UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM 10-Q
FOR QUARTERLY REPORTS UNDER SECTION 13 OR 15(d) OF
THE SECURITIES AND EXCHANGE ACT OF 1934
For the Quarter Ended February 28,August 31, 2006
Commission file number - 1-10635
NIKE, Inc.
(Exact name of registrant as specified in its charter)
OREGON 93-0584541
(State or other jurisdiction of (I.R.S. Employer
incorporation or organization) Identification No.)
One Bowerman Drive, Beaverton, Oregon 97005-6453
(Address of principal executive offices) (Zip Code)
Registrant's telephone number, including area code (503) 671-6453
Indicate by check mark whether the registrant (1) has filed all reports
required to be filed by Section 13 or 15 (d) of the Securities Exchange
Act of 1934 during the preceding 12 months (or for such shorter period
that the registrant was required to file such reports), and (2) has been
subject to such filing requirements for the past 90 days
Yes X No .
___ ___
Indicate by check mark whether the registrant is a large accelerated filer, or
accelerated filer, or a non-accelerated filer.
Large accelerated filer X Accelerated filer Non-accelerated filer
___ ___ ___
Indicate by check mark whether the registrant is a shell company (as defined
in Rule 12b-2 of the Exchange Act). Yes No X .
___ ___
Common Stock shares outstanding as of February 28,August 31, 2006 were:
_______________
Class A 63,906,694
Class B 194,710,833186,799,591
_______________
258,617,527250,706,285
===============
PART 1 - FINANCIAL INFORMATION
Item 1. FINANCIAL STATEMENTS
NIKE, Inc.
UNAUDITED CONDENSED CONSOLIDATED BALANCE SHEETS
February 28,August 31, May 31,
2006 20052006
________ ________
(in millions)
ASSETS
Current assets:
Cash and equivalents $1,472.1 $1,388.1$1,030.7 $ 954.2
Short-term investments 535.0 436.6693.9 1,348.8
Accounts receivable, net 2,351.6 2,262.12,569.1 2,395.9
Inventories (Note 2) 2,034.2 1,811.12,134.3 2,076.7
Deferred income taxes 115.0 110.2188.8 203.3
Prepaid expenses and other current assets 536.8 343.0382.3 380.1
________ ________
Total current assets 7,044.7 6,351.16,999.1 7,359.0
Property, plant and equipment 3,283.2 3,179.23,451.1 3,408.3
Less accumulated depreciation 1,684.8 1,573.41,802.4 1,750.6
________ ________
Property, plant and equipment, net 1,598.4 1,605.81,648.7 1,657.7
Identifiable intangible assets, net (Note 3) 406.2 406.1407.5 405.5
Goodwill (Note 3) 135.3 135.4130.8 130.8
Deferred income taxes and other assets 333.6 295.2384.4 316.6
________ ________
Total assets $9,518.2 $8,793.6$9,570.5 $9,869.6
======== ========
LIABILITIES AND SHAREHOLDERS' EQUITY
Current liabilities:
Current portion of long-term debt $ 254.730.5 $ 6.2255.3
Notes payable 79.3 69.861.3 43.4
Accounts payable 785.8 775.0867.7 952.2
Accrued liabilities (Note 4) 1,128.9 1,053.21,297.7 1,286.9
Income taxes payable 55.5 95.0152.5 85.5
________ ________
Total current liabilities 2,304.2 1,999.22,409.7 2,623.3
Long-term debt 411.3 687.3380.4 410.7
Deferred income taxes and other liabilities 540.8 462.6559.2 550.1
Commitments and contingencies (Note 9) -- --
Redeemable preferred stock 0.3 0.3
Shareholders' equity:
Common stock at stated value:
Class A convertible-63.9 and
71.963.9 million shares outstanding 0.1 0.1
Class B-194.7B-186.8 and 189.2192.1 million shares
outstanding 2.7 2.7
Capital in excess of stated value 1,417.4 1,182.9
Unearned stock compensation (5.1) (11.4)1,538.0 1,447.3
Accumulated other comprehensive income (Note 5) 127.7 73.4137.0 121.7
Retained earnings 4,718.8 4,396.54,543.1 4,713.4
________ ________
Total shareholders' equity 6,261.6 5,644.26,220.9 6,285.2
________ ________
Total liabilities and shareholders' equity $9,518.2 $8,793.6$9,570.5 $9,869.6
======== ========
The accompanying Notes to Unaudited Condensed Consolidated Financial
Statements are an integral part of this statement.
