, compared to 67 percent in 2004
and 2003.
3
We utilize 22 NIKE sales offices to solicit sales in the United
States. We also utilize 9 independent sales representatives to
sell specialty products for golf and outdoor activities. In
addition, we sell NIKE brand products through our internet
website, www.niketown.com, and we operate the following
retail outlets in the United States:
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U.S. Retail Stores |
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NIKE factory stores (which carry primarily overstock and
closeout merchandise)
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77 |
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NIKE stores (including NIKE Women Stores)
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11 |
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NIKETOWNs (designed to showcase NIKE products)
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12 |
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NIKE employee-only stores
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4 |
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Cole Haan, Converse, and Hurley stores (including factory and
employee stores)
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80 |
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Total
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184 |
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NIKEs domestic distribution centers for footwear are
located in Wilsonville, Oregon, and Memphis, Tennessee. Apparel
and equipment products are shipped from our Memphis, Tennessee,
Tigard, Oregon, and Foothill Ranch, California distribution
centers. Cole Haan and Bauer NIKE Hockey products are
distributed primarily from Greenland, New Hampshire, Converse
products are shipped from Ontario and Fontana, California, and
Hurley products are shipped from Costa Mesa, California.
International Markets
We sell our products to retail accounts, through NIKE-owned
retail stores, and through a mix of independent distributors and
licensees, in over 160 countries around the world.
Non-U.S. sales (including non-U.S. sales of Bauer NIKE
Hockey, Cole Haan, Converse, Exeter Brands Group, Hurley and
NIKE Golf) accounted for 54 percent of total revenues in
fiscal 2005, compared to 53 percent in fiscal 2004 and
51 percent in fiscal 2003. We estimate that we sell to more
than 37,000 retail accounts outside the United States, excluding
sales by independent distributors and licensees. We operate 21
distribution centers in Europe, Asia, Australia, Latin America,
Africa and Canada. In many countries and regions, including
Canada, Asia, some Latin American countries, and Europe, we have
a futures ordering program for retailers similar to the United
States futures program described above. NIKEs three
largest customers outside of the U.S. accounted for
approximately 12 percent of non-U.S. sales.
We operate the following retail outlets outside the United
States:
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Non-U.S. Retail Stores |
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NIKE factory stores
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129 |
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NIKE stores and employee-only stores
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8 |
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NIKETOWNs
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2 |
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Cole Haan stores (including factory and employee stores)
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51 |
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Total
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190 |
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International branch offices and subsidiaries of NIKE are
located in Argentina, Australia, Austria, Belgium, Brazil,
Bulgaria, Canada, Chile, Croatia, Czech Republic, Denmark,
Finland, France, Germany, Greece, Hong Kong, Hungary, Indonesia,
India, Ireland, Israel, Italy, Japan, Korea, Lebanon, Malaysia,
Mexico, New Zealand, The Netherlands, Norway, Peoples
Republic of China, The Philippines, Poland, Portugal, Russia,
Singapore, Slovakia, Slovenia, South Africa, Spain, Sri Lanka,
Sweden, Switzerland, Taiwan, Thailand, Turkey, the United
Kingdom and Vietnam.
Significant Customer
Foot Locker Inc., which operates a chain of retail stores
specializing in athletic footwear and apparel, accounted for
approximately 11 percent of global net sales of NIKE, Inc.
during fiscal 2005. No other customer accounted for
10 percent or more of our net sales during fiscal 2005.
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Orders
Worldwide futures orders for NIKE brand athletic footwear and
apparel, scheduled for delivery from June through November 2005,
were $6.3 billion compared to $5.7 billion for the
same period last year. Based upon historical data, we expect
that approximately 95 percent of these orders will be
filled in that time period, although some orders may be
cancelled. Reported futures orders are not necessarily
indicative of our expectation of revenues for this period. This
is because the mix of orders can shift between advance/futures
and at-once orders. In addition, foreign currency 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, Exeter Brands Group, Hurley, NIKE
Golf, and retail sales across all brands.
Product Research and Development
We believe that our research and development efforts are a key
factor in our past and future success. Technical innovation in
the design of footwear, apparel, and athletic equipment receive
continued emphasis as NIKE strives to produce products that help
to reduce injury, aid athletic performance and maximize comfort.
In addition to NIKEs own staff of specialists in the areas
of biomechanics, exercise physiology, engineering, industrial
design and related fields, we also utilize research committees
and advisory boards made up of athletes, coaches, trainers,
equipment managers, orthopedists, podiatrists and other experts
who consult with us and review designs, materials and concepts
for product improvement. Employee athletes and other athletes
wear-test and evaluate products during the design and
development process.
Manufacturing
Virtually all of our footwear is produced outside of the United
States. In fiscal 2005, contract suppliers in China, Vietnam,
Indonesia and Thailand manufactured 36 percent,
26 percent, 22 percent and 15 percent of total
NIKE brand footwear, respectively. We also have manufacturing
agreements with independent factories in Argentina, Brazil,
India, Italy, Mexico and South Africa to manufacture footwear
for sale primarily within those countries. Our largest single
footwear supplier accounted for approximately 7 percent of
total fiscal 2005 footwear production.
Almost all of NIKE brand apparel production for sale to the
United States market, and all of our apparel production for sale
to the international market, was manufactured outside of the
United States by independent contract manufacturers located in
38 countries. Most of this apparel production occurred in
Bangladesh, China, Honduras, India, Indonesia, Malaysia, Mexico,
Pakistan, Sri Lanka, Taiwan, Thailand, Turkey and Vietnam. Our
largest single apparel supplier accounted for approximately
5 percent of total fiscal 2005 apparel production.
The principal materials used in our footwear products are
natural and synthetic rubber, plastic compounds, foam cushioning
materials, nylon, leather, canvas and polyurethane films used to
make AIR-SOLE cushioning components. NIKE IHM, Inc., a
wholly-owned subsidiary of NIKE, is our sole supplier of the
AIR-SOLE cushioning components used in footwear. The principal
materials used in our apparel products are natural and synthetic
fabrics and threads, plastic and metal hardware, and specialized
performance fabrics designed to repel rain, retain heat, or
efficiently transport body moisture. NIKE and its contractors
and suppliers buy raw materials in bulk. Most raw materials are
available in the countries where manufacturing takes place. We
have thus far experienced little difficulty in satisfying our
raw material requirements.
Since 1972, Sojitz Corporation of America (Sojitz
America) and its predecessor, Nissho Iwai American
Corporation, a subsidiary of Nissho Iwai Corporation, a large
Japanese trading company, have performed significant
import-export financing services for us. During fiscal 2005,
Sojitz America provided such financing services for nearly all
of the NIKE brand products sold outside of the United States,
Europe, Middle East, Africa and Japan, excluding products
produced and sold in the same country. However, less
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than 11 percent of NIKE brand products, excluding products
produced and sold in the same country, were sold outside of the
United States, Europe, Middle East, Africa and Japan in fiscal
2005. Any failure of Sojitz America to provide these services or
any failure of Sojitz Americas banks could disrupt our
ability to acquire products from our suppliers and to deliver
products to our customers outside of the United States, Europe,
Middle East, Africa and Japan. Such a disruption could result in
cancelled orders that would adversely affect sales and
profitability. However, we believe that any such disruption
would be short term in duration due to the ready availability of
alternative sources of financing at competitive rates. Our
current agreements with Sojitz America expire on May 31,
2008.
International Operations and Trade
Our international operations and sources of supply are subject
to the usual risks of doing business abroad, such as possible
revaluation of currencies, export duties, anti-dumping duties,
quotas, safeguard measures, trade restrictions, restrictions on
the transfer of funds and, in certain parts of the world,
political instability and terrorism. We have not, to date, been
materially affected by any such risk, but cannot predict the
likelihood of such developments occurring. We believe that we
have the ability to develop, over a period of time, adequate
alternative sources of supply for the products obtained from our
present suppliers outside of the United States. If events
prevented us from acquiring products from our suppliers in a
particular country, our operations could be temporarily
disrupted and we could experience an adverse financial impact.
However, we believe that we could abate any such disruption
within a period of no more than 12 months, and that much of
the adverse impact on supply would, therefore, be of a
short-term nature. We believe that our principal competitors are
subject to similar risks.
As a result of the Trade Act of 2003, the United States
implemented significant new Federal requirements for cargo
security, focused on imports of containerized cargo. We are a
significant importer of containerized cargo. Accordingly, we
participate actively in appropriate governmental programs, such
as the Customs Trade Partnership Against Terrorism
(C-TPAT), to reduce risks of possible supply
disruptions caused by U.S. and international cargo security
mandates and terrorism.
All of our products manufactured overseas and imported into the
United States, the European Union and other countries are
subject to customs duties collected by customs authorities.
Customs information submitted by us is routinely subject to
review by customs authorities. We are unable to predict whether
additional customs duties, anti-dumping duties, quotas,
safeguard measures, or other trade restrictions may be imposed
on the importation of our products in the future. Such actions
could result in increases in the cost of our products generally
and might adversely affect the sales or profitability of NIKE
and the imported footwear and apparel industry as a whole.
Accordingly, we are actively monitoring the developments
described below.
Footwear Imports into the European Union
From 1994 through January 1, 2005, the European Union
(EU) imposed limits (or quotas) on the
import of certain types of footwear manufactured in China.
Footwear designed for use in sporting activities, meeting
certain technical criteria and having a CIF (cost, insurance and
freight) price above 9 euros (Special Technology Athletic
Footwear or STAF), was excluded from the
quotas. As a result of the STAF exclusion, and the amount of
quota made available to us, the quotas did not have a material
effect on our business. However, as part of Chinas 2001
accession to the World Trade Organization (WTO),
China entered into an agreement with the EU and other WTO
members to abide by a special safeguard arrangement whereby
quotas could be imposed on any product sourced in China,
including footwear, if there was a surge in imports from China
into another WTO country, and after a legal proceeding it was
determined that such imports were injuring a domestic producer.
Additionally, under longstanding WTO rules, all WTO member
countries reserved the right to impose (1) safeguard
measures (temporary quotas) if it can be demonstrated in a legal
proceeding that increased imports are injuring another WTO
members domestic industry; and (2) anti-dumping
measures if it can be demonstrated in a legal proceeding that
imports are being sold at an unfair low price in another WTO
members home market, and those imports were causing or
threatening to cause material injury to the domestic industry.
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Accordingly, with the phase-out of the quotas at the beginning
of 2005, and the expiration of a separate EU anti-dumping case
in 2003 against footwear made in China, Indonesia, and Thailand,
there has been renewed pressure from some parts of the EU
footwear manufacturing sector to re-impose some level of trade
protection on imported footwear from China, India, Vietnam, and
other exporting countries. In mid-2005 the European Commission,
at the request of the European domestic footwear industry,
initiated investigations into leather footwear imported from
China and Vietnam. NIKE and all other major athletic footwear
manufacturers are currently participating actively as
respondents in this investigation and are taking the position
that athletic footwear (i) should not be within the product
scope of this investigation and (ii) does not meet the
legal requirements of injury and price in an anti-dumping
investigation. We believe that our major competitors stand in
much the same position of risk regarding these potential trade
measures.
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Expiration of the Textile and Apparel Multi-Fiber
Arrangement |
Under the WTO, the Multi-Fiber Arrangement, a four-decade old
agreement that allows WTO countries to impose quotas on the
import of textile and apparel products, expired on
January 1, 2005. This effectively meant that absent some
other form of trade restrictions (see China discussion below)
all trade of textile and apparel products between WTO members is
free from quotas as of the end of the 2004 calendar year.
Elimination of textile and apparel quotas is significant for
NIKE and other textile and apparel companies as it provides
these companies greater flexibility in their global sourcing
decisions. At the same time, we are monitoring closely actions
by textile and apparel importing countries to ensure that they
do not unilaterally attempt to re-impose restrictions through
some other legal mechanism, such as safeguards, anti-dumping
measures, or in the case of China (as part of the agreement
reached in Chinas 2001 WTO accession), through the
short-term re-imposition of quotas on certain categories of
textile and apparel products in order to protect a domestic
market from rising Chinese imports.
We are currently monitoring potential restrictions by the United
States and the European Union. In early 2005 the EU began
consultations with China over imposition of quotas. However, as
a result of those negotiations, in June of 2005, the EU and
China reached an agreement which voluntarily limits the amount
of apparel product China can export to the EU in particular
categories until January 1, 2008. NIKE monitored these
negotiations closely, adjusted its sourcing and distribution
strategy, and as a result, the agreement has not had a material
effect on our business.
In early 2005 the United States launched provisional safeguard
measures on several categories of apparel products from China.
In May of 2005, the U.S. found that imports from China of
certain apparel categories were causing market disruption to the
U.S. industry and the United States reimposed quota on
certain apparel categories. NIKE monitored these negotiations
closely, adjusted its sourcing and distribution strategy, and as
a result, the actions have not had a material effect on our
business. We believe that our principal competitors face the
same risks regarding these trade measures.
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Vietnam Imports into the United States |
We currently source a portion of our footwear and apparel
products from factories in Vietnam. In 2001, the United States
Congress and the Vietnamese National Assembly approved a
comprehensive bilateral trade agreement, which, among other
things, provides reciprocal, non-discriminatory Normal Trade
Relations (NTR) between the U.S. and Vietnam.
Following that approval, the U.S. granted an annual
extension of NTR to Vietnam. The U.S. President must renew
this grant annually with the opportunity for review by Congress.
In June 2005, President Bush renewed NTR for Vietnam for an
additional year and we anticipate Congress will support this
decision, as it has done for the past four years. We currently
believe that, absent unforeseen circumstances, the President
will continue his annual extensions of NTR to Vietnam and that
Congress will support the Presidents decisions. The annual
extensions on NTR will remain in place until Vietnam enters the
WTO, at which time the U.S. must grant Vietnam permanent
NTR. Vietnams WTO accession negotiations are ongoing, and
may conclude as early as the end of 2005. Ongoing NTR trading
status for Vietnam will allow us to expand our production and
marketing opportunities in Vietnam and allow for
Vietnamese-sourced product to continue to enter the United
States at NTR tariff rates.
7
Competition
The athletic footwear, apparel and equipment industry is keenly
competitive in the United States and on a worldwide basis. We
compete internationally with an increasing number of athletic
and leisure shoe companies, athletic and leisure apparel
companies, sports equipment companies, and large companies
having diversified lines of athletic and leisure shoes, apparel
and equipment, including Reebok, Adidas and others. The intense
competition and the rapid changes in technology and consumer
preferences in the markets for athletic and leisure footwear and
apparel, and athletic equipment, constitute significant risk
factors in our operations.
NIKE is the largest seller of athletic footwear and athletic
apparel in the world. Performance and reliability of shoes,
apparel, and equipment, new product development, price, product
identity through marketing and promotion, and customer support
and service are important aspects of competition in the athletic
footwear, apparel and equipment industry. To help market our
products, we contract with prominent and influential athletes,
coaches, teams, colleges and sports leagues to endorse our
brands and use our products, and we actively sponsor sporting
events and clinics. We believe that we are competitive in all of
these areas.
Trademarks and Patents
We utilize trademarks on nearly all of our products and believe
that having distinctive marks that are readily identifiable is
an important factor in creating a market for our goods, in
identifying the Company, and in distinguishing our goods from
the goods of others. We consider our NIKE® and Swoosh
Design® trademarks to be among our most valuable assets and
we have registered these trademarks in over 100 countries.
In addition, we own many other trademarks that we utilize in
marketing our products. We continue to vigorously protect our
trademarks against infringement.
NIKE has an exclusive, worldwide license to make and sell
footwear using patented Air technology. The process
utilizes pressurized gas encapsulated in polyurethane. Some of
the early NIKE AIR® patents have expired, which may enable
competitors to use certain types of similar technology.
Subsequent NIKE AIR patents will not expire for several years.
We also have hundreds of U.S. and foreign patents covering
components, features, and designs used in various athletic and
leisure shoes, apparel and equipment. These patents expire at
various times, and have a remaining duration of from now to at
least 2025, although the duration of patents varies by country.
We believe that our success depends primarily upon skills in
design, research and development, production and marketing
rather than upon our patent position. However, we have followed
a policy of filing applications for United States and foreign
patents on inventions, designs and improvements that we deem
valuable.
Employees
We had approximately 26,000 employees at May 31, 2005.
Management considers its relationship with employees to be
excellent. None of our employees is represented by a union, with
the exception of Bauer NIKE Hockey Inc. Of Bauer NIKE
Hockeys employees, approximately 33 percent, or
approximately 157, are covered by two union collective
bargaining agreements with two separate bargaining units. The
collective bargaining agreements expire on various dates from
2005 through 2007. There has never been a material interruption
of operations due to labor disagreements.
Executive Officers of the Registrant
The executive officers of NIKE as of July 25, 2005 are as
follows:
Philip H. Knight, Chairman of the Board
Mr. Knight, 67, a director since 1968, is a co-founder of
NIKE and, except for the period from June 1983 through September
1984, served as its President from 1968 to 1990, and from June
2000 to December 2004. Prior to 1968, Mr. Knight was a
certified public accountant with Price Waterhouse and
Coopers & Lybrand and was an Assistant Professor of
Business Administration at Portland State University.
8
William D. Perez, Chief Executive Officer and
President Mr. Perez, 57, joined NIKE in
December 2004 as CEO and President. Immediately prior to joining
NIKE, he was President and Chief Executive Officer of S. C.
Johnson & Son, Inc., a household consumer products
company in Racine, Wisconsin, a position he held since 1997.
Mr. Perez joined S. C. Johnson & Son, Inc. in
1970, where he held a number of senior positions in marketing,
regional management, and global management, becoming President
and Chief Operating Officer of Worldwide Consumer Products in
1993. Mr. Perez is also a director of Kellogg Company,
where he serves on the Audit Committee and the Consumer
Marketing Committee.
Donald W. Blair, Vice President and Chief Financial
Officer Mr. Blair, 47, joined NIKE in November
1999. Prior to joining NIKE, he held a number of financial
management positions with Pepsico, Inc., including Vice
President, Finance of Pepsi-Cola Asia, Vice President, Planning
of PepsiCos Pizza Hut Division, and Senior Vice President,
Finance of The Pepsi Bottling Group, Inc. Prior to joining
Pepsico, Mr. Blair was a certified public accountant with
Deloitte, Haskins, and Sells.
Thomas E. Clarke, President of New Ventures
Dr. Clarke, 54, a director from 1994 to 2004, joined NIKE
in 1980. He was appointed divisional Vice President in charge of
marketing in 1987, elected corporate Vice President in 1989,
appointed General Manager in 1990, and served as President and
Chief Operating Officer from 1994 to 2000. Dr. Clarke
previously held various positions with the Company, primarily in
research, design, development and marketing. Dr. Clarke
holds a doctorate degree in biomechanics.
Wesley A. Coleman, Vice President, Global Human
Resources Mr. Coleman, 55, has been employed by
NIKE since 2002 in his current role. Prior to joining NIKE, he
held a number of Human Resource positions over a 20-year period
with S. C. Johnson & Son, Inc., including Vice
President HR, North America and Vice President HR, Asia/ Pacific.
Charles D. Denson, President of the NIKE
Brand Mr. Denson, 49, has been employed by NIKE
since 1979. Mr. Denson held several positions within the
Company, including his appointments as Director of USA Apparel
Sales in 1994, divisional Vice President, US Sales in 1994,
divisional Vice President European Sales in 1997, divisional
Vice President and General Manager, NIKE Europe in 1998, Vice
President and General Manager of NIKE USA in 2000, and President
of the NIKE Brand in 2001.
Gary M. DeStefano, President of USA
Operations Mr. DeStefano, 48, has been employed
by NIKE since 1982, with primary responsibilities in sales and
regional administration. Mr. DeStefano was appointed
Director of Domestic Sales in 1990, divisional Vice President in
charge of domestic sales in 1992, Vice President of Global Sales
in 1996, Vice President and General Manager of Asia Pacific in
1997, and President of USA Operations in 2001.
Trevor Edwards, Vice President, Global Brand
Management Mr. Edwards, 42, joined NIKE in
1992. He was appointed Marketing Manager, Strategic Accounts,
Foot Locker in 1993, Director of Marketing, the Americas in
1995, Director of Marketing, Europe in 1997, Vice President,
Marketing for Europe, Middle East and Africa in 1999, and Vice
President, US Brand Marketing in 2000. Mr. Edwards was
appointed corporate Vice President, Global Brand Management in
2002.
Mindy F. Grossman, Vice President of Global
Apparel Ms. Grossman, 47, joined NIKE in 2000.
Prior to joining NIKE, she was President and Chief Executive
Officer of Polo Jeans Company/ Ralph Lauren, a division of Jones
Apparel Group, Inc. from 1995 to 2000. Prior to that,
Ms. Grossman was Vice President of New Business Development
at Polo Ralph Lauren Corp. from 1994 to 1995, President of The
Warnaco Group Inc. Chaps Ralph Lauren division, and Senior Vice
President of The Warnaco Group Inc. Menswear division from 1991
to 1994.
Adam S. Helfant, Vice President, Global Sports
Marketing Mr. Helfant, 40, joined NIKE in 1995
in the Companys legal department, and was appointed
Director of Business Affairs for Global Sports Marketing in
1997, Director of Global Sports Marketing in 1998, Director of
US Sports Marketing in 2001, Vice President of US Sports
Marketing in 2003, and corporate Vice President, Global Sports
Marketing in August 2004. Prior to joining NIKE, he was in
private practice and an attorney for NHL Enterprises, Inc.
9
P. Eunan McLaughlin, Vice President, Europe, Middle
East & Africa Mr. McLaughlin, 47, joined
NIKE as Director of Sales, NIKE Europe in 1999, and was
appointed Vice President Commercial Sales and Retail in 2000,
Vice President, Asia Pacific in 2001, and Vice President,
Europe, Middle East & Africa in May 2004. Prior to
joining NIKE, he was Partner and Vice President of
Consumer & Retail Practices Division, Korn/ Ferry
International from 1996 to 1999. From 1983 to 1996
Mr. McLaughlin held various positions with Mars, Inc. in
finance, sales, marketing and general management.
D. Scott Olivet, Vice President, NIKE Subsidiaries
and New Business Development Mr. Olivet, 43,
joined NIKE in 2001. Prior to joining NIKE, he was a Senior Vice
President of Gap Inc., responsible for real estate, store
design, and construction across Gap, Banana Republic, and Old
Navy brands from 1998 to 2001. Prior to that, Mr. Olivet
was employed by Bain & Company, an international
strategic consulting firm from 1984 to 1998 (a Partner from 1993
to 1998).
Mark G. Parker, President of the NIKE Brand
Mr. Parker, 49, has been employed by NIKE since 1979 with
primary responsibilities in product research, design and
development, marketing, and brand management. Mr. Parker
was appointed divisional Vice President in charge of development
in 1987, corporate Vice President in 1989, General Manager in
1993, Vice President of Global Footwear in 1998, and President
of the NIKE Brand in 2001.
Eric D. Sprunk, Vice President, Global
Footwear Mr. Sprunk, 41, joined NIKE in 1993.
He was appointed Finance Director and General Manager of the
Americas in 1994, Finance Director, NIKE Europe in 1995,
Regional General Manager, NIKE Europe Footwear in 1998, and Vice
President & General Manager of the Americas in 2000.
Mr. Sprunk was appointed corporate Vice President, Global
Footwear in 2001. Prior to joining NIKE, Mr. Sprunk was a
certified public accountant with Pricewaterhouse from 1987 to
1993.
Lindsay D. Stewart, Vice President and Chief of Staff,
and Secretary Mr. Stewart, 58, joined NIKE as
Assistant Corporate Counsel in 1981. Mr. Stewart became
Corporate Counsel in 1983. He was appointed Vice President and
General Counsel in 1991, and Chief of Staff in 2001. Prior to
joining NIKE, Mr. Stewart was in private practice and an
attorney for Georgia-Pacific Corporation.
Roland P. Wolfram, Vice President and General Manager,
Asia Pacific Mr. Wolfram, 45, joined NIKE as Vice
President, Strategic Planning in 1998, and was appointed Vice
President, Global Operations & Technology in 2002, and
Corporate Vice President, Asia Pacific in April 2004. Prior to
NIKE, Mr. Wolfram was Vice President and General Manager at
Pacific Bell Video Services.
Following is a summary of principal properties owned or leased
by NIKE.
The NIKE World Campus, owned by NIKE and located in Beaverton,
Oregon, USA, is a 176 acre facility of 16 buildings which
functions as our world headquarters and is occupied by almost
6,000 employees engaged in management, research, design,
development, marketing, finance, and other administrative
functions from nearly all divisions of the Company. We also
lease various office facilities in the surrounding metropolitan
area. We lease a similar, but smaller, administrative facility
in Hilversum, The Netherlands, which serves as the headquarters
for the Europe, Middle East and Africa Region.
There are three significant distribution and customer service
facilities for NIKE brand products in the United States. Two of
them are located in Memphis, Tennessee, one of which is leased,
and one is located in Wilsonville, Oregon, which is owned by us.
Cole Haan and Bauer NIKE Hockey also operate a distribution
facility in Greenland, New Hampshire, which is owned by us.
Smaller leased distribution facilities for other brands and
subsidiaries are located in various parts of the country. We
also own or lease distribution and customer service facilities
in many parts of the world, the most significant of which are
the Japan distribution facility located in Tomisatomachi, Japan,
and the Europe distribution facility located in Laakdal,
Belgium, both of which we own.
10
We manufacture NIKE AIR-SOLE cushioning materials and components
at NIKE IHM, Inc. manufacturing facilities located in Beaverton,
Oregon and St. Charles, Missouri, which are owned by us.
Aside from the principal properties described above, we lease
approximately 21 production offices outside the United States,
approximately 100 sales offices and showrooms worldwide, and
approximately 75 administrative offices worldwide. We lease
approximately 377 retail stores worldwide, which consist
primarily of factory outlet stores. See United States
Market and International Markets on
pages 3 and 4 of this report. Our leases expire at
various dates through the year 2034.
|
|
Item 3. |
Legal Proceedings |
There are no material pending legal proceedings, other than
ordinary routine litigation incidental to our business, to which
we are a party or of which any of our property is the subject.
|
|
Item 4. |
Submission of Matters to a Vote of Security Holders |
No matter was submitted during the fourth quarter of the 2005
fiscal year to a vote of security holders, through the
solicitation of proxies or otherwise.
11
PART II
|
|
Item 5. |
Market for Registrants Common Equity, Related
Stockholder Matters and Issuer Purchases of Equity
Securities |
NIKEs Class B Common Stock is listed on the New York
Stock Exchange and trades under the symbol NKE. At July 25,
2005, there were 19,054 holders of record of our Class B
Common Stock and 20 holders of record of our Class A Common
Stock. These figures do not include beneficial owners who hold
shares in nominee name. The Class A Common Stock is not
publicly traded but each share is convertible upon request of
the holder into one share of Class B Common Stock.
We refer to the table entitled Selected Quarterly
Financial Data in Item 6, which lists, for the
periods indicated, the range of high and low closing sales
prices on the New York Stock Exchange. That table also describes
the amount and frequency of all cash dividends declared on our
common stock for the 2005 and 2004 fiscal years.
The following table presents a summary of share repurchases made
by NIKE during the quarter ended May 31, 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 Shares | |
|
Maximum Dollar Value | |
|
|
|
|
Average Price | |
|
Purchased as Part of | |
|
of Shares that May Yet | |
|
|
Total Number of | |
|
Paid per | |
|
Publicly Announced | |
|
Be Purchased Under | |
Period |
|
Shares Purchased | |
|
Share | |
|
Plans or Programs | |
|
the Plans or Programs | |
|
|
| |
|
| |
|
| |
|
| |
|
|
|
|
|
|
|
|
(In millions) | |
March 1 March 31, 2005
|
|
|
1,128,700 |
|
|
$ |
85.48 |
|
|
|
1,128,700 |
|
|
$ |
1,000.0 |
|
April 1 April 30, 2005
|
|
|
448,500 |
|
|
$ |
77.36 |
|
|
|
448,500 |
|
|
|
965.3 |
|
May 1 May 31, 2005
|
|
|
276,300 |
|
|
$ |
77.70 |
|
|
|
276,300 |
|
|
|
943.8 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total
|
|
|
1,853,500 |
|
|
$ |
82.36 |
|
|
|
1,853,500 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
12
|
|
Item 6. |
Selected Financial Data |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Financial History | |
|
|
| |
|
|
2005 | |
|
2004 | |
|
2003 | |
|
2002 | |
|
2001 | |
|
|
| |
|
| |
|
| |
|
| |
|
| |
|
|
(In millions, except per share data and financial ratios) | |
Year Ended May 31,
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Revenues
|
|
$ |
13,739.7 |
|
|
$ |
12,253.1 |
|
|
$ |
10,697.0 |
|
|
$ |
9,893.0 |
|
|
$ |
9,488.8 |
|
Gross margin
|
|
|
6,115.4 |
|
|
|
5,251.7 |
|
|
|
4,383.4 |
|
|
|
3,888.3 |
|
|
|
3,703.9 |
|
Gross margin %
|
|
|
44.5 |
% |
|
|
42.9 |
% |
|
|
41.0 |
% |
|
|
39.3 |
% |
|
|
39.0 |
% |
Restructuring charge, net
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
0.1 |
|
Income before cumulative effect of accounting change
|
|
|
1,211.6 |
|
|
|
945.6 |
|
|
|
740.1 |
|
|
|
668.3 |
|
|
|
589.7 |
|
Cumulative effect of accounting change
|
|
|
|
|
|
|
|
|
|
|
266.1 |
|
|
|
5.0 |
|
|
|
|
|
Net income
|
|
|
1,211.6 |
|
|
|
945.6 |
|
|
|
474.0 |
|
|
|
663.3 |
|
|
|
589.7 |
|
Basic earnings per common share:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Income before accounting change
|
|
|
4.61 |
|
|
|
3.59 |
|
|
|
2.80 |
|
|
|
2.50 |
|
|
|
2.18 |
|
|
Cumulative effect of change in accounting principle
|
|
|
|
|
|
|
|
|
|
|
1.01 |
|
|
|
0.02 |
|
|
|
|
|
|
Net income
|
|
|
4.61 |
|
|
|
3.59 |
|
|
|
1.79 |
|
|
|
2.48 |
|
|
|
2.18 |
|
Diluted earnings per common share:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Income before accounting change
|
|
|
4.48 |
|
|
|
3.51 |
|
|
|
2.77 |
|
|
|
2.46 |
|
|
|
2.16 |
|
|
Cumulative effect of change in accounting principle
|
|
|
|
|
|
|
|
|
|
|
1.00 |
|
|
|
0.02 |
|
|
|
|
|
|
Net income
|
|
|
4.48 |
|
|
|
3.51 |
|
|
|
1.77 |
|
|
|
2.44 |
|
|
|
2.16 |
|
Average common shares outstanding
|
|
|
262.6 |
|
|
|
263.2 |
|
|
|
264.5 |
|
|
|
267.7 |
|
|
|
270.0 |
|
Diluted average common shares outstanding
|
|
|
270.3 |
|
|
|
269.7 |
|
|
|
267.6 |
|
|
|
272.2 |
|
|
|
273.3 |
|
Cash dividends declared per common share
|
|
|
0.95 |
|
|
|
0.74 |
|
|
|
0.54 |
|
|
|
0.48 |
|
|
|
0.48 |
|
Cash flow from operations
|
|
|
1,570.7 |
|
|
|
1,518.5 |
|
|
|
922.0 |
|
|
|
1,082.2 |
|
|
|
656.5 |
|
Price range of common stock
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
High
|
|
|
92.43 |
|
|
|
78.56 |
|
|
|
57.85 |
|
|
|
63.99 |
|
|
|
59.438 |
|
|
Low
|
|
|
68.61 |
|
|
|
49.60 |
|
|
|
38.53 |
|
|
|
40.81 |
|
|
|
35.188 |
|
At May 31,
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Cash and equivalents
|
|
$ |
1,388.1 |
|
|
$ |
828.0 |
|
|
$ |
634.0 |
|
|
$ |
575.5 |
|
|
$ |
304.0 |
|
Short-term investments
|
|
|
436.6 |
|
|
|
400.8 |
|
|
|
|
|
|
|
|
|
|
|
|
|
Inventories
|
|
|
1,811.1 |
|
|
|
1,650.2 |
|
|
|
1,514.9 |
|
|
|
1,373.8 |
|
|
|
1,424.1 |
|
Working capital
|
|
|
4,351.9 |
|
|
|
3,498.1 |
|
|
|
2,766.5 |
|
|
|
2,321.5 |
|
|
|
1,838.6 |
|
Total assets
|
|
|
8,793.6 |
|
|
|
7,908.7 |
|
|
|
6,821.1 |
|
|
|
6,440.0 |
|
|
|
5,819.6 |
|
Long-term debt
|
|
|
687.3 |
|
|
|
682.4 |
|
|
|
551.6 |
|
|
|
625.9 |
|
|
|
435.9 |
|
Redeemable Preferred Stock
|
|
|
0.3 |
|
|
|
0.3 |
|
|
|
0.3 |
|
|
|
0.3 |
|
|
|
0.3 |
|
Shareholders equity
|
|
|
5,644.2 |
|
|
|
4,781.7 |
|
|
|
3,990.7 |
|
|
|
3,839.0 |
|
|
|
3,494.5 |
|
Year-end stock price
|
|
|
82.20 |
|
|
|
71.15 |
|
|
|
55.99 |
|
|
|
53.75 |
|
|
|
41.100 |
|
Market capitalization
|
|
|
21,462.3 |
|
|
|
18,724.2 |
|
|
|
14,758.8 |
|
|
|
14,302.5 |
|
|
|
11,039.5 |
|
Financial Ratios:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Return on equity
|
|
|
23.2 |
% |
|
|
21.6 |
% |
|
|
18.9 |
% |
|
|
18.2 |
% |
|
|
17.8 |
% |
Return on assets
|
|
|
14.5 |
% |
|
|
12.8 |
% |
|
|
11.2 |
% |
|
|
10.9 |
% |
|
|
10.1 |
% |
Inventory turns
|
|
|
4.4 |
|
|
|
4.4 |
|
|
|
4.4 |
|
|
|
4.3 |
|
|
|
4.0 |
|
Current ratio at May 31
|
|
|
3.2 |
|
|
|
2.7 |
|
|
|
2.4 |
|
|
|
2.3 |
|
|
|
2.0 |
|
Price/ Earnings ratio at May 31 (Diluted before accounting
change)
|
|
|
18.3 |
|
|
|
20.3 |
|
|
|
20.2 |
|
|
|
21.8 |
|
|
|
19.0 |
|
13
The Companys Class B Common Stock is listed on the
New York Stock Exchange and trades under the symbol NKE. At
May 31, 2005, there were approximately
200,300 shareholders of Class A and Class B
common stock, including beneficial owners who hold shares in
nominee name.
Selected Quarterly Financial Data
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
1st Quarter | |
|
2nd Quarter | |
|
3rd Quarter | |
|
4th Quarter | |
|
|
| |
|
| |
|
| |
|
| |
|
|
2005 | |
|
2004 | |
|
2005 | |
|
2004 | |
|
2005 | |
|
2004 | |
|
2005 | |
|
2004 | |
|
|
| |
|
| |
|
| |
|
| |
|
| |
|
| |
|
| |
|
| |
|
|
(Unaudited) | |
|
|
(In millions, except per share data and financial ratios) | |
Revenues
|
|
$ |
3,561.8 |
|
|
$ |
3,024.9 |
|
|
$ |
3,148.3 |
|
|
$ |
2,837.1 |
|
|
$ |
3,308.2 |
|
|
$ |
2,904.0 |
|
|
$ |
3,721.4 |
|
|
$ |
3,487.1 |
|
Gross margin
|
|
|
1,585.8 |
|
|
|
1,301.5 |
|
|
|
1,388.1 |
|
|
|
1,199.6 |
|
|
|
1,458.8 |
|
|
|
1,221.9 |
|
|
|
1,682.7 |
|
|
|
1,528.7 |
|
Gross margin %
|
|
|
44.5 |
% |
|
|
43.0 |
% |
|
|
44.1 |
% |
|
|
42.3 |
% |
|
|
44.1 |
% |
|
|
42.1 |
% |
|
|
45.2 |
% |
|
|
43.8 |
% |
Net income
|
|
|
326.8 |
|
|
|
261.2 |
|
|
|
261.9 |
|
|
|
179.1 |
|
|
|
273.4 |
|
|
|
200.3 |
|
|
|
349.5 |
|
|
|
305.0 |
|
Basic earnings per common share
|
|
|
1.24 |
|
|
|
0.99 |
|
|
|
0.99 |
|
|
|
0.68 |
|
|
|
1.04 |
|
|
|
0.76 |
|
|
|
1.34 |
|
|
|
1.16 |
|
Diluted earnings per common share
|
|
|
1.21 |
|
|
|
0.98 |
|
|
|
0.97 |
|
|
|
0.66 |
|
|
|
1.01 |
|
|
|
0.74 |
|
|
|
1.30 |
|
|
|
1.13 |
|
Average common shares outstanding
|
|
|
262.7 |
|
|
|
262.9 |
|
|
|
263.3 |
|
|
|
263.3 |
|
|
|
263.3 |
|
|
|
263.5 |
|
|
|
261.1 |
|
|
|
263.2 |
|
Diluted average common shares outstanding
|
|
|
269.8 |
|
|
|
267.2 |
|
|
|
271.1 |
|
|
|
269.5 |
|
|
|
271.7 |
|
|
|
271.1 |
|
|
|
268.5 |
|
|
|
270.8 |
|
Cash dividends declared per common share
|
|
|
0.20 |
|
|
|
0.14 |
|
|
|
0.25 |
|
|
|
0.20 |
|
|
|
0.25 |
|
|
|
0.20 |
|
|
|
0.25 |
|
|
|
0.20 |
|
Price range of common stock
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
High
|
|
|
77.34 |
|
|
|
57.50 |
|
|
|
87.80 |
|
|
|
67.48 |
|
|
|
92.43 |
|
|
|
74.60 |
|
|
|
88.52 |
|
|
|
78.56 |
|
|
Low
|
|
|
68.61 |
|
|
|
49.60 |
|
|
|
74.52 |
|
|
|
55.07 |
|
|
|
82.60 |
|
|
|
63.22 |
|
|
|
75.10 |
|
|
|
65.81 |
|
|
|
Item 7. |
Managements Discussion and Analysis of Financial
Condition and Results of Operations |
Overview
NIKE designs, develops and markets high quality footwear,
apparel, equipment and accessory products worldwide. We are the
largest seller of athletic footwear and athletic apparel in the
world and sell our products primarily through a combination of
retail accounts, NIKE-owned retail stores, independent
distributors and licensees, in the United States and over 160
countries worldwide. Our goal is to deliver value to our
shareholders by building a profitable portfolio of global
footwear, apparel, equipment and accessories brands. Our
strategy for building this portfolio is focused in four key
areas:
|
|
|
|
|
Deepening our relationship with consumers; |
|
|
|
Delivering superior, innovative products to the marketplace; |
|
|
|
Making our supply chain a competitive advantage, through
operational discipline and excellence; and |
|
|
|
Accelerating growth through focused execution. |
By executing this strategy, we aim to deliver the following
long-term financial goals:
|
|
|
|
|
High single digit revenue growth; |
|
|
|
Mid-teens earnings per share growth; |
|
|
|
Increased return on invested capital and accelerated cash
flows; and |
|
|
|
Consistent results through effective management of our
diversified portfolio of businesses. |
14
In fiscal 2005 we met or surpassed these financial goals. Our
revenues grew 12% to $13.7 billion, net income grew 28% to
$1.2 billion, and we delivered diluted earnings per share
of $4.48, a 28% increase versus fiscal 2004. The impact of
foreign currency changes has had a favorable impact on this
years consolidated results of operations, primarily as a
contributor to the growth in our gross margin percentage. For
fiscal 2005, our consolidated gross margin percentage increased
160 basis points to 44.5%. Additionally, we have improved
our return on invested capital, increased free cash flow from
operations and continued to return cash to shareholders through
dividends and share repurchases. Although in any particular
quarter or fiscal year we may not meet all of the financial
goals outlined above, we continue to believe these are
appropriate long-term goals.
Results of Operations
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
2005 | |
|
2004 | |
|
% Change | |
|
2003 | |
|
% Change | |
|
|
| |
|
| |
|
| |
|
| |
|
| |
Revenues
|
|
$ |
13,739.7 |
|
|
$ |
12,253.1 |
|
|
|
12% |
|
|
$ |
10,697.0 |
|
|
|
15% |
|
Cost of sales
|
|
|
7,624.3 |
|
|
|
7,001.4 |
|
|
|
9% |
|
|
|
6,313.6 |
|
|
|
11% |
|
Gross margin
|
|
|
6,115.4 |
|
|
|
5,251.7 |
|
|
|
16% |
|
|
|
4,383.4 |
|
|
|
20% |
|
|
Gross margin %
|
|
|
44.5 |
% |
|
|
42.9 |
% |
|
|
|
|
|
|
41.0 |
% |
|
|
|
|
Selling and administrative
|
|
|
4,221.7 |
|
|
|
3,702.0 |
|
|
|
14% |
|
|
|
3,154.1 |
|
|
|
17% |
|
|
% of Revenues
|
|
|
30.7 |
% |
|
|
30.2 |
% |
|
|
|
|
|
|
29.5 |
% |
|
|
|
|
Income before income taxes and cumulative effect of accounting
change
|
|
|
1,859.8 |
|
|
|
1,450.0 |
|
|
|
28% |
|
|
|
1,123.0 |
|
|
|
29% |
|
Income before cumulative effect of accounting change
|
|
|
1,211.6 |
|
|
|
945.6 |
|
|
|
28% |
|
|
|
740.1 |
|
|
|
28% |
|
Net income
|
|
|
1,211.6 |
|
|
|
945.6 |
|
|
|
28% |
|
|
|
474.0 |
|
|
|
99% |
|
Diluted earnings per share before accounting change
|
|
|
4.48 |
|
|
|
3.51 |
|
|
|
28% |
|
|
|
2.77 |
|
|
|
27% |
|
Diluted earnings per share
|
|
|
4.48 |
|
|
|
3.51 |
|
|
|
28% |
|
|
|
1.77 |
|
|
|
98% |
|
|
|
|
Fiscal 2005 Compared to Fiscal 2004 |
|
|
|
Consolidated Operating Results |
In fiscal 2005, consolidated revenues grew 12% versus fiscal
2004; three percentage points of this growth is attributed 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
4 percentage points to the consolidated revenue growth, as
all three of our international regions posted higher revenues.
The U.S. Region contributed 3 percentage points of the
consolidated revenue growth for fiscal 2005. Sales in our Other
businesses operating segment drove the remainder of the
improvement of consolidated revenue growth for fiscal 2005.
Converse, a component of the Other businesses, was acquired at
the beginning of the second quarter of fiscal 2004. The
comparison of a full year of results in fiscal 2005 versus a
partial year in fiscal 2004 contributed 1 percentage point
to the consolidated revenue growth. See the accompanying
Notes to Consolidated Financial Statements
(Note 15 Acquisitions) for additional
information related to the acquisition.
During fiscal 2005, our consolidated gross margin percentage
improved 160 basis points versus the prior year, from 42.9%
to 44.5%. The primary factors contributing to the improved gross
margin percentage for fiscal 2005 were as follows:
|
|
|
|
(1) |
Higher gross margins in our international regions, driven
primarily by our Europe, Middle East and Africa (EMEA) Region,
accounted for 90 basis points of the overall margin
improvement in fiscal 2005. This improvement was driven by
changes in currency hedge rates, primarily the euro, partially
offset by lower in-line pricing margins (net revenue for current
product offerings minus product costs) and a higher percentage
of less profitable closeout sales (non-current |
15
|
|
|
|
|
product offerings), the result of higher footwear and apparel
closeout inventories in our EMEA and Asia Pacific regions (as
discussed below): |
|
|
|
|
(a) |
Year-over-year hedge rate improvements contributed approximately
170 basis points to the fiscal 2005 consolidated gross
margin percentage improvement. |
We have hedged the majority of product purchases for fiscal 2006
and a significant portion of those are at more favorable rates
than product purchases in fiscal 2005. Based on these hedge
rates, we expect hedge rates to have a positive impact on our
gross margin percentage during fiscal 2006 as compared to fiscal
2005, with the greater impact occurring during the first half of
the year. See the accompanying Notes to Consolidated
Financial Statements (Note 16 Risk Management
and Derivatives) for additional information on hedges.
|
|
|
|
(b) |
Lower in-line pricing margins in EMEA and Asia Pacific were due
to strategies to improve product value in these regions. In
addition, increased levels of closeout sales and lower closeout
pricing, the result of the liquidation of higher footwear and
apparel closeout inventories this year, reduced the overall
gross margin percentage improvement in those regions. Together,
these factors resulted in a reduction in the consolidated gross
margin percentage of about 60 basis points for fiscal 2005. |
|
|
|
|
(2) |
Higher gross margins in the U.S. Region contributed
approximately 30 basis points to the improvement in the
consolidated gross margin percentage for fiscal 2005. Fewer,
more profitable closeouts in footwear drove the improvement
partially offset by increased sales discounts (the result of
increased sales to high volume accounts) and higher product
costs and air freight incurred to meet strong footwear demand. |
|
|
(3) |
Improved gross margin percentages in our Other businesses
represented 30 basis points of improvement for fiscal 2005.
The addition of Converse (acquired in the second quarter of
fiscal 2004) and Exeter Brands Group (formed in the first
quarter of fiscal 2005) drove the gross margin percentage
improvement. Both Exeter Brands Group and the international
portion of Converses business operate on a licensing
model, which carries higher gross margins and lower operating
expenses than the remainder of our Other businesses. |
Fiscal 2005 selling and administrative expense, comprised of
demand creation and operating overhead, grew 14% versus fiscal
2004. Three percentage points of the increase for fiscal 2005
were due to changes in currency exchange rates. The impact of a
full fiscal year for Converse and the formation of Exeter Brands
Group added one percentage point of growth.
Demand creation (advertising and promotion) expense grew 16% to
$1,600.7 million in fiscal 2005. Three percentage points of
the increase in demand creation were due to changes in currency
exchange rates. Excluding the impact of changes in foreign
currency rates, the increase in demand creation spending for the
fiscal year was attributable to higher spending on sports
marketing endorsement contracts and events primarily in the
U.S., EMEA and Asia Pacific regions (5 percentage points),
higher advertising spending primarily in the EMEA Region
(3 percentage points), and incremental investment in retail
marketing in the U.S., EMEA and Asia Pacific regions
(2 percentage points). The addition of Converse and
formation of Exeter Brands Group contributed 2 percentage
points of the demand creation increase for the year.
Operating overhead for fiscal 2005 was $2,621.0 million, a
13% increase over fiscal 2004. Changes in currency exchange
rates contributed 3 percentage points of the increase.
Excluding the effects of foreign currency, operating overhead
increases for fiscal 2005 were mainly attributable to higher
personnel costs due to increased headcount, higher wages and
benefits and increased incentive-based compensation for
employees (4 percentage points), investments in emerging
markets (such as China, India and our Central Europe, Middle
East and Africa unit) and our Other businesses
(3 percentage points), increased costs due to sales and
leadership events (2 percentage points) and investments in
NIKE-owned retail stores (1 percentage point).
16
The most significant component of other expense, net, of
$29.1 million for fiscal 2005 was foreign currency hedge
losses. These losses are reflected in the Corporate line in our
segment presentation of pre-tax income in the accompanying
Notes to Consolidated Financial Statements
(Note 17 Operating Segments and Related
Information). The hedge losses reflect that the euro has
strengthened since we entered into these hedge contracts. In
fiscal 2004, foreign currency hedge losses were also the most
significant component of other expense, net, of
$74.7 million. The year-over-year improvement in other
expense, net, for fiscal 2005 was mainly due to lower foreign
currency hedge losses and lower net losses on asset disposals
compared to those recorded in fiscal 2004.
In 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 combined impact of lower foreign currency conversion losses
and the favorable translation of foreign-currency denominated
profits is a $95 million addition to consolidated income
before income taxes compared to the prior year. If current
exchange rates remain constant, we do not expect a significant
impact on our consolidated income before income taxes related to
foreign currency gains or losses and the offsetting translation
for fiscal 2006 as compared to fiscal 2005.
Our effective tax rate for fiscal 2005 was 34.9%, which is
slightly higher than the fiscal 2004 rate of 34.8% primarily due
to decreases in tax credits partially offset by lower taxes on
foreign earnings in fiscal 2005.
During the fourth quarter of fiscal 2005 we decided to
repatriate $500 million of foreign earnings during fiscal
2006 under 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. We elected to repatriate a combination of foreign
earnings for which U.S. taxes had previously been provided
and foreign earnings that had been designated as permanently
reinvested. Accordingly, the provisions made did not have a
material impact on our income tax expense or our effective tax
rate for the year.
Worldwide futures and advance orders for footwear and apparel
scheduled for delivery from June through November 2005 were 9.5%
higher than such orders reported for the comparable period of
fiscal 2004. Approximately 1 point of this reported increase was
due to changes in currency exchange rates versus the same period
last year. Excluding this currency impact, slightly higher
average selling prices for both footwear and apparel contributed
1 point 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, foreign
currency 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, Exeter Brands Group, Hurley, NIKE Golf and retail
sales across all brands.
17
The breakdown of revenues follows:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
FY05 vs. | |
|
|
|
FY04 vs. | |
|
|
|
|
|
|
FY04 | |
|
|
|
FY03 | |
|
|
Fiscal 2005 | |
|
Fiscal 2004* | |
|
% CHG | |
|
Fiscal 2003* | |
|
% CHG | |
|
|
| |
|
| |
|
| |
|
| |
|
| |
|
|
(Dollars in millions) | |
U.S. Region
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Footwear
|
|
$ |
3,358.2 |
|
|
$ |
3,070.4 |
|
|
|
9 |
% |
|
$ |
3,019.5 |
|
|
|
2 |
% |
|
Apparel
|
|
|
1,457.7 |
|
|
|
1,433.5 |
|
|
|
2 |
% |
|
|
1,351.0 |
|
|
|
6 |
% |
|
Equipment
|
|
|
313.4 |
|
|
|
277.9 |
|
|
|
13 |
% |
|
|
266.9 |
|
|
|
4 |
% |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total U.S.
|
|
|
5,129.3 |
|
|
|
4,781.8 |
|
|
|
7 |
% |
|
|
4,637.4 |
|
|
|
3 |
% |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
EMEA Region
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Footwear
|
|
|
2,500.0 |
|
|
|
2,232.2 |
|
|
|
12 |
% |
|
|
1,896.0 |
|
|
|
18 |
% |
|
Apparel
|
|
|
1,497.1 |
|
|
|
1,333.8 |
|
|
|
12 |
% |
|
|
1,133.1 |
|
|
|
18 |
% |
|
Equipment
|
|
|
284.5 |
|
|
|
261.7 |
|
|
|
9 |
% |
|
|
192.4 |
|
|
|
36 |
% |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total EMEA
|
|
|
4,281.6 |
|
|
|
3,827.7 |
|
|
|
12 |
% |
|
|
3,221.5 |
|
|
|
19 |
% |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Asia Pacific Region
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Footwear
|
|
|
962.9 |
|
|
|
855.3 |
|
|
|
13 |
% |
|
|
730.6 |
|
|
|
17 |
% |
|
Apparel
|
|
|
755.5 |
|
|
|
612.3 |
|
|
|
23 |
% |
|
|
497.8 |
|
|
|
23 |
% |
|
Equipment
|
|
|
178.9 |
|
|
|
143.2 |
|
|
|
25 |
% |
|
|
112.2 |
|
|
|
28 |
% |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total Asia Pacific
|
|
|
1,897.3 |
|
|
|
1,610.8 |
|
|
|
18 |
% |
|
|
1,340.6 |
|
|
|
20 |
% |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Americas Region
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Footwear
|
|
|
478.6 |
|
|
|
408.2 |
|
|
|
17 |
% |
|
|
334.8 |
|
|
|
22 |
% |
|
Apparel
|
|
|
169.1 |
|
|
|
159.5 |
|
|
|
6 |
% |
|
|
143.2 |
|
|
|
11 |
% |
|
Equipment
|
|
|
48.1 |
|
|
|
36.8 |
|
|
|
31 |
% |
|
|
31.1 |
|
|
|
18 |
% |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total Americas
|
|
|
695.8 |
|
|
|
604.5 |
|
|
|
15 |
% |
|
|
509.1 |
|
|
|
19 |
% |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
12,004.0 |
|
|
|
10,824.8 |
|
|
|
11 |
% |
|
|
9,708.6 |
|
|
|
11 |
% |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Other
|
|
|
1,735.7 |
|
|
|
1,428.3 |
|
|
|
22 |
% |
|
|
988.4 |
|
|
|
45 |
% |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total Revenues
|
|
$ |
13,739.7 |
|
|
$ |
12,253.1 |
|
|
|
12 |
% |
|
$ |
10,697.0 |
|
|
|
15 |
% |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
* |
Certain prior year amounts have been reclassified to conform to
fiscal year 2005 presentation. |
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 17
Operating Segments and Related Information in the
accompanying Notes to Consolidated Financial Statements,
certain corporate costs are not included in pre-tax income of
our operating segments.
For EMEA, changes in foreign currency exchange rates accounted
for 7 percentage points of the reported revenue growth in
fiscal 2005. Excluding the effects of foreign currency, EMEA
Region revenues grew 5 percent as each product business
unit (footwear, apparel and equipment) experienced growth. The
following analysis excludes the impact of changes in foreign
currency. The increase over the prior year was primarily driven
by increased unit sales of footwear, apparel and equipment
partially offset by declines in the average prices in each of
the business units. Although apparel and equipment business
units experienced growth for fiscal 2005, revenues fell slightly
in the fourth quarter primarily due to comparisons to very
strong sales in the prior years fourth quarter related to
the 2004 European Football Championships. For fiscal 2005, sales
increases in the emerging markets in our Central Europe, Middle
East and Africa unit, along with sales increases in the UK and
Italy, drove the growth. These increases were partially offset
by lower sales in France, Germany and Northern Europe.