NIKE, Inc.
UNAUDITED CONDENSED CONSOLIDATED STATEMENTS OF INCOME
Three Months Ended
Nine Months Ended
February 28, February 28,August 31,
____________________
__________________
2006 2005 2006 2005
____ ____
____ ____
(in millions, except per share data)
Revenues $3,612.8 $3,308.2 $10,949.5 $10,018.3$4,194.1 $3,862.0
Cost of sales 2,038.7 1,849.4 6,115.9 5,585.6
_________ _________2,344.9 2,113.9
_________ _________
Gross margin 1,574.1 1,458.8 4,833.6 4,432.71,849.2 1,748.1
Selling and administrative expense 1,086.6 1,035.7 3,245.7 3,082.51,289.7 1,104.4
Interest (income) expense,income, net (8.4) (0.1) (20.5) 8.4(13.1) (6.4)
Other (income) expense,income, net (10.7) 9.8 (22.0) 19.9
_________ _________(3.2) (9.9)
_________ _________
Income before income taxes 506.6 413.4 1,630.4 1,321.9575.8 660.0
Income taxes 180.8 140.0 571.2 459.8
_________ _________198.6 227.7
_________ _________
Net income $ 325.8377.2 $ 273.4 $1,059.2 $ 862.1
========= =========432.3
========= =========
Basic earnings per common share (Note 7) $ 1.261.49 $ 1.04 $ 4.08 $ 3.28
========= =========1.66
========= =========
Diluted earnings per common share (Note 7) $ 1.241.47 $ 1.01 $ 4.00 $ 3.18
========= =========1.61
========= =========
Dividends declared per common share $ 0.31 $ 0.25 $ 0.87 $ 0.70
========= =========
========= =========
The accompanying Notes to Unaudited Condensed Consolidated Financial Statements
are an integral part of this statement.
NIKE, Inc.
UNAUDITED CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS
NineThree Months Ended
February 28,August 31,
_____________________
2006 2005
____ ____
(in millions)
Cash provided (used) by operations:
Net income $1,059.2 $ 862.1
Income/377.2 $ 432.3
Income charges (credits) not affecting cash:
Depreciation 206.4 188.966.9 68.9
Deferred income taxes 4.6 (4.1)(1.9) (11.2)
Stock-based compensation (Note 6) 69.7 --
Amortization and other 27.3 30.5
Income tax7.1 0.7
Tax benefit from exercise of stock options 49.2 60.3-- 15.9
Changes in certain working capital components net of the effect of
acquisition of subsidiary:and other
assets and liabilities:
Increase in accounts receivable (95.5) (97.5)
(Increase) decrease(164.3) (132.8)
Increase in inventories (198.0) 2.8
(Increase) decrease(73.9) (29.1)
Increase in prepaid expenses
and other current assets ( 135.6) 39.1
Increase (decrease)(47.9) (39.6)
Decrease in accounts payable, accrued
liabilities and income taxes payable 35.5 (1.0)(1.1) (43.4)
_________ _________________
Cash provided by operations 953.1 1,081.1231.8 261.7
_________ _________________
Cash provided (used) by investing activities:
Purchases of investments (1,379.8) (1,103.9)(300.0) (261.6)
Maturities of investments 1,279.0 1,086.0961.8 395.6
Additions to property, plant and
equipment (232.1) (180.5)(72.3) (58.5)
Disposals of property, plant and
equipment 1.2 6.30.1 0.4
Increase in other assets (20.8) (18.7)
Decrease in otherand liabilities, (3.4) (5.0)
Acquisition of subsidiary, net of cash
acquired -- (47.2)(5.5) (6.6)
_________ _________________
Cash usedprovided by investing activities (355.9) (263.0)584.1 69.3
_________ _________________
Cash provided (used) by financing activities:
Reductions in long-term debt,
including current portion (4.6) (7.5)(251.4) (1.6)
Increase (decrease) in notes payable 16.8 (59.9)16.5 4.2
Proceeds from exercise of options and
other stock issuances 188.6 204.730.1 53.6