18
For the EMEA Region, futures orders scheduled for delivery from
June through November 2005 were 7 percentage points higher
than such orders received 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 regions footwear and apparel unit orders and
increases in apparels average price. These increases were
partially offset by a decrease in the regions footwear
average price per pair, partially due to strategies to improve
the product value.
EMEA pre-tax income for fiscal 2005 was $917.5 million, up
23% versus the prior year. Higher revenues and gross margin
improvements drove the increase, more than offsetting increased
selling and administrative costs. The improved gross margins,
which contributed 90 basis points of growth to the
consolidated gross margin percentage, were primarily the result
of improved year-over-year hedge rates partially offset by
reduced in-line pricing margins and higher, less profitable
closeout sales.
In the Asia Pacific Region, 4 percentage points of reported
revenue growth for the fiscal year were due to changes in
currency exchange rates. The following analysis excludes the
impact of changes in foreign currency. Sales in each Asia
Pacific product business unit grew versus fiscal 2004 with the
growth primarily due to unit volume; average price per unit
increased slightly. Significant revenue increases in China
(driven by expansion of retail distribution and strong consumer
demand) and increases in every other country in the region
except Australia and New Zealand were the key growth drivers for
fiscal 2005.
For the Asia Pacific Region, futures orders scheduled for
delivery from June through November 2005 were 11 percentage
points higher than such orders received 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 regions footwear and apparel unit
orders. These increases were partially offset by a decrease in
the regions average selling price per unit for footwear
and apparel.
Pre-tax income for the Asia Pacific Region increased 13% versus
fiscal 2004 to $399.8 million. Higher revenues were
partially offset by a lower gross margin percentage and
increased selling and administrative costs. The reduced gross
margin percentage, which had a minimal negative impact on the
net overall consolidated gross margin percentage change, was
primarily attributable to less profitable closeout sales and
reduced in-line pricing margins due to strategies to improve the
product value, partially offset by better year-over-year
currency hedge rates.
In the Americas Region, 1 percentage point of the revenue
growth for fiscal 2005 was due to changes in currency exchange
rates. Excluding the effects of changes in foreign currency,
sales in each Americas product business unit grew in fiscal
2005. The revenue growth was driven primarily by higher sales in
Central and South America, partially offset by lower sales in
Canada.
In fiscal 2005, pre-tax income for the Americas Region increased
21% from the prior year, to $117.6 million. The increase in
pre-tax income was attributable to higher revenues and an
improved gross margin percentage, partially offset by higher
selling and administrative costs. The improved gross margin
percentage had a minimal impact on the consolidated gross margin
percentage improvement.
In the U.S. Region, revenues for fiscal 2005 grew 7% versus
fiscal 2004, as revenues increased in each product business
unit. The increase in footwear revenue was due to a
5 percentage point increase in unit sales and a
4 percentage point increase in the average price per pair.
The increases in unit sales and the average price per pair are
due to increased consumer demand for performance products,
especially those with a suggested retail price over $100.
The increase in apparel sales for fiscal 2005 was driven by
volume increases in branded apparel, partially offset by a
decline in revenue from sales of licensed apparel. The decline
in revenue from licensed apparel was due to the expiration of
our license agreement with the NBA, in the second quarter of
fiscal 2005, and a shift in consumer preference towards branded
apparel. For the first quarter and into the second quarter of
fiscal 2006, we expect revenues generated by licensed apparel to
be below the prior year levels due to the expiration of the
agreement with the NBA.
19
For the U.S. Region, futures orders scheduled for delivery
from June through November 2005 increased 9 percentage
points versus the same period of the prior year. Futures orders
increased due to unit growth for both footwear and apparel and
higher average price per pair for footwear. 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
U.S. Region for the first quarter of fiscal 2006 is
expected to be below the reported futures growth.
For fiscal 2005, pre-tax income for the U.S. Region was
$1,125.8 million, a 12% increase versus fiscal 2004. Higher
revenues and improved gross margin percentage drove the
increase, more than offsetting higher selling and administrative
costs. The improved gross margin percentage contributed
30 basis points of growth to the consolidated gross margin
percentage growth and was primarily the result of fewer, more
profitable closeouts partially offset by increased discounts and
higher product costs and air freight incurred to meet strong
footwear demand.
Revenues and pre-tax income for our Other businesses in 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 Companys 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 fiscal 2005, the addition of
Converse, acquired in the second quarter of fiscal 2004, and the
formation of Exeter Brands Group together drove
12 percentage points of the Other business revenue increase
of 22% over fiscal 2004. The remainder of the increase was
driven by revenue growth at Cole Haan, NIKE Golf and Hurley.
Pre-tax income from the Other businesses improved to
$153.9 million in fiscal 2005, versus income of
$75.3 million in fiscal 2004. The year-over-year
improvement was driven by the addition of Converse, improved
results from Cole Haan and Bauer and the formation of the Exeter
Brands Group.
|
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Fiscal 2004 Compared to Fiscal 2003 |
|
|
|
Consolidated Operating Results |
In fiscal 2004, consolidated revenues grew 15% versus fiscal
2003; seven percentage points of this growth were due 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
3 percentage points to the consolidated revenue growth and
all three of our international regions posted higher revenues,
with our Asia Pacific Region making the largest contribution.
Converse, which was acquired at the beginning of the second
quarter of fiscal 2004, contributed 2 percentage points of
consolidated revenue growth. Improved sales in the
U.S. Region and increases in our Other businesses drove the
balance of the consolidated revenue growth.
During fiscal 2004, our consolidated gross margin percentage
improved 190 basis points versus the prior year, from 41.0%
to 42.9%. The primary factors contributing to the improved gross
margin percentage for fiscal 2004 were as follows:
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|
(1) |
Changes in hedge rates, primarily the euro, represented
70 basis points of improvement for fiscal 2004. The
positive impact of hedge rates on the fiscal 2004 gross margin
percentage was most significant in the fourth quarter,
contributing 140 basis points of the year-over-year
quarterly improvement. |
|
|
(2) |
Higher in-line pricing margins drove approximately 70 basis
points of the improvement in the consolidated gross margin
percentage for fiscal 2004. This was primarily attributable to
improved footwear margins as a result of lower product costs due
to manufacturing efficiencies, reduced materials costs and lower
air freight. |
|
|
(3) |
Improved profitability on wholesale closeout sales, primarily in
the U.S. and EMEA regions due to improved closeout pricing
margins, partially offset by increased obsolescence reserves due
to a less favorable mix of product remaining in closeout
inventory. These factors |
20
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|
represented approximately 10 basis points of the
improvement in the consolidated gross margin percentage for
fiscal 2004. |
|
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|
(4) |
Most of the remaining increase was due to improved gross margin
percentages for NIKE-owned retail stores in the U.S. and EMEA
regions, which contributed approximately 30 basis points of
the improvement in consolidated gross margins for fiscal 2004. |
Fiscal 2004 selling and administrative expense grew 17% versus
fiscal 2003. Demand creation expense grew 18% to
$1,377.9 million in fiscal 2004. Seven percentage points of
the increase in demand creation were due to changes in currency
exchange rates. Excluding the impact of changes in foreign
currency rates, the increase in demand creation spending for the
fiscal year was attributable to higher spending on endorsement
contracts in the U.S., primarily basketball (3 percentage
point impact), incremental investment in retail marketing in the
U.S., EMEA and Asia Pacific regions (3 percentage point
impact), and higher advertising spending in the Asia Pacific
region (1 percentage point impact). The addition of
Converse contributed 2 percentage points of the demand
creation increase for the year.
Operating overhead for fiscal 2004 was $2,324.1 million, a
17% increase over fiscal 2003. Currency exchange rates
contributed 5 percentage points of the increase. The
addition of Converse accounted for 2 percentage points of
growth. Other key factors driving the increase in operating
overhead for the fiscal year were: (a) increased
incentive-based compensation for employees (3 percentage
points); and (b) increased costs to support the growth of
our NIKE Golf, Cole Haan, Bauer NIKE Hockey and Hurley
businesses (2 percentage points). The remaining increase,
about 5 percentage points, is primarily attributable to
normal wage increases and some added infrastructure necessary to
support global business growth, including costs related to our
worldwide supply chain initiative and additional factory outlet
stores in the EMEA Region.
Other expense, net, was $74.7 million for fiscal 2004
compared to $77.5 million in fiscal 2003. In both years,
the most significant component of other expense, net, was
foreign currency hedge losses. The hedge losses reflect that the
euro strengthened considerably since we entered into these hedge
contracts. Also included in other expense, net, for fiscal 2004
was an increase in net losses on asset disposals, including a
loss of $5.3 million on land gifted to the NIKE Foundation
in the first quarter.
In 2004, 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 $157 million addition to consolidated income before
income taxes compared to the prior year.
Our effective tax rate for fiscal 2004 was 34.8%, which is
higher than the fiscal 2003 rate of 34.1% as a result of a
higher tax provision on foreign earnings in fiscal 2004.
Included in net income for fiscal 2003 was a $266.1 million
charge for the cumulative effect of implementing Statement of
Financial Accounting Standard (SFAS) No. 142,
Goodwill and Other Intangible Assets,
(FAS 142). This charge related to the impairment of
goodwill and trademarks associated with Bauer NIKE Hockey and
the goodwill of Cole Haan, reflecting that the fair values we
estimated for these assets were less than the carrying values.
See the accompanying Notes to Consolidated Financial
Statements (Note 4 Identifiable Intangible
Assets and Goodwill) for further information.
For EMEA, changes in foreign currency exchange rates accounted
for 17 percentage points of the reported increase in
revenues in fiscal 2004. The remaining increase over the prior
year was primarily driven by NIKE-owned retail (due to the
addition of new stores in fiscal 2004) and increased footwear
volume (led by soccer products). Excluding the impact of
currency exchange movements, sales in each EMEA business unit
grew versus fiscal 2003.
EMEA pre-tax income for fiscal 2004 was $744.0 million, up
43% versus the prior year. Higher revenues and gross margin
improvements drove the increase, more than offsetting
incremental selling and
21
administrative costs. The improved gross margins were primarily
the result of improved year-over-year hedge rates and higher
in-line and closeout pricing margins.
In the Asia Pacific Region, fiscal 2004 revenues increased 20%
year-over-year. Eight percentage points of growth for the fiscal
year were due to changes in currency exchange rates. Excluding
the impact of currency exchange movements, sales in each Asia
Pacific business unit grew versus fiscal 2003. The regions
revenue growth was primarily due to unit volume increases, with
significant revenue growth in China (driven by expansion of
retail distribution and strong consumer demand) and Japan
(driven by strong consumer demand).
Pre-tax income for the Asia Pacific Region increased to
$352.3 million in fiscal 2004, up 22% versus fiscal 2003.
Higher revenues and gross margin improvements drove the
increase, more than offsetting incremental selling and
administrative costs. The higher gross margins were primarily
attributable to higher in-line pricing margins and the benefit
of better hedge rates on product purchases, partially offset by
lower profitability of closeouts.
In the Americas Region, revenues increased 19% compared to
fiscal 2003, with 8 percentage points of the growth due to
changes in currency exchange rates. Excluding the currency
effects, the revenue growth was driven primarily by stronger
consumer demand in South America and sales in each Americas
business unit grew versus fiscal 2003.
In fiscal 2004, pre-tax income for the Americas Region increased
6% from the prior year, to $97.4 million. The increase in
pre-tax income was attributable to changes in currency exchange
rates slightly offset by reduced gross margins and higher
selling and administrative costs. Gross margins fell due to
lower in-line pricing margins as well as weaker currency
exchange rates in Mexico.
In the U.S. Region, revenues for fiscal 2004 grew 3% versus
fiscal 2003, as revenues increased in each business unit. The
increase in apparel sales was primarily driven by growth in
sport performance product and increased consumer demand for team
licensed apparel primarily in the first half of fiscal 2004.
The increase in footwear revenue was due to an increase in
average wholesale selling price per pair and increased sales in
NIKE-owned retail stores, partially offset by a slight decline
in wholesale unit sales. The increase in average wholesale
selling price per pair was partially due to a larger percentage
of sales of products with a suggested retail price over $100.
The slight decline in U.S. footwear wholesale unit sales
was largely due to changes in distribution to several retail
customers. For the first half of the year, sales to our largest
customer, Foot Locker, were lower as a result of changes to our
distribution strategy implemented in fiscal 2002 and 2003; while
the decline in first half sales resulted in slightly lower sales
for the full year, our year-over-year sales to Foot Locker grew
in the second half of fiscal 2004. In addition, fiscal 2004
sales declined for another large customer, Footstar, which
declared bankruptcy in March 2004. The sales declines for Foot
Locker and Footstar were partially offset by increased sales to
other accounts.
For fiscal 2004, pre-tax income for the U.S. Region was
$1,007.3 million, a 6% increase versus fiscal 2003.
Higher revenues and gross margins drove the increase, more than
offsetting higher selling and administrative costs. The improved
gross margins were primarily the result of higher in-line and
closeout pricing margins and expanded retail margins.
Revenues for Other businesses grew 45% in fiscal 2004 compared
to fiscal 2003; the addition of Converse contributed
23 percentage points of the increase. The remainder of the
increase was due to revenue growth at NIKE Golf, Cole Haan,
Hurley and Bauer NIKE Hockey.
Pre-tax income for Other businesses improved to
$75.3 million in fiscal 2004, versus income of
$7.9 million in fiscal 2003. The addition of Converse,
combined with improved results from NIKE Golf and Cole Haan,
drove the year-over-year improvement.
22
Liquidity and Capital Resources
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Fiscal 2005 Cash Flow Activity |
Cash provided by operations was $1.6 billion in fiscal
2005, compared to $1.5 billion in fiscal 2004. Our primary
source of operating cash flow was net income of
$1.2 billion. In fiscal 2005, cash provided by operations
was not significantly affected by the net change in working
capital. In fiscal 2004, a net decrease in working capital
provided $193.2 million in cash flow primarily due to
improved cash management of our accounts receivable and timing
of inventory receipts and vendor payments.
Cash used by investing activities during fiscal 2005 was
$360.4 million, compared to $950.6 million invested
during fiscal 2004. The most significant uses of cash for
investing activities in fiscal 2005 were net additions to
property, plant and equipment of $250 million, and a net
increase in short-term investments (purchases partially offset
by the maturities). The additions to property, plant and
equipment reflect capital expenditures on computer equipment and
software (to support both normal business operations and our
supply chain systems upgrade), and continued investment in
NIKE-owned retail stores. The improvement over the prior year
was primarily due to lower net purchases of short-term
investments and lower costs associated with the acquisition of
subsidiaries.
In fiscal 2005 and since inception of our current share
repurchase program, we purchased approximately 6.9 million
shares of NIKEs Class B common stock for
$556.2 million. The share repurchases were part of a
four-year $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 ultimate amount of shares purchased under the
program will be dictated by our capital needs and stock market
conditions.
Dividends declared per share of common stock for fiscal 2005
were $0.95, compared to $0.74 in fiscal 2004. We have paid a
dividend every quarter since February 1984. Our current dividend
policy is to provide an annual dividend equal to 20% to 30% of
the trailing twelve-months earnings per share paid out on
a quarterly basis. We review our dividend policy from time to
time, and based upon current projected earnings and cash flow
requirements we anticipate continuing to pay a quarterly
dividend in the foreseeable future.
Our long-term contractual obligations as of May 31, 2005
are as follows:
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Cash Payments Due During the Year Ended May 31, | |
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| |
Description of Commitment |
|
2006 | |
|
2007 | |
|
2008 | |
|
2009 | |
|
2010 | |
|
Thereafter | |
|
Total | |
|
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| |
|
| |
|
| |
|
| |
|
| |
|
| |
|
| |
|
|
(In millions) | |
Operating Leases
|
|
$ |
186.7 |
|
|
$ |
157.6 |
|
|
$ |
135.3 |
|
|
$ |
112.9 |
|
|
$ |
97.8 |
|
|
$ |
556.3 |
|
|
$ |
1,246.6 |
|
Long-term Debt
|
|
|
6.2 |
|
|
|
256.2 |
|
|
|
31.2 |
|
|
|
6.2 |
|
|
|
31.2 |
|
|
|
353.5 |
|
|
|
684.5 |
|
Endorsement Contracts(1)
|
|
|
400.3 |
|
|
|
405.0 |
|
|
|
276.9 |
|
|
|
182.3 |
|
|
|
102.9 |
|
|
|
317.6 |
|
|
|
1,685.0 |
|
Product Purchase Obligations(2)
|
|
|
1,858.2 |
|
|
|
2.8 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
1,861.0 |
|
Other(3)
|
|
|
250.5 |
|
|
|
75.9 |
|
|
|
26.1 |
|
|
|
25.5 |
|
|
|
2.1 |
|
|
|
1.3 |
|
|
|
381.4 |
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|
|
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Total
|
|
$ |
2,701.9 |
|
|
$ |
897.5 |
|
|
$ |
469.5 |
|
|
$ |
326.9 |
|
|
$ |
234.0 |
|
|
$ |
1,228.7 |
|
|
$ |
5,858.5 |
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|
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(1) |
The amounts listed for endorsement contracts represent
approximate amounts of base compensation and minimum guaranteed
royalty fees we are obligated to pay athlete and sport team
endorsers of our products. Actual payments under some contracts
may be higher than the amounts listed as these contracts provide
for bonuses to be paid to the endorsers based upon athletic
achievements and/or royalties on product sales in future
periods. Actual payments under some contracts may also be lower
as these contracts include provisions for reduced payments if
athletic performance declines in future periods. |
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|
In addition to the cash payments, we are obligated to furnish
the endorsers with NIKE products for their use. It is not
possible to determine how much we will spend on this product on
an annual basis as the contracts do not stipulate a specific
amount of cash to be spent on the product. The amount of product |
23
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provided to the endorsers will depend on many factors including
general playing conditions, the number of sporting events in
which they participate, and our own decisions regarding product
and marketing initiatives. In addition, the costs to design,
develop, source, and purchase the products furnished to the
endorsers are incurred over a period of time and are not
necessarily tracked separately from similar costs incurred for
products sold to customers. |
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(2) |
We generally order product four to five months in advance of
sale based primarily on advanced futures orders received from
customers. The amounts listed for product purchase obligations
represent agreements (including open purchase orders) to
purchase products in the ordinary course of business, that are
enforceable and legally binding and that specify all significant
terms. In some cases, prices are subject to change throughout
the production process. The reported amounts exclude product
purchase liabilities included in accounts payable on the
Consolidated Balance Sheet. |
|
(3) |
Other amounts primarily include service and marketing
commitments made in the ordinary course of business. The amounts
represent the minimum payments required by legally binding
contracts and agreements, including open purchase orders for
non-product purchases. The reported amounts exclude those
liabilities included in accounts payable or accrued liabilities
on the Consolidated Balance Sheet. |
Excluded from the table above is a commitment to an outsourcing
contractor that provides us with information technology
operations management services through fiscal 2006. The amount
of the payments in future years depends on our level of monthly
use of the different elements of the contractors services.
If we were to terminate the entire contract as of May 31,
2005, we would be required to provide the contractor with four
months notice and pay a termination fee of
$13.4 million. Our monthly payments to the contractor
currently approximate $7 million. Subsequent to
May 31, 2005, we extended this contract through fiscal 2008
with substantially the same terms as noted above; however, the
termination fee increased to approximately $19 million upon
execution of the renewed contract and our estimated monthly
payments decreased to approximately $6 million.
We also have the following outstanding short-term debt
obligations as of May 31, 2005. Please refer to the
accompanying Notes to Consolidated Financial Statements
(Note 6 Short-term Borrowings and Credit
Lines) for further description and interest rates related to
the short-term debt obligations listed below.
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Outstanding as of | |
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May 31, 2005 | |
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(In millions) | |
Notes payable, due at mutually agreed-upon dates, generally
ninety days from issuance or on demand
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|
$ |
69.8 |
|
Payable to Sojitz Corporation of America (Sojitz America) for
the purchase of inventories, generally due sixty days after
shipment of goods from a foreign port
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|
$ |
53.1 |
|
As of May 31, 2005, letters of credit of
$555.0 million were outstanding, primarily for the purchase
of inventory. All letters of credit generally expire within one
year.
In October 2001, we filed a shelf registration statement with
the Securities and Exchange Commission (SEC) under
which $1 billion in debt securities may be issued. In May
2002, we commenced a medium-term note program under the shelf
registration that allows us to issue up to $500 million in
medium-term notes, as our capital needs dictate. We entered into
this program to provide additional liquidity to meet our working
capital and general corporate cash requirements. During fiscal
2005, there were no medium-term notes issued under the program.
In previous years $240.0 million in medium-term notes were
issued under the program. Currently, $760 million remains
available to be issued under the shelf registration. We may
issue additional notes under the shelf registration in fiscal
2006 depending on general corporate needs.
As of May 31, 2005, we had a multi-year $750 million
revolving credit facility in place with a group of banks, and we
currently have no amounts outstanding under the facility. The
maturity date is November 20,
24
2008 and the facility can be extended for one additional year on
the anniversary date. Based on our current long-term senior
unsecured debt ratings of A+ and A2 from Standard and
Poors Corporation and Moodys Investor Services,
respectively, the interest rate charged on any outstanding
borrowings would be the prevailing LIBOR plus 0.18%. The
facility fee is 0.07% of the total commitment.
If our long-term debt rating were to decline, the facility fee
and interest rate under our committed credit facility would
increase. Conversely, if our long-term debt rating were to
improve, the facility fee and interest rate would decrease.
Changes in our long-term debt rating would not trigger
acceleration of maturity of any then outstanding borrowings or
any future borrowings under the committed credit facilities.
Under this committed credit facility, we have agreed to various
covenants. These covenants include limits on our disposal of
fixed assets and the amount of debt secured by liens we may
incur, and set a minimum capitalization ratio. In the event we
were to have any borrowings outstanding under this facility,
failed to meet any covenant, and were unable to obtain a waiver
from a majority of the banks, any borrowings would become
immediately due and payable. As of May 31, 2005, we were in
full compliance with each of these covenants and believe it is
unlikely we will fail to meet any of these covenants in the
foreseeable future.
Liquidity is also provided by our commercial paper program,
under which there was no amount outstanding at May 31, 2005
or May 31, 2004. We currently have short-term debt ratings
of A1 and P1 from Standard and Poors Corporation and
Moodys Investor Services, respectively.
We currently believe that cash generated by operations, together
with access to external sources of funds as described above,
will be sufficient to meet our operating and capital needs in
the foreseeable future.
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
SFAS No. 123R Share Based Payment,
(FAS 123R) which, after the Securities and Exchange
Commission (SEC) amended the compliance dates on
April 15, 2005, will be effective for our fiscal year
beginning June 1, 2006. The new standard will require us to
record compensation expense for stock options using a fair value
method. On March 29, 2005, the SEC issued Staff Accounting
Bulletin No. 107 (SAB 107), which provides the
Staffs 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
and the transition method to use upon adoption. The impact of
the adoption of FAS 123R is not known at this time due to
these factors as well as the unknown level of share-based
payments granted in future years. The effect on our results of
operations of expensing stock options using the Black-Scholes
model is presented in the accompanying Notes to Consolidated
Financial Statements (Note 1 Significant
Accounting Policies).
Under certain conditions, stock options granted by the Company
are eligible for accelerated vesting upon the retirement of the
employee. The FASB clarified in FAS 123R that the fair
value of such stock options should be expensed based on an
accelerated vesting schedule or immediately, rather than ratably
over the vesting period stated in the grant. Our pro forma
disclosure currently reflects the expense of such options
ratably over the stated vesting period, expensing all unvested
shares upon actual retirement. The SEC has recently clarified
that companies should continue to follow the vesting method they
have been using until adoption of FAS 123R, then apply the
accelerated vesting schedule to all subsequent grants to those
employees eligible for accelerated vesting upon retirement. Had
we been accounting for such stock options
25
using the accelerated vesting schedule for those employees
eligible for accelerated vesting upon retirement, we would have
recognized additional stock-based compensation expense in our
pro forma disclosure of the effect of expensing stock options
presented in the accompanying Notes to Consolidated Financial
Statements (Note 1 Significant Accounting
Policies) of $0.05 per diluted share in fiscal 2005,
2004 and 2003.
Critical Accounting Policies
Our previous 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 of America. 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 below 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.
We record wholesale revenues when title passes and the risks and
rewards of ownership have passed to the customer, based on the
terms of sale. Title passes generally upon shipment or upon
receipt by the customer depending on the country of the sale and
the agreement with the customer. Retail store revenues are
recorded at the time of sale.
In some instances, we ship product directly from our supplier to
the customer and recognize revenue when the product is delivered
to and accepted by the customer. Our revenues may fluctuate in
cases when our customers delay accepting shipment of product for
periods up to several weeks.
In certain countries outside of the U.S., precise information
regarding the date of receipt by the customer is not readily
available. In these cases, we estimate the date of receipt by
the customer based upon historical delivery times by geographic
location. On the basis of our tests of actual transactions, we
have no indication that these estimates have been materially
inaccurate historically.
As part of our revenue recognition policy, we record estimated
sales returns and miscellaneous claims from customers as
reductions to revenues at the time revenues are recorded. We
base our estimates on historical rates of product returns and
claims, and specific identification of outstanding claims and
outstanding returns not yet received from customers. Actual
returns and claims in any future period are inherently uncertain
and thus may differ from our estimates. If actual or expected
future returns and claims were significantly greater or lower
than the reserves we had established, we would record a
reduction or increase to net revenues in the period in which we
made such determination.
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|
|
Reserve for Uncollectible Accounts Receivable |
We make ongoing estimates relating to the collectibility of our
accounts receivable and maintain a reserve for estimated losses
resulting from the inability of our customers to make required
payments. In determining the amount of the reserve, we consider
our historical level of credit losses and make judgments about
the creditworthiness of significant customers based on ongoing
credit evaluations. Since we cannot predict future
26
changes in the financial stability of our customers, actual
future losses from uncollectible accounts may differ from our
estimates. If the financial condition of our customers were to
deteriorate, resulting in their inability to make payments, a
larger reserve might be required. In the event we determined
that a smaller or larger reserve was appropriate, we would
record a credit or a charge to selling and administrative
expense in the period in which we made such a determination.
We also make ongoing estimates relating to the net realizable
value of inventories, based upon our assumptions about future
demand and market conditions. If we estimate that the net
realizable value of our inventory is less than the cost of the
inventory recorded on our books, we record a reserve equal to
the difference between the cost of the inventory and the
estimated net realizable value. This reserve is recorded as a
charge to cost of sales. If changes in market conditions result
in reductions in the estimated net realizable value of our
inventory below our previous estimate, we would increase our
reserve in the period in which we made such a determination and
record a charge to cost of sales.
|
|
|
Contingent Payments under Endorsement Contracts |
A significant portion of our demand creation expense relates to
payments under endorsement contracts. In general, endorsement
payments are expensed uniformly over the term of the contract.
However, certain contract elements may be accounted for
differently, based upon the facts and circumstances of each
individual contract.
Some of the contracts provide for contingent payments to
endorsers based upon specific achievements in their sports
(e.g., winning a championship). We record selling and
administrative expense for these amounts when the endorser
achieves the specific goal.
Some of the contracts provide for payments based upon endorsers
maintaining a level of performance in their sport over an
extended period of time (e.g., maintaining a top ranking in a
sport for a year). These amounts are reported in selling and
administrative expense when we determine that it is probable
that the specified level of performance will be maintained
throughout the period. In these instances, to the extent that
actual payments to the endorser differ from our estimate due to
changes in the endorsers athletic performance, increased
or decreased selling and administrative expense may be reported
in a future period.
Some of the contracts provide for royalty payments to endorsers
based upon a predetermined percentage of sales of particular
products. We expense these payments in cost of sales as the
related sales are made. In certain contracts, we offer minimum
guaranteed royalty payments. For contractual obligations for
which we estimate that we will not meet the minimum guaranteed
amount of royalty fees through sales of product, we record the
amount of the guaranteed payment in excess of that earned
through sales of product in selling and administrative expense
uniformly over the remaining guarantee period.
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|
|
Property, Plant and Equipment |
Property, plant and equipment, including buildings, equipment,
and computer hardware and software is recorded at cost
(including, in some cases, the cost of internal labor) and is
depreciated over its estimated useful life. Changes in
circumstances (such as technological advances or changes to our
business operations) can result in differences between the
actual and estimated useful lives. In those cases where we
determine that the useful life of a long-lived asset should be
shortened, we increase depreciation expense over the remaining
useful life to depreciate the assets net book value to its
salvage value.
When events or circumstances indicate that the carrying value of
property, plant and equipment may be impaired, we estimate the
future undiscounted cash flows to be derived from the asset to
determine whether or not a potential impairment exists. If the
carrying value exceeds our estimate of future undiscounted cash
flows, we then calculate the impairment as the excess of the
carrying value of the asset over our estimate of its fair market
value. Any impairment charges are recorded as other expense,
net. We estimate future undiscounted cash flows using
assumptions about our expected future operating performance. Our
estimates of undiscounted
27
cash flows may change in future periods due to, among other
things, technological changes, economic conditions, changes to
our business operations or inability to meet business plans.
Such changes may result in impairment charges in the period in
which such changes in estimates are made.
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|
|
Goodwill and Other Intangible Assets |
We adopted FAS 142 effective for the first quarter of
fiscal 2003. In accordance with FAS 142, goodwill and
intangible assets with indefinite lives are no longer amortized
but instead measured for impairment at least annually in the
fourth quarter, or when events indicate that an impairment
exists. As required by FAS 142, in our impairment tests for
goodwill and other indefinite-lived intangible assets, we
compare the estimated fair value of goodwill and other
intangible assets to the carrying value. If the carrying value
exceeds our estimate of fair value, we calculate impairment as
the excess of the carrying value over our estimate of fair
value. Our estimates of fair value utilized in goodwill and
other indefinite-lived intangible asset tests may be based upon
a number of factors, including our assumptions about the
expected future operating performance of our reporting units.
Our estimates may change in future periods due to, among other
things, technological change, economic conditions, changes to
our business operations or inability to meet business plans.
Such changes may result in impairment charges recorded in future
periods.
As discussed further above, upon adoption of FAS 142 in
fiscal 2003, we recorded an impairment charge related to
goodwill and other indefinite-lived intangible assets of
$266.1 million. This charge is shown on our consolidated
statement of income as the cumulative effect of accounting
change. Subsequent to adoption, any goodwill impairment charges
would be classified as a separate line item on our consolidated
statement of income as part of income before income taxes and
cumulative effect of accounting change. Other indefinite-lived
intangible asset impairment charges would be classified as other
expense, net.
Intangible assets that are determined to have definite lives are
amortized over their useful lives and are measured for
impairment only when events or circumstances indicate the
carrying value may be impaired. In these cases, we estimate the
future undiscounted cash flows to be derived from the asset to
determine whether or not a potential impairment exists. If the
carrying value exceeds our estimate of future undiscounted cash
flows, we then calculate the impairment as the excess of the
carrying value of the asset over our estimate of its fair value.
Any impairment charges would be classified as other expense, net.
|
|
|
Hedge Accounting for Derivatives |
We use forward exchange contracts and option contracts to hedge
certain anticipated foreign currency exchange transactions, as
well as any resulting receivable or payable balance. When
specific criteria required by SFAS No. 133,
Accounting for Derivative and Hedging Activities, as
amended and interpreted (FAS 133) have been met, changes in
fair values of hedge contracts relating to anticipated
transactions are recorded in other comprehensive income rather
than net income until the underlying hedged transaction affects
net income. In most cases, this results in gains and losses on
hedge derivatives being released from other comprehensive income
into net income some time after the maturity of the derivative.
One of the criteria for this accounting treatment is that the
forward exchange contract amount should not be in excess of
specifically identified anticipated transactions. By their very
nature, our estimates of anticipated transactions may fluctuate
over time and may ultimately vary from actual transactions. When
anticipated transaction estimates or actual transaction amounts
decrease below hedged levels, or when the timing of transactions
changes significantly, we are required to reclassify at least a
portion of the cumulative changes in fair values of the related
hedge contracts from other comprehensive income to other
expense, net during the quarter in which such changes occur.
Once an anticipated transaction estimate or actual transaction
amount decreases below hedged levels, we make adjustments to the
related hedge contract in order to reduce the amount of the
hedge contract to that of the revised anticipated transaction.
We record valuation allowances against our deferred tax assets,
when necessary, in accordance with SFAS No. 109,
Accounting for Income Taxes. Realization of deferred
tax assets (such as net operating loss
28
carryforwards) is dependent on future taxable earnings and is
therefore uncertain. At least quarterly, we assess the
likelihood that our deferred tax asset balance will be recovered
from future taxable income. To the extent we believe that
recovery is not likely, we establish a valuation allowance
against our deferred tax asset, increasing our income tax
expense in the period such determination is made.
In addition, we have not recorded U.S. income tax expense
for foreign earnings that we have determined to be indefinitely
reinvested offshore, thus reducing our overall income tax
expense. The amount of earnings designated as indefinitely
reinvested offshore is based upon the actual deployment of such
earnings in our offshore assets and our expectations of the
future cash needs of our U.S. and foreign entities. Income tax
considerations are also a factor in determining the amount of
foreign earnings to be indefinitely reinvested offshore.
We carefully review all factors that drive the ultimate
disposition of foreign earnings determined to be reinvested
offshore, and apply stringent standards to overcoming the
presumption of repatriation. Despite this approach, because the
determination involves our future plans and expectations of
future events, the possibility exists that amounts declared as
indefinitely reinvested offshore may ultimately be repatriated.
For instance, the actual cash needs of our U.S. entities
may exceed our current expectations, or the actual cash needs of
our foreign entities may be less than our current expectations.
This would result in additional income tax expense in the year
we determined that amounts were no longer indefinitely
reinvested offshore. Conversely, our approach may also result in
a determination that accumulated foreign earnings (for which
U.S. income taxes have been provided) will be indefinitely
reinvested offshore. In this case, our income tax expense would
be reduced in the year of such determination.
On an interim basis, we estimate what our effective tax rate
will be for the full fiscal year. The estimated annual effective
tax rate is then applied to the year-to-date pre-tax income
excluding significant or infrequently occurring items, to
determine the year-to-date tax expense. The income tax effects
of infrequent or unusual items are recognized in the interim
period in which they occur. As the fiscal year progresses, we
continually refine our estimate based upon actual events and
earnings by jurisdiction during the year. This continual
estimation process periodically results in a change to our
expected effective tax rate for the fiscal year. When this
occurs, we adjust the income tax provision during the quarter in
which the change in estimate occurs so that the year-to-date
provision equals the expected annual rate.
In the ordinary course of business, we are involved in legal
proceedings regarding contractual and employment relationships,
product liability claims, trademark rights, and a variety of
other matters. We record contingent liabilities resulting from
claims against us, including related legal costs, when it is
probable that a liability has been incurred and the amount of
the loss is reasonably estimable. We disclose contingent
liabilities when there is a reasonable possibility that the
ultimate loss will materially exceed the recorded liability.
Estimating probable losses requires analysis of multiple
factors, in some cases including judgments about the potential
actions of third party claimants and courts. Therefore, actual
losses in any future period are inherently uncertain. Currently,
we do not believe that any of our pending legal proceedings or
claims will have a material impact on our financial position or
results of operations. However, if actual or estimated probable
future losses exceed our recorded liability for such claims, we
would record additional charges as other expense, net during the
period in which the actual loss or change in estimate occurred.
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Item 7A. |
Quantitative and Qualitative Disclosures about Market
Risk |
In the normal course of business and consistent with established
policies and procedures, we employ a variety of financial
instruments to manage exposure to fluctuations in the value of
foreign currencies and interest rates. It is our policy to
utilize these financial instruments only where necessary to
finance our business and manage such exposures; we do not enter
into these transactions for speculative purposes.
We are exposed to foreign currency fluctuation as a result of
our international sales, product sourcing and funding
activities. Our foreign currency risk management objective is to
reduce the variability of local entity cash flows as a result of
exchange rate movements. We use forward exchange contracts and
options to hedge
29
certain anticipated but not yet firmly committed transactions as
well as certain firm commitments and the related receivables and
payables, including third party or intercompany transactions.
When we begin hedging exposures depends on the nature of the
exposure and market conditions. Generally, all anticipated and
firmly committed transactions that are hedged are to be
recognized within twelve months, although at May 31, 2005
we had forward contracts hedging anticipated transactions that
will be recognized in as many as 24 months. The majority of
the contracts expiring in more than twelve months relate to the
anticipated purchase of inventory by our European and Japanese
subsidiaries. We use forward contracts to hedge non-functional
currency denominated payments under intercompany loan
agreements. When intercompany loans are hedged, it is typically
for their expected duration. Hedged transactions are principally
denominated in euros, Japanese yen, Canadian dollars, Korean
won, Australian dollars, and Mexican pesos.
Our earnings are also exposed to movements in short and
long-term market interest rates. Our objective in managing this
interest rate exposure is to limit the impact of interest rate
changes on earnings and cash flows, and to reduce overall
borrowing costs. To achieve these objectives, we maintain a mix
of medium and long-term fixed rate debt, commercial paper, and
bank loans and have entered into interest rate swaps.
Market Risk Measurement
We monitor foreign exchange risk, interest rate risk and related
derivatives using a variety of techniques including a review of
market value, sensitivity analysis, and Value-at-Risk (VaR). Our
market-sensitive derivative and other financial instruments, as
defined by the SEC, are foreign currency forward contracts,
foreign currency option contracts, interest rate swaps,
intercompany loans denominated in non-functional currencies,
fixed interest rate U.S. dollar denominated debt, and fixed
interest rate Japanese yen denominated debt.
We use VaR to monitor the foreign exchange risk of our foreign
currency forward and foreign currency option derivative
instruments only. The VaR determines the maximum potential
one-day loss in the fair value of these foreign exchange
rate-sensitive financial instruments. The VaR model estimates
assume normal market conditions and a 95% confidence level.
There are various modeling techniques that can be used in the
VaR computation. Our computations are based on
interrelationships between currencies and interest rates (a
variance/ co-variance technique). These
interrelationships are a function of foreign exchange currency
market changes and interest rate changes over the preceding one
year. The value of foreign currency options does not change on a
one-to-one basis with changes in the underlying currency rate.
We adjusted the potential loss in option value for the estimated
sensitivity (the delta and gamma) to
changes in the underlying currency rate. This calculation
reflects the impact of foreign currency rate fluctuations on the
derivative instruments only, and does not include the impact of
such rate fluctuations on non-functional currency transactions
(such as anticipated transactions, firm commitments, cash
balances, and accounts and loans receivable and payable),
including those which are hedged by these instruments.
The VaR model is a risk analysis tool and does not purport to
represent actual losses in fair value that we will incur, nor
does it consider the potential effect of favorable changes in
market rates. It also does not represent the full extent of the
possible loss that may occur. Actual future gains and losses
will differ from those estimated because of changes or
differences in market rates and interrelationships, hedging
instruments and hedge percentages, timing and other factors.
The estimated maximum one-day loss in fair value on our foreign
currency sensitive financial instruments, derived using the VaR
model, was $25.7 and $24.9 million at May 31,
2005 and May 31, 2004, respectively. The increase in VaR as
of May 31, 2005 occurred due to a larger portfolio of
foreign currency derivative instruments which was largely offset
by the effect of lower currency volatility on existing trades on
the May 31, 2005 VaR computation versus the May 31,
2004 VaR computation. Such a hypothetical loss in fair value of
our derivatives would be offset by increases in the value of the
underlying transactions being hedged. The average monthly change
in the fair values of foreign currency forward and foreign
currency option derivative instruments was $37.2 million
and $50.0 million for fiscal 2005 and fiscal 2004,
respectively.
30
Details of other market-sensitive financial instruments and
derivative financial instruments not included in the VaR
calculation above are provided in the table below, except the
interest rate swaps which are described below. These instruments
include intercompany loans denominated in non-functional
currencies, fixed interest rate Japanese yen denominated debt,
fixed interest rate U.S. dollar denominated debt and
interest rate swaps. For debt obligations, the table presents
principal cash flows and related weighted average interest rates
by expected maturity dates.
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|
|
|
|
|
|
|
|
|
|
|
|
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|
Expected Maturity Date | |
|
|
Year Ended May 31, | |
|
|
| |
|
|
2006 | |
|
2007 | |
|
2008 | |
|
2009 | |
|
2010 | |
|
Thereafter | |
|
Total | |
|
Fair Value | |
|
|
| |
|
| |
|
| |
|
| |
|
| |
|
| |
|
| |
|
| |
|
|
(In millions, except interest rates) | |
Foreign Exchange Risk
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|
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|
|
|
|
|
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|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Euro Functional Currency
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Intercompany loan U.S. dollar
denominated Fixed rate
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Principal payments
|
|
$ |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
270.4 |
|
|
$ |
270.4 |
|
|
$ |
270.4 |
|
|
|
|
Average interest rate
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
4.1 |
% |
|
|
4.1 |
% |
|
|
|
|
|
|
Intercompany loan British pound
denominated Fixed rate
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Principal payments
|
|
$ |
67.8 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
$ |
67.8 |
|
|
$ |
67.8 |
|
|
|
|
Average interest rate
|
|
|
5.0 |
% |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
5.0 |
% |
|
|
|
|
U.S. Dollar Functional Currency
|
|
|
|
|
|
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|
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|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Intercompany loan Japanese yen
denominated Variable rate
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Principal payments
|
|
$ |
202.7 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
$ |
202.7 |
|
|
$ |
202.7 |
|
|
|
|
Average interest rate
|
|
|
0.4 |
% |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
0.4 |
% |
|
|
|
|
|
|
Intercompany loan Canadian dollar
denominated Fixed rate
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Principal payments
|
|
$ |
41.2 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
$ |
41.2 |
|
|
$ |
41.2 |
|
|
|
|
Average interest rate
|
|
|
2.9 |
% |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
2.9 |
% |
|
|
|
|
Korean Won Functional Currency
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
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|
|
|
|
|
|
|
|
|
|
|
|
Intercompany loan U.S. Dollar
denominated Fixed rate
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Principal payments
|
|
$ |
40.8 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
$ |
40.8 |
|
|
$ |
40.8 |
|
|
|
|
|
Average interest rate
|
|
|
3.3 |
% |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
3.3 |
% |
|
|
|
|
Japanese Yen Functional Currency
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
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|
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|
|
|
|
|
|
|
|
Long-term Japanese yen debt Fixed rate
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Principal payments
|
|
$ |
6.2 |
|
|
|
6.2 |
|
|
|
6.2 |
|
|
|
6.2 |
|
|
|
6.2 |
|
|
|
161.9 |
|
|
|
192.9 |
|
|
$ |
218.1 |
|
|
|
|
Average interest rate
|
|
|
3.4 |
% |
|
|
3.4 |
% |
|
|
3.4 |
% |
|
|
3.5 |
% |
|
|
3.5 |
% |
|
|
2.6 |
% |
|
|
2.9 |
% |
|
|
|
|
Interest Rate Risk
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Japanese Yen Functional Currency
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Long-term Japanese yen debt Fixed rate
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Principal payments
|
|
$ |
6.2 |
|
|
|
6.2 |
|
|
|
6.2 |
|
|
|
6.2 |
|
|
|
6.2 |
|
|
|
161.9 |
|
|
|
192.9 |
|
|
$ |
218.1 |
|
|
|
|
Average interest rate
|
|
|
3.4 |
% |
|
|
3.4 |
% |
|
|
3.4 |
% |
|
|
3.5 |
% |
|
|
3.5 |
% |
|
|
2.6 |
% |
|
|
2.9 |
% |
|
|
|
|
U.S. Dollar Functional Currency
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Long-term U.S. dollar debt Fixed rate
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Principal payments
|
|
$ |
|
|
|
|
250.0 |
|
|
|
25.0 |
|
|
|
|
|
|
|
25.0 |
|
|
|
190.0 |
|
|
$ |
490.0 |
|
|
$ |
502.9 |
|
|
|
|
Average interest rate
|
|
|
5.3 |
% |
|
|
5.2 |
% |
|
|
5.1 |
% |
|
|
5.1 |
% |
|
|
5.1 |
% |
|
|
5.1 |
% |
|
|
5.1 |
% |
|
|
|
|
31
Intercompany loans and related interest amounts eliminate in
consolidation. Intercompany loans are generally hedged against
foreign exchange risk through the use of forward contracts with
third parties, as discussed above.
The fixed interest rate Japanese yen denominated debts were
issued by and are accounted for by two of our Japanese
subsidiaries. Accordingly, the monthly remeasurement of these
instruments due to changes in foreign exchange rates is
recognized in accumulated other comprehensive income upon the
consolidation of these subsidiaries.
There were no significant changes in debt market risks during
fiscal 2005. We did not issue any long-term fixed-rate corporate
bonds during fiscal 2005; however, during fiscal 2002, 2003 and
fiscal 2004 we issued a total of $490 million in long-term
fixed-rate corporate bonds that mature between August 2006 and
October 2015. Fixed interest rates on these bonds range from
4.7% to 5.66%. For each of the bonds issued in fiscal 2002, 2003
and fiscal 2004, we have entered into interest rate swap
agreements whereby we receive fixed interest payments at the
same rate as the bonds and pay variable interest payments based
on the three-month or six-month LIBOR plus a spread. As a result
of the interest rate swap agreements the average effective
interest rate payable on these bonds was 4.17% at May 31,
2005 and 2.4% at May 31, 2004. Each swap has the same
notional amount and maturity date as the corresponding bond,
except for one swap for a $50 million bond issued in fiscal
2004. The $50 million bond issued in fiscal 2004 matures in
October 2013 whereas the associated interest rate swap expires
in October 2006. These interest rate swaps are accounted for as
fair value hedges, so changes in the recorded fair values of the
swaps are offset by changes in the recorded fair value of the
related debt, except for the $50 million swap expiring in
October 2006 which is not accounted for as a hedge. Accordingly,
changes in the fair value of this swap are recorded to net
income each period. The recorded fair value of the interest rate
swaps accounted for as fair value hedges was a net
$9.0 million gain at May 31, 2005 and a
$3.3 million gain at May 31, 2004. The recorded fair
value of the $50 million interest rate swap expiring
October 2006 was not material for the years ended May 31,
2005 and 2004.
In fiscal 2003 we also entered into an interest rate swap
agreement related to a Japanese yen denominated intercompany
loan with one of our Japanese subsidiaries. The Japanese
subsidiary pays variable interest on the intercompany loan based
on 3-month LIBOR plus a spread. Under the interest rate swap
agreement, the subsidiary pays fixed interest payments at 0.8%
and receives variable interest payments based on 3-month LIBOR
plus a spread based on a notional amount of 8 billion
Japanese yen. This interest rate swap is not accounted for as a
hedge, accordingly changes in the fair value of the swap are
recorded to net income each period. The recorded fair value of
the swap was not material for the years ended May 31, 2005,
2004 and 2003.
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 NIKEs 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 SEC, 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
32
consumer preferences, consumer demand for NIKE products, and the
various market factors described above; difficulties in
implementing, operating, and maintaining NIKEs
increasingly complex information systems and controls,
including, without limitation, the systems related to demand and
supply planning, and inventory control; interruptions in data
and communications systems; 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, currency exchange rate fluctuations, order
cancellations, and the fact that a significant portion of our
revenue is not derived from futures orders; the ability of NIKE
to sustain, manage or forecast its growth and inventories; the
size, timing and mix of purchases of NIKEs 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; increases in borrowing costs due to any decline in
our debt ratings; changes in business strategy or development
plans; general risks associated with doing business outside the
United States, including without limitation, import duties,
tariffs, quotas, political and economic instability, and
terrorism; 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 NIKEs 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
NIKEs 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.
|
|
Item 8. |
Financial Statements and Supplemental Data |
Management of NIKE, Inc. is responsible for the information and
representations contained in this report. The financial
statements have been prepared in conformity with the generally
accepted accounting principles we considered appropriate in the
circumstances and include some amounts based on our best
estimates and judgments. Other financial information in this
report is consistent with these financial statements.
Our accounting systems include controls designed to reasonably
assure that assets are safeguarded from unauthorized use or
disposition and which provide for the preparation of financial
statements in conformity with generally accepted accounting
principles. These systems are supplemented by the selection and
training of qualified financial personnel and an organizational
structure providing for appropriate segregation of duties.
An Internal Audit department reviews the results of its work
with the Audit Committee of the Board of Directors, presently
consisting of four outside directors. The Audit Committee is
responsible for the appointment of the independent registered
public accounting firm and reviews with the independent
registered public accounting firm, management and the internal
audit staff, the scope and the results of the annual
examination, the effectiveness of the accounting control system
and other matters relating to the financial affairs of NIKE as
they deem appropriate. The independent registered public
accounting firm and the internal
33
auditors have full access to the Committee, with and without the
presence of management, to discuss any appropriate matters.
Managements Report on Internal Control Over Financial
Reporting
Management is responsible for establishing and maintaining
adequate internal control over financial reporting, as such term
is defined in Exchange Act rule 13a-15(f). Under the
supervision and with the participation of our Chief Executive
Officer and Chief Financial Officer, our management conducted an
evaluation of the effectiveness of our internal control over
financial reporting based upon the framework in Internal
Control Integrated Framework issued by the
Committee of Sponsoring Organizations of the Treadway
Commission. Based on that evaluation, our management concluded
that our internal control over financial reporting is effective
as of May 31, 2005.
Internal control over financial reporting cannot provide
absolute assurance of achieving financial reporting objectives
because of its inherent limitations. Internal control over
financial reporting is a process that involves human diligence
and compliance and is subject to lapses in judgment and
breakdowns resulting from human failures. Internal control over
financial reporting also can be circumvented by collusion or
improper management override. Because of such limitations, there
is a risk that material misstatements may not be prevented or
detected on a timely basis by internal control over financial
reporting. However, these inherent limitations are known
features of the financial reporting process. Therefore, it is
possible to design into the process safeguards to reduce, though
not eliminate, this risk.
PricewaterhouseCoopers LLP, an independent registered public
accounting firm, has audited (1) the consolidated financial
statements, (2) managements assessment of the
effectiveness of our internal control over financial reporting
as of May 31, 2005 and (3) the effectiveness of our
internal control over financial reporting as of May 31,
2005, as stated in their report herein.
|
|
|
William D. Perez
Chief Executive Officer
and President |
|
Donald W. Blair
Chief Financial Officer |
34
REPORT OF INDEPENDENT REGISTERED PUBLIC ACCOUNTING FIRM
To the Board of Directors and Shareholders of NIKE, Inc.:
We have completed an integrated audit of NIKE, Inc.s 2005
consolidated financial statements and of its internal control
over financial reporting as of May 31, 2005 and audits of
its 2004 and 2003 consolidated financial statements in
accordance with the standards of the Public Company Accounting
Oversight Board (United States). Our opinions, based on our
audits, are presented below.
Consolidated financial statements and financial statement
schedule
In our opinion, the consolidated financial statements listed in
the index appearing under Item 15(A)(1) present fairly, in
all material respects, the financial position of NIKE, Inc. and
its subsidiaries at May 31, 2005 and 2004, and the results
of their operations and their cash flows for each of the three
years in the period ended May 31, 2005 in conformity with
accounting principles generally accepted in the United States of
America. In addition, in our opinion, the financial statement
schedule listed in the index appearing under Item 15(A)(2)
presents fairly, in all material respects, the information set
forth therein when read in conjunction with the related
consolidated financial statements. These financial statements
and financial statement schedule are the responsibility of the
Companys management. Our responsibility is to express an
opinion on these financial statements and financial statement
schedule based on our audits. We conducted our audits of these
statements in accordance with the standards of the Public
Company Accounting Oversight Board (United States). Those
standards require that we plan and perform the audit to obtain
reasonable assurance about whether the financial statements are
free of material misstatement. An audit of financial statements
includes examining, on a test basis, evidence supporting the
amounts and disclosures in the financial statements, assessing
the accounting principles used and significant estimates made by
management, and evaluating the overall financial statement
presentation. We believe that our audits provide a reasonable
basis for our opinion.
As discussed in Note 4 to the consolidated financial
statements, effective June 1, 2002, the Company changed its
method of accounting for goodwill and intangible assets in
accordance with the Statement of Financial Accounting Standards
No. 142, Goodwill and Other Intangible Assets.
Internal control over financial reporting
Also, in our opinion, managements assessment, included in
Managements Report on Internal Control Over Financial
Reporting appearing under Item 8, that the Company
maintained effective internal control over financial reporting
as of May 31, 2005 based on criteria established in
Internal Control Integrated Framework issued
by the Committee of Sponsoring Organizations of the Treadway
Commission (COSO), is fairly stated, in all material respects,
based on those criteria. Furthermore, in our opinion, the
Company maintained, in all material respects, effective internal
control over financial reporting as of May 31, 2005, based
on criteria established in Internal Control
Integrated Framework issued by the COSO. The Companys
management is responsible for maintaining effective internal
control over financial reporting and for its assessment of the
effectiveness of internal control over financial reporting. Our
responsibility is to express opinions on managements
assessment and on the effectiveness of the Companys
internal control over financial reporting based on our audit. We
conducted our audit of internal control over financial reporting
in accordance with the standards of the Public Company
Accounting Oversight Board (United States). Those standards
require that we plan and perform the audit to obtain reasonable
assurance about whether effective internal control over
financial reporting was maintained in all material respects. An
audit of internal control over financial reporting includes
obtaining an understanding of internal control over financial
reporting, evaluating managements assessment, testing and
evaluating the design and operating effectiveness of internal
control, and performing such other procedures as we consider
necessary in the circumstances. We believe that our audit
provides a reasonable basis for our opinions.