Excess tax benefits from stock option exercises 5.1 --
Repurchase of common stock (511.0) (390.5)(472.9) (129.1)
Dividends on common stock (210.8) (171.2)(79.3) (65.3)
_________ _________________
Cash used by financing activities (521.0) (424.4)(751.9) (138.2)
_________ _________________
Effect of exchange rate changes on cash 7.8 0.812.5 8.0
_________ _________________
Net increase in cash and equivalents 84.0 394.576.5 200.8
Cash and equivalents, beginning of period 954.2 1,388.1
828.0
_________ _________________
Cash and equivalents, end of period $1,472.1 $1,222.5$ 1,030.7 $1,588.9
========= =========
The accompanying Notes to Unaudited Condensed Consolidated Financial
Statements are an integral part of this statement.
NIKE, Inc.
NOTES TO UNAUDITED CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
NOTE 1 - Summary of Significant Accounting Policies:
__________________________________________
Basis of presentation:
The accompanying unaudited condensed consolidated financial statements
reflect all adjustments (consisting of normal recurring accruals) which
are, in the opinion of management, necessary for a fair statement of
the results of operations for the interim period. The interim financial
statement information and notes thereto should be read in conjunction with the
Company's latest Annual Report on Form 10-K. The results of operations
for the nine-month periodthree (3) months ended February 28,August 31, 2006 are not necessarily
indicative of results to be expected for the entire year.
Certain prior year amounts have been reclassified to conform toRecently Issued Accounting Standards:
In June 2006, the Financial Accounting Standards Board ("FASB") issued
FASB Interpretation No. 48, "Accounting for Uncertainty in Income Taxes" ("FIN
48"). FIN 48 clarifies the accounting for uncertainty in income taxes
recognized in the Company's financial statements in accordance with FASB
Statement No. 109, "Accounting for Income Taxes." The provisions of FIN 48
are effective for the fiscal year beginning June 1, 2007. The Company is
currently evaluating the impact of the provisions of FIN 48.
In September 2006, presentation. These changes had nothe FASB issued Statement of Financial Accounting
Standard ("SFAS") No. 157, "Fair Value Measurements" ("FAS 157"). FAS 157
defines fair value, establishes a framework for measuring fair value in
accordance with generally accepted accounting principles, and expands
disclosures about fair value measurements. The provisions of FAS 157 are
effective for the fiscal year beginning June 1, 2008. The Company is
currently evaluating the impact on previously reported
results of operations or shareholders' equity.the provisions of FAS 157.
In September 2006, the FASB issued SFAS No. 158, "Employers' Accounting
for Defined Benefit Pension and Other Postretirement Plans" ("FAS 158"). FAS
158 requires employers to fully recognize the obligations associated with
single-employer defined benefit pension, retiree healthcare and other
postretirement plans in their financial statements. The provisions of FAS 158
are effective as of the end of the fiscal year ending May 31, 2007. The
Company is currently evaluating the impact of the provisions of FAS 158.
NOTE 2 - Inventories:
___________
Inventory balances of $2,034.2$2,134.3 million and $1,811.1$2,076.7 million at February
28,August 31,
2006 and May 31, 2005,2006, respectively, were substantially all finished goods.