A companys internal control over financial reporting is a
process designed to provide reasonable assurance regarding the
reliability of financial reporting and the preparation of
financial statements for
35
external purposes in accordance with generally accepted
accounting principles. A companys internal control over
financial reporting includes those policies and procedures that
(i) pertain to the maintenance of records that, in
reasonable detail, accurately and fairly reflect the
transactions and dispositions of the assets of the company;
(ii) provide reasonable assurance that transactions are
recorded as necessary to permit preparation of financial
statements in accordance with generally accepted accounting
principles, and that receipts and expenditures of the company
are being made only in accordance with authorizations of
management and directors of the company; and (iii) provide
reasonable assurance regarding prevention or timely detection of
unauthorized acquisition, use, or disposition of the
companys assets that could have a material effect on the
financial statements.
Because of its inherent limitations, internal control over
financial reporting may not prevent or detect misstatements.
Also, projections of any evaluation of effectiveness to future
periods are subject to the risk that controls may become
inadequate because of changes in conditions, or that the degree
of compliance with the policies or procedures may deteriorate.
|
|
|
/s/ PricewaterhouseCoopers
LLP
|
PricewaterhouseCoopers LLP
Portland, Oregon
July 27, 2005
36
NIKE, INC.
CONSOLIDATED STATEMENTS OF INCOME
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Year Ended May 31, | |
|
|
| |
|
|
2005 | |
|
2004 | |
|
2003 | |
|
|
| |
|
| |
|
| |
|
|
(In millions, except per share data) | |
Revenues
|
|
$ |
13,739.7 |
|
|
$ |
12,253.1 |
|
|
$ |
10,697.0 |
|
Cost of sales
|
|
|
7,624.3 |
|
|
|
7,001.4 |
|
|
|
6,313.6 |
|
|
|
|
|
|
|
|
|
|
|
Gross Margin
|
|
|
6,115.4 |
|
|
|
5,251.7 |
|
|
|
4,383.4 |
|
Selling and administrative
|
|
|
4,221.7 |
|
|
|
3,702.0 |
|
|
|
3,154.1 |
|
Interest expense, net (Notes 1, 6 and 7)
|
|
|
4.8 |
|
|
|
25.0 |
|
|
|
28.8 |
|
Other expense, net (Note 16)
|
|
|
29.1 |
|
|
|
74.7 |
|
|
|
77.5 |
|
|
|
|
|
|
|
|
|
|
|
Income before income taxes and cumulative effect of accounting
change
|
|
|
1,859.8 |
|
|
|
1,450.0 |
|
|
|
1,123.0 |
|
Income taxes (Note 8)
|
|
|
648.2 |
|
|
|
504.4 |
|
|
|
382.9 |
|
|
|
|
|
|
|
|
|
|
|
Income before cumulative effect of accounting change
|
|
|
1,211.6 |
|
|
|
945.6 |
|
|
|
740.1 |
|
Cumulative effect of accounting change, net of income taxes of
($-, $- and $-) (Note 4)
|
|
|
|
|
|
|
|
|
|
|
266.1 |
|
|
|
|
|
|
|
|
|
|
|
Net income
|
|
$ |
1,211.6 |
|
|
$ |
945.6 |
|
|
$ |
474.0 |
|
|
|
|
|
|
|
|
|
|
|
Basic earnings per common share before accounting
change (Notes 1 and 11)
|
|
$ |
4.61 |
|
|
$ |
3.59 |
|
|
$ |
2.80 |
|
Cumulative effect of accounting change
|
|
|
|
|
|
|
|
|
|
|
1.01 |
|
|
|
|
|
|
|
|
|
|
|
|
|
$ |
4.61 |
|
|
$ |
3.59 |
|
|
$ |
1.79 |
|
|
|
|
|
|
|
|
|
|
|
Diluted earnings per common share before accounting
change (Notes 1 and 11)
|
|
$ |
4.48 |
|
|
$ |
3.51 |
|
|
$ |
2.77 |
|
Cumulative effect of accounting change
|
|
|
|
|
|
|
|
|
|
|
1.00 |
|
|
|
|
|
|
|
|
|
|
|
|
|
$ |
4.48 |
|
|
$ |
3.51 |
|
|
$ |
1.77 |
|
|
|
|
|
|
|
|
|
|
|
Dividends declared per common share
|
|
$ |
0.95 |
|
|
$ |
0.74 |
|
|
$ |
0.54 |
|
|
|
|
|
|
|
|
|
|
|
The accompanying notes to consolidated financial statements are
an integral part of this statement.
37
NIKE, INC.
CONSOLIDATED BALANCE SHEETS
|
|
|
|
|
|
|
|
|
|
|
|
|
|
May 31, | |
|
|
| |
|
|
2005 | |
|
2004 | |
|
|
| |
|
| |
|
|
(In millions) | |
ASSETS |
Current Assets:
|
|
|
|
|
|
|
|
|
|
Cash and equivalents
|
|
$ |
1,388.1 |
|
|
$ |
828.0 |
|
|
Short-term investments
|
|
|
436.6 |
|
|
|
400.8 |
|
|
Accounts receivable, less allowance for doubtful accounts of
$80.4 and $95.3
|
|
|
2,262.1 |
|
|
|
2,120.2 |
|
|
Inventories (Note 2)
|
|
|
1,811.1 |
|
|
|
1,650.2 |
|
|
Deferred income taxes (Note 8)
|
|
|
110.2 |
|
|
|
165.0 |
|
|
Prepaid expenses and other current assets
|
|
|
343.0 |
|
|
|
364.4 |
|
|
|
|
|
|
|
|
|
|
|
Total current assets
|
|
|
6,351.1 |
|
|
|
5,528.6 |
|
|
|
|
|
|
|
|
Property, plant and equipment, net (Note 3)
|
|
|
1,605.8 |
|
|
|
1,611.8 |
|
Identifiable intangible assets, net (Note 4)
|
|
|
406.1 |
|
|
|
366.3 |
|
Goodwill (Note 4)
|
|
|
135.4 |
|
|
|
135.4 |
|
Deferred income taxes and other assets (Note 8)
|
|
|
295.2 |
|
|
|
266.6 |
|
|
|
|
|
|
|
|
|
|
|
Total assets
|
|
$ |
8,793.6 |
|
|
$ |
7,908.7 |
|
|
|
|
|
|
|
|
|
LIABILITIES AND SHAREHOLDERS EQUITY |
Current Liabilities:
|
|
|
|
|
|
|
|
|
|
Current portion of long-term debt (Note 7)
|
|
$ |
6.2 |
|
|
$ |
6.6 |
|
|
Notes payable (Note 6)
|
|
|
69.8 |
|
|
|
146.0 |
|
|
Accounts payable (Note 6)
|
|
|
843.9 |
|
|
|
780.4 |
|
|
Accrued liabilities (Notes 5 and 16)
|
|
|
984.3 |
|
|
|
979.3 |
|
|
Income taxes payable
|
|
|
95.0 |
|
|
|
118.2 |
|
|
|
|
|
|
|
|
|
|
|
Total current liabilities
|
|
|
1,999.2 |
|
|
|
2,030.5 |
|
|
|
|
|
|
|
|
Long-term debt (Note 7)
|
|
|
687.3 |
|
|
|
682.4 |
|
Deferred income taxes and other liabilities (Note 8)
|
|
|
462.6 |
|
|
|
413.8 |
|
Commitments and contingencies (Notes 14 and 16)
|
|
|
|
|
|
|
|
|
Redeemable Preferred Stock (Note 9)
|
|
|
0.3 |
|
|
|
0.3 |
|
Shareholders Equity:
|
|
|
|
|
|
|
|
|
|
Common Stock at stated value (Note 10):
|
|
|
|
|
|
|
|
|
|
|
Class A convertible 71.9 and 77.6 shares
outstanding
|
|
|
0.1 |
|
|
|
0.1 |
|
|
|
Class B 189.2 and 185.5 shares outstanding
|
|
|
2.7 |
|
|
|
2.7 |
|
|
Capital in excess of stated value
|
|
|
1,182.9 |
|
|
|
887.8 |
|
|
Unearned stock compensation
|
|
|
(11.4 |
) |
|
|
(5.5 |
) |
|
Accumulated other comprehensive income (loss) (Note 13)
|
|
|
73.4 |
|
|
|
(86.3 |
) |
|
Retained earnings
|
|
|
4,396.5 |
|
|
|
3,982.9 |
|
|
|
|
|
|
|
|
|
|
|
Total shareholders equity
|
|
|
5,644.2 |
|
|
|
4,781.7 |
|
|
|
|
|
|
|
|
|
|
|
Total liabilities and shareholders equity
|
|
$ |
8,793.6 |
|
|
$ |
7,908.7 |
|
|
|
|
|
|
|
|
The accompanying notes to consolidated financial statements are
an integral part of this statement.
38
NIKE, INC.
CONSOLIDATED STATEMENTS OF CASH FLOWS
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Year Ended May 31, | |
|
|
| |
|
|
2005 | |
|
2004 | |
|
2003 | |
|
|
| |
|
| |
|
| |
|
|
(In millions) | |
Cash provided (used) by operations:
|
|
|
|
|
|
|
|
|
|
|
|
|
Net income
|
|
$ |
1,211.6 |
|
|
$ |
945.6 |
|
|
$ |
474.0 |
|
Income charges not affecting cash:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Cumulative effect of accounting change
|
|
|
|
|
|
|
|
|
|
|
266.1 |
|
|
Depreciation
|
|
|
257.2 |
|
|
|
255.2 |
|
|
|
239.3 |
|
|
Deferred income taxes
|
|
|
21.3 |
|
|
|
19.0 |
|
|
|
55.0 |
|
|
Amortization and other
|
|
|
30.5 |
|
|
|
58.3 |
|
|
|
23.2 |
|
Income tax benefit from exercise of stock options
|
|
|
63.1 |
|
|
|
47.2 |
|
|
|
12.5 |
|
Changes in certain working capital components:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(Increase) decrease in accounts receivable
|
|
|
(93.5 |
) |
|
|
97.1 |
|
|
|
(136.3 |
) |
|
Increase in inventories
|
|
|
(103.3 |
) |
|
|
(55.9 |
) |
|
|
(102.8 |
) |
|
Decrease (increase) in prepaids and other current assets
|
|
|
71.4 |
|
|
|
(103.6 |
) |
|
|
60.9 |
|
|
Increase in accounts payable, accrued liabilities and income
taxes payable
|
|
|
112.4 |
|
|
|
255.6 |
|
|
|
30.1 |
|
|
|
|
|
|
|
|
|
|
|
|
|
Cash provided by operations
|
|
|
1,570.7 |
|
|
|
1,518.5 |
|
|
|
922.0 |
|
|
|
|
|
|
|
|
|
|
|
Cash provided (used) by investing activities:
|
|
|
|
|
|
|
|
|
|
|
|
|
Purchases of short-term investments
|
|
|
(1,527.2 |
) |
|
|
(400.8 |
) |
|
|
|
|
Maturities of short-term investments
|
|
|
1,491.9 |
|
|
|
|
|
|
|
|
|
Additions to property, plant and equipment
|
|
|
(257.1 |
) |
|
|
(214.8 |
) |
|
|
(185.9 |
) |
Disposals of property, plant and equipment
|
|
|
7.2 |
|
|
|
11.6 |
|
|
|
14.8 |
|
Increase in other assets
|
|
|
(39.1 |
) |
|
|
(53.4 |
) |
|
|
(46.3 |
) |
Increase (decrease) in other liabilities
|
|
|
11.1 |
|
|
|
(4.1 |
) |
|
|
1.8 |
|
Acquisition of subsidiary, net of cash acquired
|
|
|
(47.2 |
) |
|
|
(289.1 |
) |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Cash used by investing activities
|
|
|
(360.4 |
) |
|
|
(950.6 |
) |
|
|
(215.6 |
) |
|
|
|
|
|
|
|
|
|
|
Cash provided (used) by financing activities:
|
|
|
|
|
|
|
|
|
|
|
|
|
Proceeds from long-term debt issuance
|
|
|
|
|
|
|
153.8 |
|
|
|
90.4 |
|
Reductions in long-term debt including current portion
|
|
|
(9.2 |
) |
|
|
(206.6 |
) |
|
|
(55.9 |
) |
Decrease in notes payable
|
|
|
(81.7 |
) |
|
|
(0.3 |
) |
|
|
(351.1 |
) |
Proceeds from exercise of stock options and other stock issuances
|
|
|
226.8 |
|
|
|
253.6 |
|
|
|
44.2 |
|
Repurchase of stock
|
|
|
(556.2 |
) |
|
|
(419.8 |
) |
|
|
(196.3 |
) |
Dividends common and preferred
|
|
|
(236.7 |
) |
|
|
(179.2 |
) |
|
|
(137.8 |
) |
|
|
|
|
|
|
|
|
|
|
|
|
Cash used by financing activities
|
|
|
(657.0 |
) |
|
|
(398.5 |
) |
|
|
(606.5 |
) |
|
|
|
|
|
|
|
|
|
|
Effect of exchange rate changes
|
|
|
6.8 |
|
|
|
24.6 |
|
|
|
(41.4 |
) |
|
|
|
|
|
|
|
|
|
|
|
|
Net increase in cash and equivalents
|
|
|
560.1 |
|
|
|
194.0 |
|
|
|
58.5 |
|
Cash and equivalents, beginning of year
|
|
|
828.0 |
|
|
|
634.0 |
|
|
|
575.5 |
|
|
|
|
|
|
|
|
|
|
|
Cash and equivalents, end of year
|
|
$ |
1,388.1 |
|
|
$ |
828.0 |
|
|
$ |
634.0 |
|
|
|
|
|
|
|
|
|
|
|
Supplemental disclosure of cash flow information:
|
|
|
|
|
|
|
|
|
|
|
|
|
Cash paid during the year for:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Interest, net of capitalized interest
|
|
$ |
33.9 |
|
|
$ |
37.8 |
|
|
$ |
38.9 |
|
|
Income taxes
|
|
|
585.3 |
|
|
|
418.6 |
|
|
|
330.2 |
|
The accompanying notes to consolidated financial statements are
an integral part of this statement.
39
NIKE, INC.
CONSOLIDATED STATEMENTS OF SHAREHOLDERS EQUITY
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Common Stock | |
|
|
|
|
|
|
|
|
|
|
|
|
| |
|
|
|
|
|
Accumulated | |
|
|
|
|
|
|
|
|
|
|
Capital in | |
|
|
|
Other | |
|
|
|
|
|
|
Class A | |
|
Class B | |
|
Excess of | |
|
Unearned | |
|
Comprehensive | |
|
|
|
|
|
|
| |
|
| |
|
Stated | |
|
Stock | |
|
Income | |
|
Retained | |
|
|
|
|
Shares | |
|
Amount | |
|
Shares | |
|
Amount | |
|
Value | |
|
Compensation | |
|
(Loss) | |
|
Earnings | |
|
Total | |
|
|
| |
|
| |
|
| |
|
| |
|
| |
|
| |
|
| |
|
| |
|
| |
|
|
(In millions, except per share data) | |
Balance at May 31, 2002
|
|
|
98.1 |
|
|
$ |
0.2 |
|
|
|
168.0 |
|
|
$ |
2.6 |
|
|
$ |
538.7 |
|
|
$ |
(5.1 |
) |
|
$ |
(192.4 |
) |
|
$ |
3,495.0 |
|
|
$ |
3,839.0 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Stock options exercised
|
|
|
|
|
|
|
|
|
|
|
1.3 |
|
|
|
|
|
|
|
48.2 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
48.2 |
|
Conversion to Class B Common Stock
|
|
|
(0.3 |
) |
|
|
|
|
|
|
0.3 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Repurchase of Class B Common Stock
|
|
|
|
|
|
|
|
|
|
|
(4.0 |
) |
|
|
|
|
|
|
(4.8 |
) |
|
|
|
|
|
|
|
|
|
|
(186.2 |
) |
|
|
(191.0 |
) |
Dividends on Common stock ($.54 per share)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(142.7 |
) |
|
|
(142.7 |
) |
Issuance of shares to employees
|
|
|
|
|
|
|
|
|
|
|
0.3 |
|
|
|
|
|
|
|
9.6 |
|
|
|
(0.2 |
) |
|
|
|
|
|
|
|
|
|
|
9.4 |
|
Amortization of unearned compensation
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
3.7 |
|
|
|
|
|
|
|
|
|
|
|
3.7 |
|
Forfeiture of shares from employees
|
|
|
|
|
|
|
|
|
|
|
(0.1 |
) |
|
|
|
|
|
|
(2.7 |
) |
|
|
1.0 |
|
|
|
|
|
|
|
(0.9 |
) |
|
|
(2.6 |
) |
Comprehensive income (Note 13):
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net income
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
474.0 |
|
|
|
474.0 |
|
|
Other comprehensive income (net of tax benefit of $72.8):
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Foreign currency translation
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
127.4 |
|
|
|
|
|
|
|
127.4 |
|
|
|
Adjustment for fair value of hedge derivatives
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(174.7 |
) |
|
|
|
|
|
|
(174.7 |
) |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Comprehensive income
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(47.3 |
) |
|
|
474.0 |
|
|
|
426.7 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Balance at May 31, 2003
|
|
|
97.8 |
|
|
$ |
0.2 |
|
|
|
165.8 |
|
|
$ |
2.6 |
|
|
$ |
589.0 |
|
|
$ |
(0.6 |
) |
|
$ |
(239.7 |
) |
|
$ |
3,639.2 |
|
|
$ |
3,990.7 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Stock options exercised
|
|
|
|
|
|
|
|
|
|
|
5.5 |
|
|
|
|
|
|
|
284.9 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
284.9 |
|
Conversion to Class B Common Stock
|
|
|
(20.2 |
) |
|
|
(0.1 |
) |
|
|
20.2 |
|
|
|
0.1 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Repurchase of Class B Common Stock
|
|
|
|
|
|
|
|
|
|
|
(6.4 |
) |
|
|
|
|
|
|
(7.6 |
) |
|
|
|
|
|
|
|
|
|
|
(406.7 |
) |
|
|
(414.3 |
) |
Dividends on Common stock ($.74 per share)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(194.9 |
) |
|
|
(194.9 |
) |
Issuance of shares to employees
|
|
|
|
|
|
|
|
|
|
|
0.4 |
|
|
|
|
|
|
|
23.2 |
|
|
|
(7.5 |
) |
|
|
|
|
|
|
|
|
|
|
15.7 |
|
Amortization of unearned compensation
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
2.6 |
|
|
|
|
|
|
|
|
|
|
|
2.6 |
|
Forfeiture of shares from employees
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(1.7 |
) |
|
|
|
|
|
|
|
|
|
|
(0.3 |
) |
|
|
(2.0 |
) |
Comprehensive income (Note 13):
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net income
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
945.6 |
|
|
|
945.6 |
|
|
Other comprehensive income (net of tax expense of $69.0):
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Foreign currency translation
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
27.5 |
|
|
|
|
|
|
|
27.5 |
|
|
|
Adjustment for fair value of hedge derivatives
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
125.9 |
|
|
|
|
|
|
|
125.9 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Comprehensive income
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
153.4 |
|
|
|
945.6 |
|
|
|
1,099.0 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Balance at May 31, 2004
|
|
|
77.6 |
|
|
$ |
0.1 |
|
|
|
185.5 |
|
|
$ |
2.7 |
|
|
$ |
887.8 |
|
|
$ |
(5.5 |
) |
|
$ |
(86.3 |
) |
|
$ |
3,982.9 |
|
|
$ |
4,781.7 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Stock options exercised
|
|
|
|
|
|
|
|
|
|
|
4.4 |
|
|
|
|
|
|
|
273.2 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
273.2 |
|
Conversion to Class B Common Stock
|
|
|
(5.7 |
) |
|
|
|
|
|
|
5.7 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Repurchase of Class B Common Stock
|
|
|
|
|
|
|
|
|
|
|
(6.9 |
) |
|
|
|
|
|
|
(8.3 |
) |
|
|
|
|
|
|
|
|
|
|
(547.9 |
) |
|
|
(556.2 |
) |
Dividends on Common stock ($.95 per share)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(249.4 |
) |
|
|
(249.4 |
) |
Issuance of shares to employees
|
|
|
|
|
|
|
|
|
|
|
0.5 |
|
|
|
|
|
|
|
32.1 |
|
|
|
(10.2 |
) |
|
|
|
|
|
|
|
|
|
|
21.9 |
|
Amortization of unearned compensation
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
3.9 |
|
|
|
|
|
|
|
|
|
|
|
3.9 |
|
Forfeiture of shares from employees
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(1.9 |
) |
|
|
0.4 |
|
|
|
|
|
|
|
(0.7 |
) |
|
|
(2.2 |
) |
Comprehensive income (Note 13):
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net income
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
1,211.6 |
|
|
|
1,211.6 |
|
|
Other comprehensive income (net of tax expense of $40.2):
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Foreign currency translation
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
70.1 |
|
|
|
|
|
|
|
70.1 |
|
|
|
Adjustment for fair value of hedge derivatives
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
89.6 |
|
|
|
|
|
|
|
89.6 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Comprehensive income
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
159.7 |
|
|
|
1,211.6 |
|
|
|
1,371.3 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Balance at May 31, 2005
|
|
|
71.9 |
|
|
$ |
0.1 |
|
|
|
189.2 |
|
|
$ |
2.7 |
|
|
$ |
1,182.9 |
|
|
$ |
(11.4 |
) |
|
$ |
73.4 |
|
|
$ |
4,396.5 |
|
|
$ |
5,644.2 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
The accompanying notes to consolidated financial statements are
an integral part of this statement.
40
NIKE, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
|
|
Note 1 |
Summary of Significant Accounting Policies |
The consolidated financial statements include the accounts of
NIKE, Inc. and its subsidiaries (the Company). All
significant intercompany transactions and balances have been
eliminated.
Wholesale revenues are recognized when the risks and rewards of
ownership have passed to the customer, based on the terms of
sale. This occurs upon shipment or upon receipt by the customer
depending on the country of the sale and the agreement with the
customer. Retail store revenues are recorded at the time of
sale. Provisions for sales discounts, returns and miscellaneous
claims from customers are made at the time of sale.
|
|
|
Shipping and Handling Costs |
Shipping and handling costs are expensed as incurred and
included in cost of sales.
|
|
|
Advertising and Promotion |
Advertising production costs are expensed the first time the
advertisement is run. Media (TV and print) placement costs
are expensed in the month the advertising appears. A significant
amount of the Companys promotional expenses result from
payments under endorsement contracts. Accounting for endorsement
payments is based upon specific contract provisions. Generally,
endorsement payments are expensed uniformly over the term of the
contract after giving recognition to periodic performance
compliance provisions of the contracts. Prepayments made under
contracts are included in prepaid expenses and other current
assets or other assets depending on the length of the contract.
Through cooperative advertising programs, the Company reimburses
its retail customers for certain of their costs of advertising
the Companys products. The Company records these costs in
selling and administrative expense at the point in time when it
is obligated to its customers for the costs, which is when the
related revenues are recognized. This obligation may arise prior
to the related advertisement being run. Total advertising and
promotion expenses were $1,600.7 million,
$1,377.9 million, and $1,166.8 million for the years
ended May 31, 2005, 2004 and 2003, respectively. Prepaid
advertising and promotion expenses recorded as appropriate in
prepaid expenses and other current assets and other assets
totaled $126.1 million and $154.6 million at
May 31, 2005 and 2004, respectively.
Cash and equivalents represent cash and short-term, highly
liquid investments with original maturities of three months or
less at date of purchase. The carrying amounts reflected in the
consolidated balance sheet for cash and cash equivalents
approximate fair value due to the short maturities.
Short-term investments consist primarily of U.S. Treasury
debt securities with maturities of six months or less at the
date of purchase. Debt securities which the Company has the
ability and positive intent to hold to maturity are carried at
amortized cost. Available-for-sale debt securities are recorded
at fair value with any net unrealized gains and losses reported,
net of tax, in other comprehensive income. Realized gains or
losses are determined based on the specific identification
method. The Company holds no investments considered to be
trading securities. Amortized cost of both available-for-sale
and held-to-maturity debt securities approximates fair market
value due to their short maturities. Substantially all
investments held at May 31, 2005 have remaining maturities
of 120 days or less. Included in interest expense, net for
the years ended May 31, 2005,
41
NIKE, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(Continued)
2004, and 2003, was interest income of $34.9 million,
$15.3 million and $14.1 million, respectively, related
to short-term investments and cash and cash equivalents.
Inventories are stated at the lower of cost or market.
Inventories are valued on a first-in, first-out (FIFO) or
moving-average cost basis.
|
|
|
Property, Plant and Equipment and Depreciation |
Property, plant and equipment are recorded at cost. Depreciation
for financial reporting purposes is determined on a
straight-line basis for buildings and leasehold improvements
over 2 to 40 years and principally on a double declining
balance basis for machinery and equipment over 2 to
15 years. Computer software (including, in some cases, the
cost of internal labor) is depreciated on a straight-line basis
over 3 to 10 years.
|
|
|
Impairment of Long-Lived Assets |
In accordance with Statement of Financial Accounting Standards
(SFAS) No. 144 Accounting for the Impairment or
Disposal of Long-Lived Assets (FAS 144), the Company
estimates the future undiscounted cash flows to be derived from
an asset to assess whether or not a potential impairment exists
when events or circumstances indicate the carrying value of a
long-lived asset may be impaired. If the carrying value exceeds
the Companys estimate of future undiscounted cash flows,
the Company then calculates the impairment as the excess of the
carrying value of the asset over the Companys estimate of
its fair market value.
|
|
|
Identifiable Intangible Assets and Goodwill |
In accordance with SFAS No. 142 Goodwill and
Other Intangible Assets (FAS 142), goodwill and
intangible assets with indefinite lives are not amortized but
instead are measured for impairment at least annually in the
fourth quarter, or when events indicate that an impairment
exists. As required by FAS 142, in the Companys
impairment test of goodwill, the Company compares the fair value
of the applicable reporting unit to its carrying value. If the
carrying value of the reporting unit exceeds the estimate of
fair value, the Company calculates the impairment as the excess
of the carrying value of goodwill over its implied fair value.
In the impairment tests for indefinite-lived intangible assets,
the Company compares the estimated fair value of the
indefinite-lived intangible assets to the carrying value. If the
carrying value exceeds the estimate of fair value, the Company
calculates impairment as the excess of the carrying value over
the estimate of fair value. See Note 4 for discussion of
the Companys adoption of FAS 142 in the year ended
May 31, 2003.
Intangible assets that are determined to have definite lives are
amortized over their useful lives and are measured for
impairment only when events or circumstances indicate the
carrying value may be impaired in accordance with FAS 144
discussed above.
|
|
|
Foreign Currency Translation and Foreign Currency
Transactions |
Adjustments resulting from translating foreign functional
currency financial statements into U.S. dollars are
included in the foreign currency translation adjustment, a
component of accumulated other comprehensive income (loss) in
shareholders equity.
Transaction gains and losses generated by the effect of foreign
exchange on recorded assets and liabilities denominated in a
currency different from the functional currency of the
applicable Company entity are recorded in other expense, net, in
the period in which they occur.
42
NIKE, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(Continued)
|
|
|
Accounting for Derivatives and Hedging Activities |
The Company uses derivative financial instruments to limit
exposure to changes in foreign currency exchange rates and
interest rates. The Company accounts for derivatives pursuant to
SFAS No. 133, Accounting for Derivative
Instruments and Hedging Activities, as amended and
interpreted (FAS 133). FAS 133 establishes accounting
and reporting standards for derivative instruments and requires
that all derivatives be recorded at fair value on the balance
sheet. Changes in the fair value of derivative financial
instruments are either recognized in other comprehensive income
(a component of shareholders equity) or net income
depending on whether the derivative is being used to hedge
changes in cash flows or fair value.