NOTE 3 - Identifiable Intangible Assets and Goodwill:
___________________________________________
The following table summarizes the Company's identifiable intangible
assets and goodwill balances as of February 28,August 31, 2006 and May 31, 2005:2006:
February 28,August 31, 2006 May 31, 20052006
______________________ ______________________
Gross Net Gross Net
Carrying Accumulated Carrying Carrying Accumulated Carrying
Amount Amortization Amount Amount Amortization Amount
________ ____________ ________ ________ ____________ ________
(in millions)
Amortized intangible assets:
Patents $ 33.137.4 $ (9.8)(11.2) $ 23.326.2 $ 29.234.1 $ (10.9)(10.5) $ 18.323.6
Trademarks 45.6 (10.4) 35.2 54.8 (16.4) 38.447.7 (13.3) 34.4 46.4 (11.8) 34.6
Other 21.4 (15.2) 6.2 21.4 (13.5) 7.921.5 (16.1) 5.4 21.5 (15.7) 5.8
________ ________ ________ ________ ________ _________________
Total $ 100.1106.6 $ (35.4)(40.6) $ 64.766.0 $ 105.4102.0 $ (40.8)(38.0) $ 64.664.0
======== ======== ======== ========
Unamortized intangible assets - Trademarks $ 341.5 $ 341.5
________ ________
Identifiable intangible assets, net $ 406.2407.5 $ 406.1405.5
======== ========
Goodwill $ 135.3130.8 $ 135.4130.8
======== ========
Amortization expense, which is included in selling and administrative
expense, was $2.4$2.5 million and $2.7$2.5 million for the three-month periods ended
February 28, 2006 and 2005, respectively and $7.3 million and $7.0 million for
the nine-month periods ending February 28,August 31, 2006 and 2005, respectively. The estimated amortization expense
for intangible assets subject to amortization for each of the succeeding years
ending May 31, 20062007 through May 31, 20102011 are as follows: 2006: $9.7 million; 2007: $8.9$10.0 million;
2008: $8.4$9.8 million; 2009: $7.1$8.7 million; 2010: $6.3$8.0 million; 2011: $7.5
million.
NOTE 4 - Accrued Liabilities:
___________________
Accrued liabilities include the following:
February 28,August 31, 2006 May 31, 20052006
_______________ ____________
(in millions)
Compensation and benefits, excluding taxes $374.4 $397.2
Advertising and marketing 125.2 76.6$295.4 $427.2
Taxes other than income taxes 114.4 96.8180.4 115.1
Endorser compensation 107.6 101.9
Dividends payable 80.5 65.3151.5 124.7
Advertising and marketing 123.0 75.4
Fair value of derivatives 68.7 61.8
Other1 258.1 253.6
_________ _________
$1,128.9 $1,053.282.5 111.2
Dividends payable 78.2 79.5
Converse arbitration1 36.0 51.9
Other2 350.7 301.9
_______ _______
$1,297.7 $1,286.9
========= =========
1 The Converse arbitration relates to a charge taken during the fourth
quarter ended May 31, 2006 as a result of a contract dispute between
NIKE, Inc.'s Converse subsidiary and a former South American licensee.
2 Other consists of various accrued expenses and no individual item accounted
for more than $50 million of the balance at February 28,August 31, 2006 and May 31, 2005.2006.