See Note 16 for more information on the Companys Risk
Management program and derivatives.
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 SFAS No. 123 Accounting for
Stock-Based Compensation (FAS 123). The
Companys 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.
As required by FAS 123 and amended by
SFAS No. 148 Accounting for Stock-Based
Compensation Transition and Disclosure
(FAS 148), the Company has computed, for pro forma
disclosure purposes, the fair value of options granted and
employees purchase rights under the Employee Stock
Purchase Plan (ESPP) during the years ended May 31,
2005, 2004 and 2003 using the Black-Scholes option pricing
model. The weighted average assumptions used for the majority of
stock option grants for each of these years were a dividend
yield of 1%, expected volatility of the market price of the
Companys common stock of 42%, 44%, and 38% for the years
ended May 31, 2005, 2004 and 2003, respectively; a
weighted-average expected life of the options of approximately
five years; and interest rates of 3.7%, 2.9%, and 3.8% for the
years ended May 31, 2005, 2004 and 2003, respectively.
Options were assumed to be exercised over the five year expected
life for purposes of this valuation. Adjustments for forfeitures
are made as they occur. For the years ended May 31, 2005,
2004 and 2003, the total value of the options granted, for which
no previous expense has been recognized, was computed as
approximately $150.2 million, $102.3 million, and
$89.8 million, respectively, which would be amortized on a
straight line basis over the vesting period of the options. The
weighted average fair value per share of the options granted in
the years ended May 31, 2005, 2004 and 2003 are $27.90,
$20.36, and $17.45, respectively.
43
NIKE, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(Continued)
If the Company had accounted for these stock options and ESPP
purchase rights issued to employees in accordance with
FAS 123, the Companys pro forma net income and pro
forma earnings per share (EPS) would have been reported as
follows:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Year Ended May 31, | |
|
|
| |
|
|
2005 | |
|
2004 | |
|
2003 | |
|
|
| |
|
| |
|
| |
|
|
(In millions) | |
Net income as reported
|
|
$ |
1,211.6 |
|
|
$ |
945.6 |
|
|
$ |
474.0 |
|
Add: Stock-based compensation expense included in reported net
income, net of tax
|
|
|
0.6 |
|
|
|
|
|
|
|
|
|
Deduct: Total stock-based employee compensation expense under
fair value based method for all awards, net of tax
|
|
|
(64.1 |
) |
|
|
(48.7 |
) |
|
|
(42.2 |
) |
|
|
|
|
|
|
|
|
|
|
Pro forma net income
|
|
$ |
1,148.1 |
|
|
$ |
896.9 |
|
|
$ |
431.8 |
|
|
|
|
|
|
|
|
|
|
|
Earnings per Share:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Basic as reported
|
|
$ |
4.61 |
|
|
$ |
3.59 |
|
|
$ |
1.79 |
|
|
Basic pro forma
|
|
$ |
4.37 |
|
|
$ |
3.41 |
|
|
$ |
1.63 |
|
|
Diluted as reported
|
|
$ |
4.48 |
|
|
$ |
3.51 |
|
|
$ |
1.77 |
|
|
Diluted pro forma
|
|
$ |
4.28 |
|
|
$ |
3.35 |
|
|
$ |
1.62 |
|
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 years since options vest over
several years and additional awards are made each year.
On December 16, 2004, the Financial Accounting Standards
Board (FASB) finalized SFAS No. 123R
Share-Based Payment (FAS 123R) which, after the
Securities and Exchange Commission (SEC) amended the
compliance dates on April 15, 2005, will be effective for
the Companys fiscal year beginning June 1, 2006. 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 Staff Accounting
Bulletin No. 107 (SAB 107), which provides the
Staffs 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 and the transition method to use upon
adoption. The impact of the adoption of FAS 123R is not
known at this time due to these factors as well as the unknown
level of share-based payments granted in future years. The
effect on the Companys results of operations of expensing
stock options using the Black-Scholes model is presented in the
table above.
Under certain conditions, stock options granted by the Company
are eligible for accelerated vesting upon the retirement of the
employee. The FASB clarified in FAS 123R that the fair
value of such stock options should be expensed based on an
accelerated vesting schedule or immediately, rather than ratably
over the vesting period stated in the grant. The Companys
pro forma disclosure above currently reflects the expense of
such options ratably over the stated vesting period, expensing
all unvested shares upon actual retirement. The SEC has recently
clarified that companies should continue to follow the vesting
method they have been using until adoption of FAS 123R,
then apply the accelerated vesting schedule to all subsequent
grants to those employees eligible for accelerated vesting upon
retirement. Had the Company been accounting for such stock
options using the accelerated vesting schedule for those
employees eligible for accelerated vesting upon retirement, the
Company would have recognized additional stock-based
compensation expense in the above pro forma of $0.05 per
diluted share for the years ended May 31, 2005, 2004 and
2003.
44
NIKE, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(Continued)
The Company accounts for income taxes using the asset and
liability method. This approach requires the recognition of
deferred tax assets and liabilities for the expected future tax
consequences of temporary differences between the carrying
amounts and the tax bases of other assets and liabilities.
United States income taxes are provided currently on financial
statement earnings of non-U.S. subsidiaries that are
expected to be repatriated. The Company determines annually the
amount of undistributed non-U.S. earnings to invest
indefinitely in its non-U.S. operations. See Note 8
for further discussion.
Basic earnings per common share is calculated by dividing net
income by the weighted average number of common shares
outstanding during the year. Diluted earnings per common share
is calculated by adjusting weighted average outstanding shares,
assuming conversion of all potentially dilutive stock options
and awards. See Note 11 for further discussion.
The preparation of financial statements in conformity with
generally accepted accounting principles requires management to
make estimates, including estimates relating to assumptions that
affect the reported amounts of assets and liabilities and
disclosure of contingent assets and liabilities at the date of
financial statements and the reported amounts of revenues and
expenses during the reporting period. Actual results could
differ from these estimates.
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 Standards |
In November 2004, the FASB issued 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
Companys consolidated financial position or results of
operations.
In December 2004, the FASB issued FAS 123R. In March 2005,
the SEC issued SAB 107 regarding the SEC Staffs
interpretation of FAS 123R. See the Stock-Based
Compensation section within Note 1 above for further
discussion.
45
NIKE, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(Continued)
Inventories by major classification are as follows:
|
|
|
|
|
|
|
|
|
|
|
May 31, | |
|
|
| |
|
|
2005 | |
|
2004 | |
|
|
| |
|
| |
|
|
(In millions) | |
Finished goods
|
|
$ |
1,807.1 |
|
|
$ |
1,626.3 |
|
Work-in-progress
|
|
|
1.5 |
|
|
|
10.6 |
|
Raw materials
|
|
|
2.5 |
|
|
|
13.3 |
|
|
|
|
|
|
|
|
|
|
$ |
1,811.1 |
|
|
$ |
1,650.2 |
|
|
|
|
|
|
|
|
|
|
Note 3 |
Property, Plant and Equipment |
Property, plant and equipment includes the following:
|
|
|
|
|
|
|
|
|
|
|
May 31, | |
|
|
| |
|
|
2005 | |
|
2004 | |
|
|
| |
|
| |
|
|
(In millions) | |
Land
|
|
$ |
185.4 |
|
|
$ |
179.5 |
|
Buildings
|
|
|
823.9 |
|
|
|
813.6 |
|
Machinery and equipment
|
|
|
1,528.4 |
|
|
|
1,608.6 |
|
Leasehold improvements
|
|
|
568.4 |
|
|
|
521.3 |
|
Construction in process
|
|
|
73.1 |
|
|
|
60.4 |
|
|
|
|
|
|
|
|
|
|
|
3,179.2 |
|
|
|
3,183.4 |
|
Less accumulated depreciation
|
|
|
1,573.4 |
|
|
|
1,571.6 |
|
|
|
|
|
|
|
|
|
|
$ |
1,605.8 |
|
|
$ |
1,611.8 |
|
|
|
|
|
|
|
|
Capitalized interest was not material for the years ended
May 31, 2005, 2004 and 2003.
|
|
Note 4 |
Identifiable Intangible Assets and Goodwill: |
The Company adopted FAS 142 effective June 1, 2002. In
accordance with FAS 142, goodwill and intangible assets
with indefinite lives are not amortized but instead are measured
for impairment at least annually in the fourth quarter, or when
events indicate that an impairment exists. Intangible assets
that are determined to have definite lives are amortized over
their useful lives.
As required by FAS 142, the Company performed impairment
tests on goodwill and other intangible assets with indefinite
lives, which consisted only of certain trademarks, as of
June 1, 2002. As a result of the impairment tests, the
Company recorded a $266.1 million cumulative effect of
accounting change for the year ended May 31, 2003. Under
FAS 142, goodwill impairment exists if the net book value
of a reporting unit exceeds its estimated fair value. The
Company estimated the fair value of its reporting units by using
a combination of discounted cash flow analyses and comparisons
with the market values of similar publicly-traded companies.
Included in the Companys $266.1 million impairment
charge was a $178.5 million charge related to the
impairment of the goodwill associated with the Bauer NIKE Hockey
(Bauer) and Cole Haan reporting units. These
reporting units are reflected in the Companys Other
operating segment. Since the Companys purchase of Bauer in
1995, the hockey equipment and apparel markets have not grown as
fast as expected and
46
NIKE, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(Continued)
the in-line skate market has contracted significantly. As a
result, the Company determined that the goodwill acquired at
Bauer had been impaired. The goodwill impairment at Cole Haan
reflected the significantly lower fair value calculated on the
basis of reduced operating income in the year following the
September 11, 2001 terrorist attacks.
The remaining $87.6 million of the impairment charge
relates to trademarks associated with Bauer. Under FAS 142,
impairment of an indefinite-lived asset exists if the net book
value of the asset exceeds its fair value. The Company estimated
the fair value of trademarks using the relief-from-royalty
approach, which is a standard form of discounted cash flow
analysis typically used for the valuation of trademarks. The
impairment of the Bauer trademarks reflects the same
circumstances as described above related to the Bauer goodwill
impairment.
The following table summarizes the Companys identifiable
intangible assets and goodwill balances as of May 31, 2005
and May 31, 2004:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
May 31, 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
|
|
$ |
29.2 |
|
|
$ |
(10.9 |
) |
|
$ |
18.3 |
|
|
$ |
27.9 |
|
|
$ |
(11.9 |
) |
|
$ |
16.0 |
|
|
Trademarks
|
|
|
54.8 |
|
|
|
(16.4 |
) |
|
|
38.4 |
|
|
|
14.1 |
|
|
|
(11.5 |
) |
|
|
2.6 |
|
|
Other
|
|
|
21.4 |
|
|
|
(13.5 |
) |
|
|
7.9 |
|
|
|
17.0 |
|
|
|
(10.8 |
) |
|
|
6.2 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total
|
|
$ |
105.4 |
|
|
$ |
(40.8 |
) |
|
$ |
64.6 |
|
|
$ |
59.0 |
|
|
$ |
(34.2 |
) |
|
$ |
24.8 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Unamortized intangible assets Trademarks
|
|
|
|
|
|
|
|
|
|
$ |
341.5 |
|
|
|
|
|
|
|
|
|
|
$ |
341.5 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total
|
|
|
|
|
|
|
|
|
|
$ |
406.1 |
|
|
|
|
|
|
|
|
|
|
$ |
366.3 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Goodwill
|
|
|
|
|
|
|
|
|
|
$ |
135.4 |
|
|
|
|
|
|
|
|
|
|
$ |
135.4 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Amortization expense of identifiable assets with definite lives,
which is included in selling and administrative expense, was
$9.3 million, $12.0 million and $3.6 million for
the years ended May 31, 2005, 2004, and 2003, respectively.
The estimated amortization expense for intangible assets subject
to amortization for each of the succeeding years ending
May 31, 2006 through May 31, 2010 is as follows: 2006:
$9.4 million; 2007: $8.5 million; 2008:
$8.0 million; 2009: $6.7 million; 2010:
$5.9 million.
On August 11, 2004, the Company acquired Official Starter
LLC and Official Starter Properties LLC (collectively
Official Starter). 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. See Note 15 for additional information
related to the acquisition.
47
NIKE, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(Continued)
|
|
Note 5 |
Accrued Liabilities |
Accrued liabilities include the following:
|
|
|
|
|
|
|
|
|
|
|
May 31, | |
|
|
| |
|
|
2005 | |
|
2004 | |
|
|
| |
|
| |
|
|
(In millions) | |
Compensation and benefits
|
|
$ |
394.2 |
|
|
$ |
339.0 |
|
Fair value of derivatives
|
|
|
61.8 |
|
|
|
141.3 |
|
Tax
|
|
|
96.8 |
|
|
|
87.5 |
|
Endorser compensation
|
|
|
93.0 |
|
|
|
86.9 |
|
Dividends payable
|
|
|
65.3 |
|
|
|
52.6 |
|
Advertising and marketing
|
|
|
57.4 |
|
|
|
44.8 |
|
Other(1)
|
|
|
215.8 |
|
|
|
227.2 |
|
|
|
|
|
|
|
|
|
|
$ |
984.3 |
|
|
$ |
979.3 |
|
|
|
|
|
|
|
|
|
|
(1) |
Other consists of various accrued expenses and no individual
item accounted for more than $50 million of the balance at
May 31, 2005 or 2004. |
|
|
Note 6 |
Short-Term Borrowings and Credit Lines |
Notes payable to banks and interest-bearing accounts payable to
Sojitz Corporation of America (Sojitz America) as of
May 31, 2005 and 2004, are summarized below:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
May 31, | |
|
|
| |
|
|
2005 | |
|
2004 | |
|
|
| |
|
| |
|
|
|
|
Interest | |
|
|
|
Interest | |
|
|
Borrowings | |
|
Rate | |
|
Borrowings | |
|
Rate | |
|
|
| |
|
| |
|
| |
|
| |
|
|
(In millions) | |
|
|
|
(In millions) | |
|
|
Notes payable:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
U.S. operations
|
|
$ |
37.0 |
|
|
|
0.12% |
(1) |
|
$ |
28.3 |
|
|
|
0.67% |
(1) |
|
Non-U.S. operations
|
|
|
32.8 |
|
|
|
6.68% |
|
|
|
117.7 |
|
|
|
3.18% |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
$ |
69.8 |
|
|
|
|
|
|
$ |
146.0 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Sojitz America
|
|
|
53.1 |
|
|
|
3.90% |
|
|
|
43.9 |
|
|
|
1.88% |
|
|
|
(1) |
Weighted average interest rate includes non-interest bearing
overdrafts. |
The carrying amounts reflected in the consolidated balance sheet
for notes payable approximate fair value due to the short
maturities.
The Company purchases through Sojitz America certain athletic
footwear, apparel and equipment it acquires from
non-U.S. suppliers. These purchases are for the
Companys operations outside of the U.S., Europe, Middle
East, Africa and Japan. Accounts payable to Sojitz America are
generally due up to 60 days after shipment of goods from
the foreign port. The interest rate on such accounts payable is
the 60 day London Interbank Offered Rate
(LIBOR) as of the beginning of the month of the
invoice date, plus 0.75%.
The Company had no borrowings outstanding under its commercial
paper program at May 31, 2005 and 2004.
The Company has a multi-year $750 million revolving credit
facility in place with a group of banks under which no amounts
were outstanding as of May 31, 2005 and 2004. The facility
matures on November 20, 2008
48
NIKE, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(Continued)
and can be extended for one additional year on the anniversary
date. Based on the Companys current long-term senior
unsecured debt ratings the interest rate charged on any
outstanding borrowings would be the prevailing LIBOR plus 0.18%.
The facility fee is 0.07% of the total commitment. Under this
agreement, the Company must maintain, among other things,
certain minimum specified financial ratios with which the
Company was in compliance at May 31, 2005.
Long-term debt includes the following:
|
|
|
|
|
|
|
|
|
|
|
|
May 31, | |
|
|
| |
|
|
2005 | |
|
2004 | |
|
|
| |
|
| |
|
|
(In millions) | |
5.5% Corporate Bond, payable August 15, 2006
|
|
$ |
250.6 |
|
|
$ |
254.9 |
|
4.8% Corporate Bond, payable July 9, 2007
|
|
|
25.2 |
|
|
|
25.4 |
|
5.375% Corporate Bond, payable July 8, 2009
|
|
|
25.7 |
|
|
|
25.5 |
|
5.66% Corporate Bond, payable July 23, 2012
|
|
|
26.4 |
|
|
|
25.5 |
|
5.4% Corporate Bond, payable August 7, 2012
|
|
|
15.5 |
|
|
|
14.9 |
|
4.7% Corporate Bond, payable October 1, 2013
|
|
|
50.0 |
|
|
|
50.0 |
|
5.15% Corporate Bonds, payable October 15, 2015
|
|
|
107.2 |
|
|
|
98.7 |
|
4.3% Japanese yen note, payable June 26, 2011
|
|
|
97.2 |
|
|
|
93.2 |
|
2.6% Japanese yen note, maturing August 20, 2001 through
November 20, 2020
|
|
|
66.1 |
|
|
|
67.5 |
|
2.0% Japanese yen note, maturing August 20, 2001 through
November 20, 2020
|
|
|
29.5 |
|
|
|
30.1 |
|
Other
|
|
|
0.1 |
|
|
|
3.3 |
|
|
|
|
|
|
|
|
|
Total
|
|
|
693.5 |
|
|
|
689.0 |
|
Less current maturities
|
|
|
6.2 |
|
|
|
6.6 |
|
|
|
|
|
|
|
|
|
|
$ |
687.3 |
|
|
$ |
682.4 |
|
|
|
|
|
|
|
|
The fair value of long-term debt is estimated using discounted
cash flow analyses, based on the Companys incremental
borrowing rates for similar types of borrowing arrangements. The
fair value of the Companys long-term debt, including
current portion, is approximately $721.2 million at
May 31, 2005 and $721.4 million at May 31, 2004.
The Company has interest rate swap agreements with the same
notional amount and maturity dates as the $250.0 million
corporate bond maturing August 15, 2006, whereby the
Company receives fixed interest payments at the same rate as the
bond and pays variable interest payments based on the
three-month LIBOR plus a spread. The interest rates payable on
these swap agreements were approximately 4.7% and 2.7% at
May 31, 2005 and 2004, respectively.
The Company has an effective shelf registration statement with
the Securities and Exchange Commission for $1 billion of
debt securities. The Company has a medium-term note program
under the shelf registration that allows the Company to issue up
to $500 million in medium-term notes. During the year ended
May 31, 2005 there were no notes issued under the
medium-term note program of the shelf registration. During the
year ended May 31, 2004, the Company issued a total of
$150 million in notes under the medium-term note program of
the shelf registration. The notes have coupon rates that range
from 4.70% to 5.15%. The maturities range from October 1,
2013 to October 15, 2015. For each of these notes, the
Company has entered into interest rate swap agreements whereby
the Company receives fixed interest payments at the same rate as
the
49
NIKE, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(Continued)
notes and pays variable interest payments based on the
three-month or six-month LIBOR plus a spread. Each swap has the
same notional amount and maturity date as the corresponding
note, except for the swap for the $50 million note maturing
October 1, 2013, which expires October 2, 2006. At
May 31, 2005, the interest rates payable on these swap
agreements range from approximately 3.3% to 5.3%. Currently,
$760 million remains available to be issued under the shelf
registration.
In June 1996, one of the Companys Japanese subsidiaries
borrowed 10,500 million Japanese yen in a private placement
with a maturity of June 26, 2011. Interest is paid
semi-annually. The agreement provides for early retirement after
year ten.
In July 1999, another of the Companys Japanese
subsidiaries assumed 13,000 million in Japanese yen loans
as part of its agreement to purchase a distribution center in
Japan, which serves as collateral for the loans. These loans
mature in equal quarterly installments during the period
August 20, 2001 through November 20, 2020. Interest is
also paid quarterly.
Amounts of long-term debt maturities in each of the years ending
May 31, 2006 through 2010 are $6.2 million,
$256.2 million, $31.2 million, $6.2 million and
$31.2 million, respectively.
Income before income taxes and cumulative effect of accounting
change is as follows:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Year Ended May 31, | |
|
|
| |
|
|
2005 | |
|
2004 | |
|
2003 | |
|
|
| |
|
| |
|
| |
|
|
(In millions) | |
Income before income taxes and cumulative effect of accounting
change:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
United States
|
|
$ |
755.5 |
|
|
$ |
607.7 |
|
|
$ |
444.8 |
|
|
Foreign
|
|
|
1,104.3 |
|
|
|
842.3 |
|
|
|
678.2 |
|
|
|
|
|
|
|
|
|
|
|
|
|
$ |
1,859.8 |
|
|
$ |
1,450.0 |
|
|
$ |
1,123.0 |
|
|
|
|
|
|
|
|
|
|
|
The provision for income taxes is as follows:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Year Ended May 31, | |
|
|
| |
|
|
2005 | |
|
2004 | |
|
2003 | |
|
|
| |
|
| |
|
| |
|
|
(In millions) | |
Current:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
United States
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Federal
|
|
$ |
279.6 |
|
|
$ |
185.3 |
|
|
$ |
125.6 |
|
|
|
State
|
|
|
50.7 |
|
|
|
43.3 |
|
|
|
33.6 |
|
|
Foreign
|
|
|
292.5 |
|
|
|
266.8 |
|
|
|
190.0 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
622.8 |
|
|
|
495.4 |
|
|
|
349.2 |
|
|
|
|
|
|
|
|
|
|
|
Deferred:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
United States
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Federal
|
|
|
21.9 |
|
|
|
3.9 |
|
|
|
11.3 |
|
|
|
State
|
|
|
(5.3 |
) |
|
|
2.4 |
|
|
|
8.6 |
|
|
Foreign
|
|
|
8.8 |
|
|
|
2.7 |
|
|
|
13.8 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
25.4 |
|
|
|
9.0 |
|
|
|
33.7 |
|
|
|
|
|
|
|
|
|
|
|
|
|
$ |
648.2 |
|
|
$ |
504.4 |
|
|
$ |
382.9 |
|
|
|
|
|
|
|
|
|
|
|
50
NIKE, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(Continued)
Deferred tax (assets) and liabilities are comprised of the
following:
|
|
|
|
|
|
|
|
|
|
|
|
|
May 31, | |
|
|
| |
|
|
2005 | |
|
2004 | |
|
|
| |
|
| |
|
|
(In millions) | |
Deferred tax assets:
|
|
|
|
|
|
|
|
|
|
Allowance for doubtful accounts
|
|
$ |
(15.7 |
) |
|
$ |
(13.8 |
) |
|
Inventories
|
|
|
(29.7 |
) |
|
|
(28.4 |
) |
|
Sales return reserves
|
|
|
(31.5 |
) |
|
|
(30.7 |
) |
|
Deferred compensation
|
|
|
(89.2 |
) |
|
|
(82.2 |
) |
|
Reserves and accrued liabilities
|
|
|
(20.2 |
) |
|
|
(27.4 |
) |
|
Property, plant, and equipment
|
|
|
(26.4 |
) |
|
|
(20.3 |
) |
|
Foreign loss carryforwards
|
|
|
(28.9 |
) |
|
|
(29.1 |
) |
|
Foreign tax credit carryforwards
|
|
|
(34.4 |
) |
|
|
(24.4 |
) |
|
Hedges
|
|
|
(3.7 |
) |
|
|
(49.7 |
) |
|
Other
|
|
|
(22.7 |
) |
|
|
(17.2 |
) |
|
|
|
|
|
|
|
|
|
Total deferred tax assets
|
|
|
(302.4 |
) |
|
|
(323.2 |
) |
|
|
|
|
|
|
|
Valuation allowance
|
|
|
29.1 |
|
|
|
27.1 |
|
|
|
|
|
|
|
|
|
|
Total deferred tax assets after valuation allowance
|
|
|
(273.3 |
) |
|
|
(296.1 |
) |
|
|
|
|
|
|
|
Deferred tax liabilities:
|
|
|
|
|
|
|
|
|
|
Undistributed earnings of foreign subsidiaries
|
|
|
130.0 |
|
|
|
95.5 |
|
|
Property, plant and equipment
|
|
|
94.9 |
|
|
|
93.6 |
|
|
Intangibles
|
|
|
101.6 |
|
|
|
101.6 |
|
|
Hedges
|
|
|
4.0 |
|
|
|
5.9 |
|
|
Other
|
|
|
13.1 |
|
|
|
8.8 |
|
|
|
|
|
|
|
|
|
|
Total deferred tax liabilities
|
|
|
343.6 |
|
|
|
305.4 |
|
|
|
|
|
|
|
|
Net deferred tax liability
|
|
$ |
70.3 |
|
|
$ |
9.3 |
|
|
|
|
|
|
|
|
A reconciliation from the U.S. statutory federal income tax
rate to the effective income tax rate follows:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Year Ended May 31, | |
|
|
| |
|
|
2005 | |
|
2004 | |
|
2003 | |
|
|
| |
|
| |
|
| |
Federal income tax rate
|
|
|
35.0 |
% |
|
|
35.0 |
% |
|
|
35.0 |
% |
State taxes, net of federal benefit
|
|
|
1.8 |
|
|
|
2.1 |
|
|
|
2.5 |
|
Foreign earnings
|
|
|
(2.8 |
) |
|
|
(0.6 |
) |
|
|
(2.7 |
) |
Other, net
|
|
|
0.9 |
|
|
|
(1.7 |
) |
|
|
(0.7 |
) |
|
|
|
|
|
|
|
|
|
|
Effective income tax rate
|
|
|
34.9 |
% |
|
|
34.8 |
% |
|
|
34.1 |
% |
|
|
|
|
|
|
|
|
|
|
The Company has indefinitely reinvested approximately
$535.0 million of the cumulative undistributed earnings of
certain foreign subsidiaries. Such earnings would be subject to
U.S. taxation if repatriated to the U.S. The amount of
unrecognized deferred tax liability associated with the
permanently reinvested cumulative undistributed earnings was
approximately $110.1 million.
51
NIKE, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(Continued)
During the quarter ending May 31, 2005 the Company decided
to repatriate $500 million of foreign earnings during the
year ending May 31, 2006 under 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. The Company elected to
repatriate a combination of foreign earnings for which
U.S. taxes has previously been provided and foreign
earnings that had been designated as permanently reinvested.
Accordingly, the provisions made did not have a material impact
on the Companys income tax expense or effective tax rate
for the year.
Deferred tax assets at May 31, 2005 and 2004 were reduced
by a valuation allowance relating to tax benefits of certain
foreign subsidiaries with operating losses where it is more
likely than not that the deferred tax assets will not be
realized.
A benefit was recognized for foreign loss carryforwards of
$13.0 million and foreign tax credit carryforwards of
$34.4 million at May 31, 2005. Such losses and foreign
tax credits expire as follows (millions):
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Year Ended May 31, |
|
2008 | |
|
2009 | |
|
2010 | |
|
2011 | |
|
2012 | |
|
2013 | |
|
2014 | |
|
2015 | |
|
Indefinite | |
|
|
| |
|
| |
|
| |
|
| |
|
| |
|
| |
|
| |
|
| |
|
| |
Net Operating Losses
|
|
|
3.5 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
9.5 |
|
Tax Credits
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
0.6 |
|
|
|
18.8 |
|
|
|
15.0 |
|
|
|
|
|
During the years ended May 31, 2005, 2004, and 2003 income
tax benefits attributable to employee stock option transactions
of $63.1 million, $47.2 million, and
$12.5 million, respectively, were allocated to
shareholders equity.
|
|
Note 9 |
Redeemable Preferred Stock |
Sojitz America is the sole owner of the Companys
authorized Redeemable Preferred Stock, $1 par value, which
is redeemable at the option of Sojitz America or the Company at
par value aggregating $0.3 million. A cumulative dividend
of $0.10 per share is payable annually on May 31 and
no dividends may be declared or paid on the common stock of the
Company unless dividends on the Redeemable Preferred Stock have
been declared and paid in full. There have been no changes in
the Redeemable Preferred Stock in the three years ended
May 31, 2005. As the holder of the Redeemable Preferred
Stock, Sojitz America does not have general voting rights but
does have the right to vote as a separate class on the sale of
all or substantially all of the assets of the Company and its
subsidiaries, on merger, consolidation, liquidation or
dissolution of the Company or on the sale or assignment of the
NIKE trademark for athletic footwear sold in the United States.
The authorized number of shares of Class A Common Stock, no
par value, and Class B Common Stock, no par value, are
110 million and 350 million, respectively. Each share
of Class A Common Stock is convertible into one share of
Class B Common Stock. Voting rights of Class B Common
Stock are limited in certain circumstances with respect to the
election of directors.
In 1990, the Board of Directors adopted, and the shareholders
approved, the NIKE, Inc. 1990 Stock Incentive Plan (the
1990 Plan). The 1990 Plan provides for the issuance
of up to 50 million shares of Class B Common Stock in
connection with stock options and other awards granted under
such plan. The 1990 Plan authorizes the grant of incentive stock
options, non-statutory stock options, stock appreciation rights,
stock bonuses and the sale of restricted stock. The exercise
price for incentive stock options may not be less than the fair
market value of the underlying shares on the date of grant and
substantially all grants vest ratably over four years and expire
10 years from the date of grant. The exercise price for
non-statutory stock options, stock appreciation rights and the
purchase price of restricted stock may not be less than 75% of
the fair market
52
NIKE, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(Continued)
value of the underlying shares on the date of grant. No
consideration will be paid for stock bonuses awarded under the
1990 Plan. A committee of the Board of Directors administers the
1990 Plan. The committee has the authority to determine the
employees to whom awards will be made, the amount of the awards,
and the other terms and conditions of the awards. As of
May 31, 2005 the committee has granted substantially all
non-statutory stock options at 100% of fair market value on the
date of grant under the 1990 Plan.
From time to time, the Company grants restricted stock and
unrestricted stock to key employees under the 1990 Plan. The
number of shares granted to employees during the years ended
May 31, 2005, 2004 and 2003 were 114,000, 148,000 and
9,000, respectively. Recipients of restricted shares are
entitled to cash dividends and to vote their respective shares
throughout the period of restriction. The value of all of the
granted shares was established by the market price on the date
of grant. Unearned compensation was charged for the market value
of the restricted shares. The unearned compensation is shown as
a reduction of shareholders equity and is being amortized
ratably over the vesting period. During the years ended
May 31, 2005, 2004, and 2003, respectively, the Company
recognized $3.9 million, $2.4 million and
$2.7 million in selling and administrative expense related
to the grants, net of forfeitures.
During the years ended May 31, 2005, 2004 and 2003, the
Company also granted shares of stock under the Long-Term
Incentive Plan (LTIP), adopted by the Board of
Directors and approved by shareholders in September 1997. The
LTIP provides for the issuance of up to
1.0 million shares of Class B Common Stock. Under
the LTIP, awards are made to certain executives in their choice
of either cash or stock, based on performance targets
established over varying time periods. Once performance targets
are achieved, cash or shares of stock are issued. The shares are
immediately vested upon grant. The value of the shares is
established by the market price on the date of issuance. Under
the LTIP 4,000 and 8,000 shares with a price of $69.69 and
$54.80, respectively, were issued during the years ended
May 31, 2005 and May 31, 2004 for the plan years ended
May 31, 2004 and May 31, 2003, respectively. No shares
were issued during the year ended May 31, 2003 as
performance targets for the plan period ended May 31, 2002
were not met. Related to the LTIP the Company recognized
$22.2 million, $18.9 million and $9.9 million of
selling and administrative expense in the years ending
May 31, 2005, 2004 and 2003, respectively, net of
forfeitures.
The following summarizes the stock option transactions under
plans discussed above:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Weighted Average | |
|
|
Shares | |
|
Option Price | |
|
|
| |
|
| |
|
|
(In thousands) | |
|
|
Options outstanding May 31, 2002
|
|
|
16,441 |
|
|
$ |
42.31 |
|
|
Exercised
|
|
|
(1,307 |
) |
|
|
29.56 |
|
|
Forfeited
|
|
|
(713 |
) |
|
|
45.23 |
|
|
Granted
|
|
|
5,278 |
|
|
|
48.83 |
|
|
|
|
|
|
|
|
Options outstanding May 31, 2003
|
|
|
19,699 |
|
|
|
44.82 |
|
|
Exercised
|
|
|
(5,526 |
) |
|
|
42.67 |
|
|
Forfeited
|
|
|
(579 |
) |
|
|
47.14 |
|
|
Granted
|
|
|
5,215 |
|
|
|
52.14 |
|
|
|
|
|
|
|
|
Options outstanding May 31, 2004
|
|
|
18,809 |
|
|
|
47.42 |
|
|
Exercised
|
|
|
(4,438 |
) |
|
|
46.34 |
|
|
Forfeited
|
|
|
(435 |
) |
|
|
52.65 |
|
|
Granted
|
|
|
5,424 |
|
|
|
73.92 |
|
|
|
|
|
|
|
|
53
NIKE, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(Continued)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Weighted Average | |
|
|
Shares | |
|
Option Price | |
|
|
| |
|
| |
|
|
(In thousands) | |
|
|
Options outstanding May 31, 2005
|
|
|
19,360 |
|
|
$ |
54.98 |
|
Options exercisable at May 31,
|
|
|
|
|
|
|
|
|
|
2003
|
|
|
9,730 |
|
|
$ |
44.18 |
|
|
2004
|
|
|
8,177 |
|
|
|
45.00 |
|
|
2005
|
|
|
7,339 |
|
|
|
46.02 |
|
The following table sets forth the exercise prices, the number
of options outstanding and exercisable and the remaining
contractual lives of the Companys stock options at
May 31, 2005:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Options Outstanding | |
|
|
|
|
| |
|
Options Exercisable | |
|
|
|
|
Weighted | |
|
| |
|
|
Number of | |
|
Weighted | |
|
Average | |
|
Number of | |
|
Weighted | |
|
|
Options | |
|
Average | |
|
Contractual Life | |
|
Options | |
|
Average | |
Exercise Price |
|
Outstanding | |
|
Exercise Price | |
|
Remaining | |
|
Exercisable | |
|
Exercise Price | |
|
|
| |
|
| |
|
| |
|
| |
|
| |
|
|
(In thousands) | |
|
|
|
(Years) | |
|
(In thousands) | |
|
|
$21.00-$48.25
|
|
|
3,944 |
|
|
$ |
38.36 |
|
|
|
5.36 |
|
|
|
2,982 |
|
|
$ |
37.05 |
|
48.44- 48.98
|
|
|
4,117 |
|
|
|
48.90 |
|
|
|
6.54 |
|
|
|
1,860 |
|
|
|
48.80 |
|
49.01- 52.24
|
|
|
4,304 |
|
|
|
52.19 |
|
|
|
8.06 |
|
|
|
838 |
|
|
|
52.03 |
|
52.44- 71.92
|
|
|
1,752 |
|
|
|
56.49 |
|
|
|
4.11 |
|
|
|
1,645 |
|
|
|
55.82 |
|
73.21- 90.85
|
|
|
5,243 |
|
|
|
74.03 |
|
|
|
9.15 |
|
|
|
14 |
|
|
|
73.44 |
|
In September 2001, the Companys shareholders approved the
establishment of an Employee Stock Purchase Plan
(ESPP) under which 3.0 million shares of
Class B Stock are reserved for issuance to employees. The
plan qualifies as a noncompensatory employee stock purchase plan
under Section 423 of the Internal Revenue Code. In February
2003, the Companys Board of Directors approved a Foreign
Subsidiary ESPP under which 1.0 million shares of
Class B Stock are reserved for issuance to employees.
Employees are eligible to participate through payroll deductions
in amounts ranging from 1% to 10% of their compensation not to
exceed limitations set out under Section 423. At the end of
each six-month offering period, shares are purchased by the
participants at 85% of the lower of the fair market value at the
beginning or the end of the offering period. Under the ESPPs
0.3 million, 0.3 million, and 0.2 million shares
were issued during the years ended May 31, 2005, 2004, and
2003, respectively.
54
NIKE, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(Continued)
|
|
Note 11 |
Earnings Per Share |
The following represents a reconciliation from basic earnings
per share to diluted earnings per share. Options to purchase
0.2 million shares of common stock were outstanding at
May 31, 2005, 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 the common
shares and, therefore, the effect would be antidilutive. There
were no such antidilutive options outstanding at May 31,
2004 and there were 11.7 million antidilutive shares
outstanding at May 31, 2003.
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Year Ended May 31, | |
|
|
| |
|
|
2005 | |
|
2004 | |
|
2003 | |
|
|
| |
|
| |
|
| |
|
|
(In millions, except per share data) | |
Determination of shares:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Average common shares outstanding
|
|
|
262.6 |
|
|
|
263.2 |
|
|
|
264.5 |
|
|
Assumed conversion of dilutive stock options and awards
|
|
|
7.7 |
|
|
|
6.5 |
|
|
|
3.1 |
|
|
|
|
|
|
|
|
|
|
|
Diluted average common shares outstanding
|
|
|
270.3 |
|
|
|
269.7 |
|
|
|
267.6 |
|
|
|
|
|
|
|
|
|
|
|
Basic earnings per common share before cumulative
effect of accounting change
|
|
$ |
4.61 |
|
|
$ |
3.59 |
|
|
$ |
2.80 |
|
Cumulative effect of accounting change
|
|
|
|
|
|
|
|
|
|
|
1.01 |
|
|
|
|
|
|
|
|
|
|
|
|
|
$ |
4.61 |
|
|
$ |
3.59 |
|
|
$ |
1.79 |
|
|
|
|
|
|
|
|
|
|
|
Diluted earnings per common share before cumulative
effect of accounting change
|
|
$ |
4.48 |
|
|
$ |
3.51 |
|
|
$ |
2.77 |
|
Cumulative effect of accounting change
|
|
|
|
|
|
|
|
|
|
|
1.00 |
|
|
|
|
|
|
|
|
|
|
|
|
|
$ |
4.48 |
|
|
$ |
3.51 |
|
|
$ |
1.77 |
|
|
|
|
|
|
|
|
|
|
|
The Company has a profit sharing plan available to most
U.S.-based employees. The terms of the plan call for annual
contributions by the Company as determined by the Board of
Directors. A subsidiary of the Company also has a profit sharing
plan available to its U.S.-based employees. The terms of the
plan call for annual contributions as determined by the
subsidiarys executive management. Contributions of
$29.1 million, $23.0 million, and $17.4 million
to the plans are included in selling and administrative expenses
in the consolidated financial statements for the years ended
May 31, 2005, 2004 and 2003, respectively. The Company has
various 401(k) employee savings plans available to U.S.-based
employees. The Company matches a portion of employee
contributions with common stock or cash. Company contributions
to the savings plans were $20.3 million,
$17.0 million, and $15.6 million for the years ended
May 31, 2005, 2004 and 2003, respectively, and are included
in selling and administrative expenses.
55
NIKE, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(Continued)
|
|
Note 13 |
Comprehensive Income |
Comprehensive income is as follows:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Year Ended May 31, | |
|
|
| |
|
|
2005 | |
|
2004 | |
|
2003 | |
|
|
| |
|
| |
|
| |
|
|
(In millions) | |
Net income
|
|
$ |
1,211.6 |
|
|
$ |
945.6 |
|
|
$ |
474.0 |
|
|
Other comprehensive income (loss):
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Change in cumulative translation adjustment and other (net of
tax benefit (expense) of $3.9 in 2005, ($4.7) in 2004, and
($22.4) in 2003)
|
|
|
70.1 |
|
|
|
27.5 |
|
|
|
127.4 |
|
|
|
Changes due to cash flow hedging instruments (Note 16):
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net (loss) gain on hedge derivatives (net of tax benefit of
$28.7 in 2005, $33.5 in 2004 and $160.8 in 2003)
|
|
|
(54.0 |
) |
|
|
(72.9 |
) |
|
|
(311.9 |
) |
|
|
|
Reclassification to net income of previously deferred
(gains) and losses related to hedge derivatives (net of tax
(benefit) of ($72.8) in 2005, ($97.8) in 2004 and ($65.6) in
2003)
|
|
|
143.6 |
|
|
|
198.8 |
|
|
|
137.2 |
|
|
|
|
|
|
|
|
|
|
|
Other comprehensive income (loss)
|
|
|
159.7 |
|
|
|
153.4 |
|
|
|
(47.3 |
) |
|
|
|
|
|
|
|
|
|
|
Total comprehensive income
|
|
$ |
1,371.3 |
|
|
$ |
1,099.0 |
|
|
$ |
426.7 |
|
|
|
|
|
|
|
|
|
|
|
The components of accumulated other comprehensive income (loss)
are as follows:
|
|
|
|
|
|
|
|
|
|
|
May 31, | |
|
|
| |
|
|
2005 | |
|
2004 | |
|
|
| |
|
| |
|
|
(In millions) | |
Cumulative translation adjustment and other
|
|
$ |
74.8 |
|
|
$ |
4.7 |
|
Net deferred loss on hedge derivatives
|
|
|
(1.4 |
) |
|
|
(91.0 |
) |
|
|
|
|
|
|
|
|
|
$ |
73.4 |
|
|
$ |
(86.3 |
) |
|
|
|
|
|
|
|
|
|
Note 14 |
Commitments and Contingencies |
The Company leases space for certain of its offices, warehouses
and retail stores under leases expiring from one to twenty-nine
years after May 31, 2005. Rent expense was
$232.6 million, $206.7 million and $183.2 million
for the years ended May 31, 2005, 2004 and 2003,
respectively. Amounts of minimum future annual rental
commitments under non-cancelable operating leases in each of the
five years ending May 31, 2006 through 2010 are
$186.7 million, $157.6 million, $135.3 million,
$112.9 million, $97.8 million, respectively, and
$556.3 million in later years.
As of May 31, 2005 and 2004, the Company had letters of
credit outstanding totaling $555.0 million and
$551.6 million, respectively. These letters of credit were
issued primarily for the purchase of inventory.
In connection with various contracts and agreements, the Company
provides routine indemnifications relating to the enforceability
of intellectual property rights, coverage for legal issues that
arise and other items that fall under the scope of FASB
Interpretation No. 45, Guarantors Accounting
and Disclosure Requirements for Guarantees, Including Indirect
Guarantees of Indebtedness of Others. Currently, the
Company has several such agreements in place. However, based on
the Companys historical experience and the estimated
probability of future loss, the Company has determined that the
fair value of such indemnifications is not material to the
Companys financial position or results of operations.
56
NIKE, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(Continued)
In the ordinary course of its business, the Company is involved
in legal proceedings involving contractual and employment
relationships, product liability claims, trademark rights, and a
variety of other matters. The Company does not believe there are
any pending legal proceedings that will have a material impact
on the Companys financial position or results of
operations.
In September 2003, the Company acquired 100 percent of the
equity shares of Converse. Converse designs, distributes, and
markets high performance and casual athletic footwear and
apparel. The acquisition was accounted for under the purchase
method of accounting in accordance with SFAS No. 141,
Business Combinations (FAS 141). The cash
purchase price, including acquisition costs, was approximately
$310 million. The results of Converses operations
have been included in the consolidated financial statements
since the date of the acquisition as part of the Companys
Other operating segment.
All assets and liabilities of Converse were initially recorded
in the Companys Consolidated Balance Sheet based on their
estimated fair values at the date of acquisition. Identifiable
intangible assets and goodwill relating to the purchase
approximated $254.8 million and $69.1 million,
respectively. Identifiable intangible assets include
$246.2 million for trademarks that have an indefinite life,
and $8.6 million of other intangible assets that were
amortized over nine months. The purchase accounting included a
deferred tax liability of $105.1 million recorded for the
book-tax difference in future tax consequences for the acquired
identifiable indefinite-lived intangible assets, which is the
primary reason that goodwill was also recorded in the
transaction. The pro forma effect of the acquisition on the
combined results of operations was not significant.
In August 2004, the Company acquired 100 percent of the
equity interests in Official Starter. The Exeter Brands Group
LLC, a wholly-owned subsidiary of the Company, was formed soon
thereafter to develop the Companys business in retail
channels serving value-conscious consumers and to operate the
Official Starter business. The acquisition was accounted for
under the purchase method of accounting in accordance with
FAS 141. The cash purchase price, including acquisition
costs net of cash acquired, was $47.2 million. All assets
and liabilities of Exeter Brands Group were initially recorded
in the Companys Consolidated Balance Sheet based on their
estimated fair values at the date of acquisition. Identifiable
intangible assets related to the purchase approximated
$43.6 million and include $39.0 million allocated to
amortized trademarks and $4.6 million allocated to other
amortized intangible assets. The results of Exeter Brands
Groups operations have been included in the consolidated
financial statements since the date of acquisition as part of
the Companys Other operating segment. The pro forma effect
of the acquisition on the combined results of operations was not
significant.
|
|
Note 16 |
Risk Management and Derivatives |
The Company is exposed to global market risks, including the
effect of changes in foreign currency exchange rates and
interest rates. The Company uses derivatives to manage financial
exposures that occur in the normal course of business. The
Company does not hold or issue derivatives for trading purposes.
The Company formally documents all relationships between hedging
instruments and hedged items, as well as its risk-management
objective and strategy for undertaking hedge transactions. This
process includes linking all derivatives to either specific
assets and liabilities on the balance sheet or specific firm
commitments or forecasted transactions.
Substantially all derivatives entered into by the Company are
designated as either cash flow or fair value hedges. All
derivatives are recognized on the balance sheet at their fair
value. Unrealized gain positions are recorded as other current
assets or other non-current assets, depending on the
instruments maturity date. Unrealized loss positions are
recorded as accrued liabilities or other non-current
liabilities. Changes in fair values of outstanding cash flow
hedge derivatives that are highly effective are recorded in
other comprehensive
57
NIKE, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(Continued)
income, until net income is affected by the variability of cash
flows of the hedged transaction. Fair value hedges are recorded
in net income and are offset by the change in fair value of the
underlying asset or liability being hedged.
The purpose of the Companys foreign currency hedging
activities is to protect the Company from the risk that the
eventual cash flows resulting from transactions in foreign
currencies, including revenues, product costs, selling and
administrative expenses, investments in
U.S. dollar-denominated available-for-sale debt securities
and intercompany transactions, including intercompany
borrowings, will be adversely affected by changes in exchange
rates. It is the Companys policy to utilize derivatives to
reduce foreign exchange risks where internal netting strategies
cannot be effectively employed.
Derivatives used by the Company to hedge foreign currency
exchange risks are forward exchange contracts, options and
cross-currency swaps. The cross-currency swaps are used to hedge
foreign currency denominated payments related to intercompany
loan agreements. There are currently no cross-currency swaps
outstanding. Hedged transactions are denominated primarily in
euros, Japanese yen, Canadian dollars, Korean won, Australian
dollars, and Mexican pesos. The Company hedges up to 100% of
anticipated exposures typically twelve months in advance but has
hedged as much as 32 months in advance. When intercompany
loans are hedged, it is typically for their expected duration.
Substantially all foreign currency derivatives entered into by
the Company qualify for and are designated as foreign-currency
cash flow hedges, including those hedging foreign currency
denominated firm commitments.
Changes in fair values of outstanding cash flow hedge
derivatives that are highly effective are recorded in other
comprehensive income, until net income is affected by the
variability of cash flows of the hedged transaction. In most
cases amounts recorded in other comprehensive income will be
released to net income some time after the maturity of the
related derivative. The consolidated statement of income
classification of effective hedge results is the same as that of
the underlying exposure. Results of hedges of revenue and
product costs are recorded in revenue and cost of sales,
respectively, when the underlying hedged transaction affects net
income. Results of hedges of selling and administrative expense
are recorded together with those costs when the related expense
is recorded. Results of hedges of both anticipated sales of
U.S. dollar-denominated available-for-sale securities and
anticipated intercompany transactions are recorded in other
expense, net when the transaction occurs. Hedges of recorded
balance sheet positions are recorded in other expense, net
currently together with the transaction gain or loss from the
hedged balance sheet position. Net foreign currency transaction
gains and losses, which includes hedge results captured in
revenues, cost of sales, selling and administrative expense and
other expense, net, were a $217.8 million loss, a
$304.3 million loss, and a $180.9 million loss for the
years ended May 31, 2005, 2004, and 2003, respectively.
Premiums paid on options are initially recorded as deferred
charges. The Company assesses effectiveness on options based on
the total cash flows method and records total changes in the
options fair value to other comprehensive income to the
degree they are effective.
As of May 31, 2005, $31.0 million of deferred net
losses (net of tax) on both outstanding and matured derivatives
accumulated in other comprehensive income are expected to be
reclassified to net income during the next twelve months as a
result of underlying hedged transactions also being recorded in
net income. Actual amounts ultimately reclassified to net income
are dependent on the exchange rates in effect when derivative
contracts that are currently outstanding mature. As of
May 31, 2005, the maximum term over which the Company is
hedging exposures to the variability of cash flows for all
forecasted and recorded transactions is 24 months.
58
NIKE, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(Continued)
The Company formally assesses, both at a hedges inception
and on an ongoing basis, whether the derivatives that are used
in the hedging transaction have been highly effective in
offsetting changes in the cash flows of hedged items and whether
those derivatives may be expected to remain highly effective in
future periods. When it is determined that a derivative is not,
or has ceased to be, highly effective as a hedge, the Company
discontinues hedge accounting prospectively.
The Company discontinues hedge accounting prospectively when
(1) it determines that the derivative is no longer highly
effective in offsetting changes in the cash flows of a hedged
item (including hedged items such as firm commitments or
forecasted transactions); (2) the derivative expires or is
sold, terminated, or exercised; (3) it is no longer
probable that the forecasted transaction will occur; or
(4) management determines that designating the derivative
as a hedging instrument is no longer appropriate.
When the Company discontinues hedge accounting because it is no
longer probable that the forecasted transaction will occur in
the originally expected period, the gain or loss on the
derivative remains in accumulated other comprehensive income and
is reclassified to net income when the forecasted transaction
affects net income. However, if it is probable that a forecasted
transaction will not occur by the end of the originally
specified time period or within an additional two-month period
of time thereafter, the gains and losses that were accumulated
in other comprehensive loss will be recognized immediately in
net income. In all situations in which hedge accounting is
discontinued and the derivative remains outstanding, the Company
will carry the derivative at its fair value on the balance
sheet, recognizing future changes in the fair value in other
expense, net. Any hedge ineffectiveness is recorded in other
expense, net. Effectiveness for cash flow hedges is assessed
based on forward rates.
For each of the years ended May 31, 2005, 2004 and 2003 the
Company recorded in other expense, net an insignificant loss
representing the total ineffectiveness of all derivatives. Net
income for each of the years ended May 31, 2005, 2004 and
2003 was not materially affected due to discontinued hedge
accounting.
The Company is also exposed to the risk of changes in the fair
value of certain fixed-rate debt attributable to changes in
interest rates. Derivatives currently used by the Company to
hedge this risk are receive-fixed, pay-variable interest rate
swaps.
Substantially all interest rate swap agreements are designated
as fair value hedges of the related long-term debt and meet the
shortcut method requirements under FAS 133. Accordingly,
changes in the fair values of the interest rate swap agreements
are exactly offset by changes in the fair value of the
underlying long-term debt. No ineffectiveness has been recorded
to net income related to interest rate swaps designated as fair
value hedges for the years ended May 31, 2005, 2004
and 2003.
As discussed in Note 7, during the year ended May 31,
2004, the Company issued a $50 million medium-term note
maturing October 1, 2013 and simultaneously entered into a
receive-fixed, pay-variable interest rate swap with the same
notional amount and fixed interest rate as the note. However,
the swap expires October 2, 2006. This interest rate swap
is not accounted for as a fair value hedge, accordingly changes
in the fair value of the swap are recorded to net income each
period as a component of other expense, net. The recorded fair
value of the swap was not material for the years ended
May 31, 2005 and 2004.
In fiscal 2003 the Company entered into an interest rate swap
agreement related to a Japanese yen denominated intercompany
loan with one of the Companys Japanese subsidiaries. The
Japanese subsidiary pays variable interest on the intercompany
loan based on 3-month LIBOR plus a spread. Under the interest
rate swap agreement, the subsidiary pays fixed interest payments
at 0.8% and receives variable interest payments based on 3-month
LIBOR plus a spread based on a notional amount of 8 billion
Japanese yen. This interest rate swap is not accounted for as a
fair value hedge, accordingly changes in the fair value of the
swap
59
NIKE, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(Continued)
are recorded to net income each period as a component of other
expense, net. The recorded fair value of the swap was not
material for the years ended May 31, 2005, 2004
and 2003.
The fair values of all derivatives recorded on the consolidated
balance sheet are as follows:
|
|
|
|
|
|
|
|
|
|
|
|
May 31, | |
|
|
| |
|
|
2005 | |
|
2004 | |
|
|
| |
|
| |
|
|
(In millions) | |
Unrealized Gains:
|
|
|
|
|
|
|
|
|
|
Foreign currency exchange contracts and options
|
|
$ |
113.2 |
|
|
$ |
83.1 |
|
|
Interest rate swaps
|
|
|
9.0 |
|
|
|
7.0 |
|
Unrealized (Losses):
|
|
|
|
|
|
|
|
|
|
Foreign currency exchange contracts and options
|
|
|
(62.9 |
) |
|
|
(144.5 |
) |
|
Interest rate swaps
|
|
|
(1.3 |
) |
|
|
(3.9 |
) |
|
|
|
Concentration of Credit Risk |
The Company is exposed to credit-related losses in the event of
non-performance by counterparties to hedging instruments. The
counterparties to all derivative transactions are major
financial institutions with investment grade credit ratings.
However, this does not eliminate the Companys exposure to
credit risk with these institutions. This credit risk is
generally limited to the unrealized gains in such contracts
should any of these counterparties fail to perform as
contracted. To manage this risk, the Company has established
strict counterparty credit guidelines that are continually
monitored and reported to senior management according to
prescribed guidelines. The Company utilizes a portfolio of
financial institutions either headquartered or operating in the
same countries the Company conducts its business. As a result of
the above considerations, the Company considers the risk of
counterparty default to be minimal.