NOTE 5 - Comprehensive Income:
____________________
Comprehensive income, net of taxes, is as follows:
Three Months Ended
Nine Months Ended
February 28, February 28,August 31,
_____________________
__________________
2006 2005 2006 2005
____ ____
____ ____
(in millions)
Net income $325.8 $273.4 $1,059.2 $862.1$377.2 $432.3
Other comprehensive income:
Change in cumulative translation
adjustment and other 22.6 (6.1) (20.7) 110.5(2.0) (17.3)
Changes due to cash flow hedging
instruments:
Net gain (loss) on hedge derivatives (4.3) (3.4) 93.1 (112.0)19.0 42.0
Reclassification to net income of
previously deferred (gains) and losses
related to hedge derivative instruments (17.4) 30.7 (18.1) 106.4(1.7) 7.7
_______ _______ _________ _______
Other comprehensive income 0.9 21.2 54.3 104.915.3 32.4
_______ _______ _________ _______
Total comprehensive income $326.7 $294.6 $1,113.5 $967.0$392.5 $464.7
======= ======= ========= =======
NOTE 6 - Stock-Based Compensation:Compensation
________________________
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 66 million previously unissued shares of
Class B Common Stock in connection with stock options and other awards granted
under the plan. The 1990 Plan authorizes the grant of non-statutory stock
options, incentive stock options, stock appreciation rights, stock bonuses and
the issuance and sale of restricted stock. The exercise price for non-
statutory stock options, stock appreciation rights and the grant price of
restricted stock may not be less than 75% of the market price of the
underlying shares on the date of grant. The exercise price for incentive stock
options may not be less than the market price of the underlying shares on
the date of grant. 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. The committee has granted substantially all stock
options at 100% of the market price on the date of grant. Substantially all
grants outstanding under the 1990 Plan vest ratably over four years and expire
10 years from the date of grant.
In addition to the 1990 Plan, the Company gives employees the right to
purchase shares at a discount to the market price under employee stock
purchase plans ("ESPPs").
On June 1, 2006, the Company adopted SFAS No. 123R "Share-Based Payment"
("FAS 123R") which requires the Company to record expense for stock-based
compensation to employees using a fair value method. Under FAS 123R, the
Company estimates the fair value of options granted under the 1990 Plan and
employees' purchase rights under the ESPPs using the Black-Scholes option
pricing model. The Company usesrecognizes this fair value as selling and
administrative expense in the Unaudited Condensed Consolidated Statements of
Income over the vesting period using the straight-line method.
The following table summarizes the effects of applying FAS 123R during
the three months ended August 31, 2006. The resulting stock-based compensation
expense primarily relates to stock options.
Three Months Ended
August 31, 2006
____________________
(in millions, except per share data)
Addition to selling and administrative expense $ 61.3
Reduction to income tax expense 20.5
_______
Reduction to net income1 $ 40.8
=======
Reduction to earnings per share:
Basic $ 0.16
Diluted $ 0.16
1 In accordance with FAS 123R, included in the total $40.8 million, net of
tax, stock-based compensation expense reported during the three months ended
August 31, 2006, is $22.2 million, net of tax, or $0.09 per diluted share, of
accelerated stock-based compensation expense recorded for employees eligible
for accelerated stock option vesting upon retirement. Because the Company
usually grants the majority of stock options in a single grant in the first
three months of each fiscal year, under FAS 123R accelerated vesting will
normally result in higher expense in the first three months and lower expense
in each of the remaining quarters of the fiscal year.
As of August 31, 2006, the Company had $209.3 million of unrecognized
compensation costs from stock options, net of estimated forfeitures, to be
recognized as selling and administrative expense over a weighted average
period of 1.9 years.
The Company has adopted the modified prospective transition method
prescribed by FAS 123R, which does not require the restatement of financial
results for previous periods. In accordance with this transition method,
beginning with the three months ended August 31, 2006, the Company's
Unaudited Condensed Consolidated Statement of Income includes (1) amortization
of outstanding stock-based compensation granted prior to, but not vested, as
of June 1, 2006, based on the fair value estimated in accordance with the
original provisions of SFAS No. 123, "Accounting for Stock-Based Compensation"
("FAS 123") and (2) amortization of all stock-based awards granted subsequent
to June 1, 2006, based on the fair value estimated in accordance with the
provisions of FAS 123R.