In addition to hedging instruments, the Company is subject to
concentrations of credit risk associated with cash and
equivalents and accounts receivable. The Company places cash and
equivalents with financial institutions with investment grade
credit ratings and, by policy, limits the amount of credit
exposure to any one financial institution. The Company considers
its concentration risk related to accounts receivable to be
mitigated by the Companys credit policy, the significance
of outstanding balances owed by each individual customer at any
point in time and the geographic dispersion of these customers.
|
|
Note 17 |
Operating Segments and Related Information |
Operating Segments. The Companys operating segments
are evidence of the structure of the Companys internal
organization. The major segments are defined by geographic
regions for operations participating in NIKE brand sales
activity excluding NIKE Golf and Bauer NIKE Hockey. 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), which
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
60
NIKE, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(Continued)
represents income before income taxes and cumulative effect of
accounting change as shown in the 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 corporate activity, certain
currency exchange rate gains and losses on transactions, and
intercompany eliminations for specific income statement items in
the Consolidated Statements of Income.
Additions to long-lived assets as presented following represent
capital expenditures.
Accounts receivable, inventory and property, plant and equipment
for operating segments are regularly reviewed by management and
are therefore provided below. Certain NIKE Golf receivables are
managed by the geographic regions and as a result, are included
in the geographic regions balances.
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Year Ended May 31, | |
|
|
| |
|
|
2005 | |
|
2004 | |
|
2003 | |
|
|
| |
|
| |
|
| |
|
|
(In millions) | |
Net Revenue
|
|
|
|
|
|
|
|
|
|
|
|
|
|
United States
|
|
$ |
5,129.3 |
|
|
$ |
4,781.8 |
|
|
$ |
4,637.4 |
|
|
Europe, Middle East and Africa
|
|
|
4,281.6 |
|
|
|
3,827.7 |
|
|
|
3,221.5 |
|
|
Asia Pacific
|
|
|
1,897.3 |
|
|
|
1,610.8 |
|
|
|
1,340.6 |
|
|
Americas
|
|
|
695.8 |
|
|
|
604.5 |
|
|
|
509.1 |
|
|
Other
|
|
|
1,735.7 |
|
|
|
1,428.3 |
|
|
|
988.4 |
|
|
|
|
|
|
|
|
|
|
|
|
|
$ |
13,739.7 |
|
|
$ |
12,253.1 |
|
|
$ |
10,697.0 |
|
|
|
|
|
|
|
|
|
|
|
Pre-tax Income
|
|
|
|
|
|
|
|
|
|
|
|
|
|
United States
|
|
$ |
1,125.8 |
|
|
$ |
1,007.3 |
|
|
$ |
952.9 |
|
|
Europe, Middle East and Africa
|
|
|
917.5 |
|
|
|
744.0 |
|
|
|
522.1 |
|
|
Asia Pacific
|
|
|
399.8 |
|
|
|
352.3 |
|
|
|
288.4 |
|
|
Americas
|
|
|
117.6 |
|
|
|
97.4 |
|
|
|
91.6 |
|
|
Other
|
|
|
153.9 |
|
|
|
75.3 |
|
|
|
7.9 |
|
|
Corporate
|
|
|
(854.8 |
) |
|
|
(826.3 |
) |
|
|
(739.9 |
) |
|
|
|
|
|
|
|
|
|
|
|
|
$ |
1,859.8 |
|
|
$ |
1,450.0 |
|
|
$ |
1,123.0 |
|
|
|
|
|
|
|
|
|
|
|
61
NIKE, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(Continued)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Year Ended May 31, | |
|
|
| |
|
|
2005 | |
|
2004 | |
|
2003 | |
|
|
| |
|
| |
|
| |
|
|
(In millions) | |
Additions to Long-lived Assets
|
|
|
|
|
|
|
|
|
|
|
|
|
|
United States
|
|
$ |
54.8 |
|
|
$ |
30.8 |
|
|
$ |
27.1 |
|
|
Europe, Middle East and Africa
|
|
|
38.8 |
|
|
|
28.9 |
|
|
|
29.2 |
|
|
Asia Pacific
|
|
|
22.0 |
|
|
|
19.9 |
|
|
|
26.2 |
|
|
Americas
|
|
|
6.8 |
|
|
|
5.8 |
|
|
|
3.5 |
|
|
Other
|
|
|
31.3 |
|
|
|
25.2 |
|
|
|
17.5 |
|
|
Corporate
|
|
|
103.4 |
|
|
|
104.2 |
|
|
|
82.4 |
|
|
|
|
|
|
|
|
|
|
|
|
|
$ |
257.1 |
|
|
$ |
214.8 |
|
|
$ |
185.9 |
|
|
|
|
|
|
|
|
|
|
|
Depreciation
|
|
|
|
|
|
|
|
|
|
|
|
|
|
United States
|
|
$ |
49.0 |
|
|
$ |
52.1 |
|
|
$ |
49.9 |
|
|
Europe, Middle East and Africa
|
|
|
45.2 |
|
|
|
43.6 |
|
|
|
38.9 |
|
|
Asia Pacific
|
|
|
28.3 |
|
|
|
38.5 |
|
|
|
38.5 |
|
|
Americas
|
|
|
4.0 |
|
|
|
3.9 |
|
|
|
4.5 |
|
|
Other
|
|
|
28.5 |
|
|
|
22.2 |
|
|
|
16.1 |
|
|
Corporate
|
|
|
102.2 |
|
|
|
94.9 |
|
|
|
91.4 |
|
|
|
|
|
|
|
|
|
|
|
|
|
$ |
257.2 |
|
|
$ |
255.2 |
|
|
$ |
239.3 |
|
|
|
|
|
|
|
|
|
|
|
Accounts Receivable, net
|
|
|
|
|
|
|
|
|
|
|
|
|
|
United States
|
|
$ |
627.0 |
|
|
$ |
616.6 |
|
|
$ |
615.5 |
|
|
Europe, Middle East and Africa
|
|
|
723.6 |
|
|
|
724.1 |
|
|
|
785.8 |
|
|
Asia Pacific
|
|
|
335.6 |
|
|
|
272.9 |
|
|
|
230.4 |
|
|
Americas
|
|
|
165.3 |
|
|
|
132.1 |
|
|
|
120.9 |
|
|
Other
|
|
|
368.2 |
|
|
|
327.8 |
|
|
|
289.9 |
|
|
Corporate
|
|
|
42.4 |
|
|
|
46.7 |
|
|
|
41.4 |
|
|
|
|
|
|
|
|
|
|
|
|
|
$ |
2,262.1 |
|
|
$ |
2,120.2 |
|
|
$ |
2,083.9 |
|
|
|
|
|
|
|
|
|
|
|
Inventory, net
|
|
|
|
|
|
|
|
|
|
|
|
|
|
United States
|
|
$ |
639.9 |
|
|
$ |
579.4 |
|
|
$ |
640.6 |
|
|
Europe, Middle East and Africa
|
|
|
496.5 |
|
|
|
485.7 |
|
|
|
383.4 |
|
|
Asia Pacific
|
|
|
228.9 |
|
|
|
163.9 |
|
|
|
143.5 |
|
|
Americas
|
|
|
94.4 |
|
|
|
78.3 |
|
|
|
78.1 |
|
|
Other
|
|
|
316.2 |
|
|
|
305.5 |
|
|
|
245.5 |
|
|
Corporate
|
|
|
35.2 |
|
|
|
37.4 |
|
|
|
23.8 |
|
|
|
|
|
|
|
|
|
|
|
|
|
$ |
1,811.1 |
|
|
$ |
1,650.2 |
|
|
$ |
1,514.9 |
|
|
|
|
|
|
|
|
|
|
|
62
NIKE, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(Continued)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Year Ended May 31, | |
|
|
| |
|
|
2005 | |
|
2004 | |
|
2003 | |
|
|
| |
|
| |
|
| |
|
|
(In millions) | |
Property, Plant and Equipment, net
|
|
|
|
|
|
|
|
|
|
|
|
|
|
United States
|
|
$ |
216.0 |
|
|
$ |
213.0 |
|
|
$ |
215.7 |
|
|
Europe, Middle East and Africa
|
|
|
230.0 |
|
|
|
232.0 |
|
|
|
241.4 |
|
|
Asia Pacific
|
|
|
380.4 |
|
|
|
379.7 |
|
|
|
386.3 |
|
|
Americas
|
|
|
15.7 |
|
|
|
12.7 |
|
|
|
11.0 |
|
|
Other
|
|
|
93.4 |
|
|
|
91.8 |
|
|
|
82.1 |
|
|
Corporate
|
|
|
670.3 |
|
|
|
682.6 |
|
|
|
684.3 |
|
|
|
|
|
|
|
|
|
|
|
|
|
$ |
1,605.8 |
|
|
$ |
1,611.8 |
|
|
$ |
1,620.8 |
|
|
|
|
|
|
|
|
|
|
|
Revenues by Major Product Lines. Revenues to external
customers for NIKE brand products are attributable to sales of
footwear, apparel and equipment. Other revenues to external
customers primarily include external sales by Cole Haan Holdings
Incorporated, Bauer NIKE Hockey Inc., Hurley International LLC,
NIKE Golf, Converse Inc. (beginning September 2003), and Exeter
Brands Group LLC (beginning August 2004).
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Year Ended May 31, | |
|
|
| |
|
|
2005 | |
|
2004 | |
|
2003 | |
|
|
| |
|
| |
|
| |
|
|
(In millions) | |
Footwear
|
|
$ |
7,299.7 |
|
|
$ |
6,566.1 |
|
|
$ |
5,980.9 |
|
Apparel
|
|
|
3,879.4 |
|
|
|
3,539.1 |
|
|
|
3,125.1 |
|
Equipment
|
|
|
824.9 |
|
|
|
719.6 |
|
|
|
602.6 |
|
Other
|
|
|
1,735.7 |
|
|
|
1,428.3 |
|
|
|
988.4 |
|
|
|
|
|
|
|
|
|
|
|
|
|
$ |
13,739.7 |
|
|
$ |
12,253.1 |
|
|
$ |
10,697.0 |
|
|
|
|
|
|
|
|
|
|
|
Revenues and Long-Lived Assets by Geographic Area.
Geographical area information is similar to that shown
previously under operating segments with the exception of the
Other activity, which has been allocated to the geographical
areas based on the location where the sales originated. Revenues
derived in the U.S. were $6,284.5 million,
$5,781.0 million, and $5,263.8 million, for the years
ended May 31, 2005, 2004, and 2003, respectively. The
Companys largest concentrations of long-lived assets are
in the U.S. and Japan. Long-lived assets attributable to
operations in the U.S., which are comprised of net
property, plant & equipment were $956.6 million,
$957.0 million, and $945.9 million at May 31,
2005, 2004, and 2003, respectively. Long-lived assets
attributable to operations in Japan were $321.0 million,
$328.0 million, and $329.0 million at May 31,
2005, 2004, and 2003, respectively.
Major Customers. During the year ended May 31, 2005,
revenues derived from Foot Locker, Inc. represented
11 percent of the Companys consolidated revenues.
Sales to this customer are included in all segments of the
Company. During the years ended May 31, 2004 and 2003 the
Company did not have a significant customer that accounted for
more than 10 percent of consolidated revenues.
63
|
|
Item 9. |
Changes In and Disagreements with Accountants on
Accounting and Financial Disclosure |
There has been no change of accountants nor any disagreements
with accountants on any matter of accounting principles or
practices or financial statement disclosure required to be
reported under this Item.
|
|
Item 9A. |
Controls and Procedures |
The Company maintains disclosure controls and procedures that
are designed to ensure that information required to be disclosed
in the Companys Exchange Act reports is recorded,
processed, summarized and reported within the time periods
specified in the Securities and Exchange Commissions rules
and forms and that such information is accumulated and
communicated to the Companys 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 Companys
management, including the Companys Chief Executive Officer
and Chief Financial Officer, to evaluate the effectiveness of
the design and operation of the Companys disclosure
controls and procedures. Based on the foregoing, the
Companys Chief Executive Officer and Chief Financial
Officer concluded that the Companys disclosure controls
and procedures were effective at the reasonable assurance level
as of May 31, 2005.
Managements report on internal control over financial
reporting and the related attestation report of
PricewaterhouseCoopers LLP are included in Item 8 on
pages 34-36 of this Report.
There has been no change in the Companys internal control
over financial reporting during the Companys most recent
fiscal quarter that has materially affected, or is reasonable
likely to materially affect, the Companys internal control
over financial reporting.
|
|
Item 9B. |
Other Information |
No disclosure is required under this Item.
PART III
|
|
Item 10. |
Directors and Executive Officers of the Registrant |
The information required by Item 401 of Regulation S-K
regarding directors is included under Election of
Directors in the definitive Proxy Statement for our 2005
Annual Meeting of Shareholders and is incorporated herein by
reference. The information required by Item 401 of
Regulation S-K regarding executive officers is included
under Executive Officers of the Registrant in
Item 1 of this Report. The information required by
Item 405 of Regulation S-K is included under
Section 16(a) Beneficial Ownership Reporting
Compliance in the definitive Proxy Statement for our 2005
Annual Meeting of Shareholders and is incorporated herein by
reference. The information required by Item 406 of
Regulation S-K is included under Code of Business
Conduct and Ethics in the definitive Proxy Statement for
our 2005 Annual Meeting of Shareholders and is incorporated
herein by reference.
|
|
Item 11. |
Executive Compensation |
The information required by this Item is included under
Director Compensation and Retirement Plan,
Executive Compensation (but excluding the
Performance Graph), Compensation Committee Interlocks and
Insider Participation and Employment Contracts and
Termination of Employment and Change-in-Control
Arrangements in the definitive Proxy Statement for our
2005 Annual Meeting of Shareholders and is incorporated herein
by reference.
64
|
|
Item 12. |
Security Ownership of Certain Beneficial Owners and
Management and Related Stockholder Matters |
The information required by this Item is included under
Stock Holdings of Certain Owners and Management and
under Equity Compensation Plans in the definitive
Proxy Statement for our 2005 Annual Meeting of Shareholders and
is incorporated herein by reference.
|
|
Item 13. |
Certain Relationships and Related Transactions |
The information required by this Item is included under
Certain Transactions and Business Relationships in
the definitive Proxy Statement for our 2005 Annual Meeting of
Shareholders and is incorporated herein by reference.
|
|
Item 14. |
Principal Accountant Fees and Services |
The information required by this Item is included under
Ratification Of Independent Registered Public Accounting
Firm in the definitive Proxy Statement for our 2005 Annual
Meeting of Shareholders and is incorporated herein by reference.
PART IV
|
|
Item 15. |
Exhibits and Financial Statement Schedules |
(a) The following documents are filed as part of this
report:
|
|
|
|
|
|
|
|
|
|
|
Form 10-K | |
|
|
|
|
Page No. | |
|
|
|
|
| |
1.
|
|
FINANCIAL STATEMENTS: |
|
|
|
|
|
|
Report of Independent Registered Public Accounting Firm |
|
|
35 |
|
|
|
Consolidated Statements of Income for each of the three years
ended May 31, 2005, May 31, 2004 and May 31, 2003 |
|
|
37 |
|
|
|
Consolidated Balance Sheets at May 31, 2005 and 2004 |
|
|
38 |
|
|
|
Consolidated Statements of Cash Flows for each of the three
years ended May 31, 2005, May 31, 2004 and
May 31, 2003 |
|
|
39 |
|
|
|
Consolidated Statements of Shareholders Equity for each of
the three years ended May 31, 2005, May 31, 2004 and
May 31, 2003 |
|
|
40 |
|
|
|
Notes to Consolidated Financial Statements |
|
|
41 |
|
2.
|
|
FINANCIAL STATEMENT SCHEDULE: |
|
|
|
|
|
|
II Valuation and Qualifying Accounts |
|
|
F-1 |
|
All other schedules are omitted because they are not applicable
or the required information is shown in the financial statements
or notes thereto.
65
3. EXHIBITS:
|
|
|
|
|
|
3 |
.1 |
|
Restated Articles of Incorporation, as amended (incorporated by
reference to Exhibit 3.1 to the Companys Quarterly
Report on Form 10-Q for the fiscal quarter ended
August 31, 1995). |
|
3 |
.2 |
|
Third Restated Bylaws, as amended (incorporated by reference to
Exhibit 3.2 to the Companys 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). |
|
4 |
.3 |
|
Indenture dated as of December 13, 1996 between the Company
and Bank One Trust Company, National Association (successor in
interest to The First National Bank of Chicago), as Trustee
(incorporated by reference to Exhibit 4.01 to Amendment
No. 1 to Registration Statement No. 333-15953 filed by
the Company on November 26, 1996). |
|
4 |
.4 |
|
Form of Officers Certificate relating to the
Companys 5.5% Notes and form of 5.5% Note
(incorporated by reference to Exhibits 4.2 and 4.3 of the
Companys Current Report on Form 8-K dated August 17,
2001). |
|
4 |
.5 |
|
Form of Officers Certificate relating to the
Companys Fixed Rate Medium-Term Notes and the
Companys Floating Rate Medium-Term Notes, form of Fixed
Rate Note and form of Floating Rate Note (incorporated by
reference to Exhibits 4.2, 4.3 and 4.4 of the
Companys Current Report on Form 8-K dated May 29,
2002). |
|
4 |
.6 |
|
Credit Agreement dated as of November 20, 2003 among NIKE,
Inc., Bank of America, N.A., individually and as Agent, and the
other banks party thereto (incorporated by reference to
Exhibit 4.3 to the Companys Quarterly Report on
Form 10-Q for the fiscal quarter ended November 30,
2003). |
|
10 |
.1 |
|
Form of Non-statutory Stock Option Agreement for options granted
to non-employee directors under the 1990 Stock Incentive Plan
(incorporated by reference to Exhibit 10.3 to the
Companys Current Report on Form 8-K filed June 21,
2005).* |
|
10 |
.2 |
|
Form of Indemnity Agreement entered into between the Company and
each of its officers and directors (incorporated by reference to
the Companys definitive proxy statement filed in
connection with its annual meeting of shareholders held on
September 21, 1987). |
|
10 |
.3 |
|
NIKE, Inc. 1990 Stock Incentive Plan (incorporated by reference
to Exhibit 10.1 to the Companys Quarterly Report on
Form 10-Q for the fiscal quarter ended August 31,
2004).* |
|
10 |
.4 |
|
NIKE, Inc. Executive Performance Sharing Plan (incorporated by
reference to the Companys definitive proxy statement filed
in connection with its annual meeting of shareholders held on
September 18, 2000).* |
|
10 |
.5 |
|
NIKE, Inc. Long-Term Incentive Plan (incorporated by reference
to the Companys definitive proxy statement filed in
connection with its annual meeting of shareholders held on
September 18, 2002).* |
|
10 |
.6 |
|
NIKE, Inc. Deferred Compensation Plan (Amended and Restated
effective June 1, 2004) (incorporated by reference to
Exhibit 10.6 to the Companys Annual Report on
Form 10-K for the fiscal year ended May 31, 2004).* |
|
10 |
.7 |
|
NIKE, Inc. Foreign Subsidiary Employee Stock Purchase Plan
(incorporated by reference to Exhibit 10.1 to the
Companys Quarterly Report on Form 10-Q for the fiscal
quarter ended February 28, 2003).* |
|
10 |
.8 |
|
Covenant Not To Compete And Non-Disclosure Agreement between
NIKE, Inc. and Mark G. Parker dated December 28, 2004
(incorporated by reference to Exhibit 10.1 to the
Companys Current Report on Form 8-K filed
December 30, 2004).* |
|
10 |
.9 |
|
Employment Agreement, and Covenant Not To Compete And
Non-Disclosure Agreement between NIKE, Inc. and Mindy F.
Grossman dated September 6, 2000 (incorporated by reference
to Exhibit 10.12 to the Companys Annual Report on
Form 10-K for the fiscal year ended May 31, 2002).* |
|
10 |
.10 |
|
Amendment to Employment Agreement between NIKE, Inc. and Mindy
F. Grossman dated March 17, 2003 (incorporated by reference
to Exhibit 10.14 to the Companys Annual Report on
Form 10-K for the fiscal year ended May 31, 2003).* |
66
|
|
|
|
|
|
10 |
.11 |
|
Covenant Not to Compete and Non-Disclosure Agreement between
NIKE, Inc. and Charles D. Denson dated December 28, 2004
(incorporated by reference to Exhibit 10.2 to the
Companys Current Report on Form 8-K filed
December 30, 2004).* |
|
10 |
.12 |
|
Form of Non-Statutory Stock Option Agreement for options granted
to executives under the 1990 Stock Incentive Plan (incorporated
by reference to Exhibit 10.2 to the Companys Current
Report on Form 8-K filed November 18, 2004).* |
|
10 |
.13 |
|
Form of Long-Term Incentive Award Agreement under the Long-Term
Incentive Plan (incorporated by reference to Exhibit 10.1
to the Companys Current Report on Form 8-K filed
June 21, 2005).* |
|
10 |
.14 |
|
Form of Restricted Stock Bonus Agreement under the 1990 Stock
Incentive Plan (incorporated by reference to Exhibit 10.2
to the Companys Current Report on Form 8-K filed
June 21, 2005).* |
|
10 |
.15 |
|
Terms of Employment dated November 18, 2004 between the
Company and William D. Perez (incorporated by reference to
Exhibit 10.1 to the Companys Current Report on
Form 8-K filed November 18, 2004).* |
|
10 |
.16 |
|
Dassault Falcon 2000EX Time-Sharing Agreement dated as of
March 1, 2005 between the Company and William D. Perez
(incorporated by reference to Exhibit 10.1 to the
Companys Current Report on Form 8-K filed March 16,
2005). |
|
12 |
.1 |
|
Computation of Ratio of Earnings to Fixed Charges. |
|
21 |
|
|
Subsidiaries of the Registrant. |
|
23 |
|
|
Consent of PricewaterhouseCoopers LLP, Independent Registered
Public Accounting Firm (set forth on page F-2 of this Annual
Report on Form 10-K). |
|
31 |
|
|
Rule 13a-14(a) Certifications. |
|
32 |
|
|
Section 1350 Certifications. |
|
|
* |
Management contract or compensatory plan or arrangement. |
The exhibits filed herewith do not include certain instruments
with respect to long-term debt of NIKE and its subsidiaries,
inasmuch as the total amount of debt authorized under any such
instrument does not exceed 10% of the total assets of NIKE and
its subsidiaries on a consolidated basis. NIKE agrees, pursuant
to Item 601(b)(4)(iii) of Regulation S-K, that it will
furnish a copy of any such instrument to the SEC upon request.
Upon written request to Investor Relations, NIKE, Inc.,
One Bowerman Drive, Beaverton, Oregon 97005-6453, NIKE will
furnish shareholders with a copy of any Exhibit upon payment of
$.10 per page, which represents our reasonable expenses in
furnishing Exhibits.
67
SCHEDULE II
VALUATION AND QUALIFYING ACCOUNTS
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|
Balance at | |
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Charged to | |
|
Charged to | |
|
Write-Offs | |
|
Balance at | |
|
|
Beginning | |
|
Costs and | |
|
Other | |
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Net of | |
|
End of | |
Description |
|
of Period | |
|
Expenses | |
|
Accounts | |
|
Recoveries | |
|
Period | |
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| |
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| |
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| |
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| |
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| |
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|
(In millions) | |
For the year ended May 31, 2003
|
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|
|
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|
|
|
|
|
|
Allowance for doubtful accounts
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|
$ |
80.4 |
|
|
$ |
25.8 |
|
|
$ |
1.2 |
|
|
$ |
(25.5 |
) |
|
$ |
81.9 |
|
For the year ended May 31, 2004
|
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|
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|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Allowance for doubtful accounts
|
|
$ |
81.9 |
|
|
$ |
36.4 |
|
|
$ |
0.1 |
|
|
$ |
(23.1 |
) |
|
$ |
95.3 |
|
For the year ended May 31, 2005
|
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|
|
|
|
|
|
|
|
|
|
|
|
|
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|
|
|
|
|
|
Allowance for doubtful accounts
|
|
$ |
95.3 |
|
|
$ |
33.5 |
|
|
$ |
1.8 |
|
|
$ |
(50.2 |
) |
|
$ |
80.4 |
|
F-1
CONSENT OF INDEPENDENT REGISTERED PUBLIC ACCOUNTING FIRM
We hereby consent to the incorporation by reference in the
Registration Statements on Form S-3 (333-71324) and
Form S-8 (Nos. 33-63995, 333-63581, 333-63583,
333-68864, 333-68886, 333-71660, 333-104822, 333-104824, and
333-117059) of NIKE, Inc. of our report dated July 27, 2005
relating to the financial statements, financial statement
schedule, managements assessment of the effectiveness of
internal control over financial reporting and the effectiveness
of internal control over financial reporting, which appears in
this Form 10-K.
PricewaterhouseCoopers llp
Portland, Oregon
July 29, 2005
F-2
SIGNATURES
Pursuant to the requirements of Section 13 or 15(d) 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.
|
|
|
|
|
William D. Perez |
|
Chief Executive Officer and President |
Date: July 29, 2005
Pursuant to the requirements of the Securities Exchange Act of
1934, this report has been signed below by the following persons
on behalf of the registrant and in the capacities and on the
dates indicated.
|
|
|
|
|
|
|
Signature |
|
Title |
|
Date |
|
|
|
|
|
Principal Executive Officer and Director: |
|
|
|
/s/ William D. Perez
William
D. Perez |
|
Director, Chief Executive Officer
and President |
|
July 29, 2005 |
Principal Financial and Accounting Officer: |
|
|
|
/s/ Donald W. Blair
Donald
W. Blair |
|
Chief Financial Officer |
|
July 29, 2005 |
Directors: |
|
|
|
/s/ Philip H. Knight
Philip
H. Knight |
|
Director |
|
July 29, 2005 |
|
/s/ John G. Connors
John
G. Connors |
|
Director |
|
July 29, 2005 |
|
/s/ Jill K. Conway
Jill
K. Conway |
|
Director |
|
July 29, 2005 |
|
/s/ Ralph D. DeNunzio
Ralph
D. DeNunzio |
|
Director |
|
July 29, 2005 |
|
/s/ Alan B.
Graf, Jr.
Alan
B. Graf, Jr. |
|
Director |
|
July 29, 2005 |
|
/s/ Delbert J. Hayes
Delbert
J. Hayes |
|
Director |
|
July 29, 2005 |
|
/s/ Douglas G. Houser
Douglas
G. Houser |
|
Director |
|
July 29, 2005 |
S-1
|
|
|
|
|
|
|
Signature |
|
Title |
|
Date |
|
|
|
|
|
|
/s/ Jeanne P. Jackson
Jeanne
P. Jackson |
|
Director |
|
July 29, 2005 |
|
/s/ Orin C. Smith
Orin
C. Smith |
|
Director |
|
July 29, 2005 |
|
/s/ John R.
Thompson, Jr.
John
R. Thompson, Jr. |
|
Director |
|
July 29, 2005 |
S-2