Prior to the adoption of FAS 123R, the Company used the intrinsic value
method to account for stock-based
compensationstock options and ESPP shares in accordance with
Accounting Principles Board (APB) Opinion No. 25, "Accounting for Stock
Issued to Employees" as permitted by Statement of
Financial Accounting Standards (SFAS) No. 123 "Accounting for Stock-Based
Compensation" (FAS 123). Substantially all options granted by the Company have
an exercise price equal to the market value at the date of grant, and
accordingly, no compensation expense is recognized. The Company also has an
Employee Stock Purchase Plan (ESPP) that qualifies as a non-compensatory
employee stock purchase plan under Section 423 of the Internal Revenue Code,
and accordingly, no compensation expense is recognized.FAS 123. If the Company had instead
accounted for stock options and ESPP purchase rights
issuedshares to employees in accordance withusing the fair value
method prescribed by FAS 123 during the three months ended August 31, 2005,
the Company's pro forma net income and pro forma earnings per share would have
been reported as follows:
Three Months Ended
Nine Months Ended
February 28, February 28,August 31, 2005
____________________ __________________
2006 2005 2006 2005
____ ____ ____ ____
(in millions, except per share data)
Net income as reported $325.8 $273.4 $1,059.2 $862.1$ 432.3
Add: Stock-based compensationStock option expense included
in reported net income, net of tax 0.1
0.2 0.2 0.5
Deduct: Total stock-based employee compensationstock option and ESPP
expense under fair value based method for all
awards, net of tax (20.6) (16.4) (59.1) (47.8)
_______ _______ _________tax1 (18.9)
_______
Pro forma net income $305.3 $257.2 $1,000.3 $814.8
======= ======= =========$ 413.5
=======
Earnings per share:
Basic - as reported $ 1.26 $ 1.04 $ 4.08 $ 3.281.66
Basic - pro forma 1.18 0.98 3.85 3.10$ 1.58
Diluted - as reported 1.24 1.01 4.00 3.18$ 1.61
Diluted - pro forma 1.17 0.96 3.80 3.04$ 1.55
The1 Accelerated stock-based compensation expense for options subject to
accelerated vesting due to employee retirement is not included in the pro
forma effects of applying FAS 123 may not be representative of
the effects on reported net income and earnings per share for future periods
as options vest over several years and additional awards are made each year.
As disclosed in the Company's Annual Report on Form 10-K as of May 31,
2005, the Company is currently evaluating SFAS No. 123R "Share-Based Payment"
(FAS 123R) and the Securities and Exchange Commission's Staff Accounting
Bulletin No. 107 (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. As a result of the
adoption of this Statement the Company will recognize additional compensation
expense beginning with the year ending May 31, 2007. The amount of expense
that will be recognized is largely dependent on several variables, most
notably the number of options that will be granted during the fiscal year in
addition to the various assumptions used in the valuation model. The effect
on the Company's results of operations of expensing stock optionsfigures shown above for the three-month and nine-month periods ending February 28, 2006 and 2005 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 Company's pro formathree months ended August 31, 2005. This
disclosure above currently reflects the expense of such options ratably over the stated
vesting period expensing all unvested sharesor upon actual retirement. The SEC 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 uponemployee retirement. Had the Company been
accountingrecognized
the fair value for such stock options using theon an accelerated vesting schedule for
those employees eligible for accelerated vesting upon retirement, the Company
would have recognized less stock-based compensation expensebasis in the abovethis pro
forma disclosure, an additional $18.7 million, net of $0.02 and $0.01 per diluted share for each of the three-month periods
ended February 28, 2006 and February 28, 2005, respectively, and additional
stock-based compensation expense in the above pro forma of $0.02 andtax, or $0.07 per
diluted share would be recognized in the disclosure.
The weighted average fair value per share of the options granted during
the three months ended August 31, 2006 and 2005 as computed using the Black-
Scholes pricing model was $17.54 and $19.36, respectively. The weighted
average assumptions used to estimate these fair values are as follows:
Three Months Ended
August 31,
_____________________
2006 2005
____ ____
Dividend yield 1.6% 1.0%
Expected volatility 18.7% 20.7%
Weighted-average expected life (in years) 5.0 4.5
Risk-free interest rate 5.0% 4.0%
Expected volatility is estimated based on the implied volatility in
market traded options on the Company's common stock, with a term greater than
one year. The weighted average expected life of options is based on an
analysis of historical and expected future exercise patterns. The interest
rate is based on the U.S. Treasury (constant maturity) risk-free rate in
effect at the date of grant for periods corresponding with the expected term
of the options.
The following summarizes the Company's stock option transactions during
the three months ended August 31, 2006:
Weighted
Weighted Average
Average Contractual Aggregate
Exercise Life Intrinsic
Shares Price Remaining Value
__________ __________ __________ _________
(in millions) (in years) (in millions)
Options outstanding May 31, 2006 20.2 $ 64.62
Exercised (0.6) 51.86
Forfeited (0.3) 67.11
Granted 5.6 78.76
__________
Options outstanding August 31, 2006 24.9 $ 68.08 7.5 $ 353.7
========== ========= ========== =========
Options exercisable August 31, 2006 12.1 $ 57.12 6.0 $ 296.2
========== ========= ========== =========
The aggregate intrinsic value in the table above was the amount by which
the market value of the underlying stock exceeded the exercise price of the
options. The total intrinsic value of the options exercised during the
three months ended August 31, 2006 and 2005 was $16.8 million and $42.4
million, respectively.
The following table summarizes the Company's total stock-based
compensation expense for the nine-month periodsthree months ended February 28,August 31, 2006 (in millions):
Stock options $59.5
ESPPs 1.8
Other1 8.4
_______
Total stock-based compensation expense $69.7
=======
1 Other includes certain bonuses, settled in cash or Company shares at
the election of the employee and February 28, 2005, respectively. The Companyrestricted stock grants the majority of stock
options in a single grantnot significant
individually or in the first three months of each fiscal year. As a
result, accelerated vesting would resultaggregate. The expense related to these awards was
included in increasedselling and administrative expense recognition in the first three months of the fiscal yearprior years and a reduction of expense recorded
in the remaining nine months of the fiscal year, as compared to the expense
recordedwas not
affected by the Company under our current policyadoption of expensing such options
ratably over the stated vesting period.FAS 123R.
NOTE 7 - Earnings Per Common Share:
_________________________
The following represents a reconciliation from basic earnings per share
to diluted earnings per share. Options to purchase 5.615.4 million and 0.25.7
million shares of common stock were outstanding at February 28,August 31, 2006 and
February 28,August 31, 2005, respectively, but were not included in the computation of
diluted earnings per share because the options' exercise pricesoptions were greater
than the average market price of common shares and, therefore, the effect
would be antidilutive.
Three Months Ended
Nine Months Ended
February 28, February 28,August 31,
_____________________
___________________
2006 2005 2006 2005
____ ____
____ ____
(in millions, except per share data)
Determination of shares:
AverageWeighted average common shares
outstanding 258.9 263.3 259.6 263.1252.7 260.9
Assumed conversion of
dilutive stock options
and awards 4.5 8.4 5.0 7.83.3 7.7
_______ _______
_______ _______
Diluted weighted average common
shares outstanding 263.4 271.7 264.6 270.9
======= =======256.0 268.6
======= =======
Basic earnings per common share $ 1.261.49 $ 1.04 $ 4.08 $ 3.28
======= =======1.66
======= =======
Diluted earnings per common share $ 1.241.47 $ 1.01 $ 4.00 $ 3.18
======= =======1.61
======= =======
NOTE 8 - Operating Segments:
__________________
The Company's operating segments are evidence of the structure of the
Company's internal organization. The major segments are defined by geographic
regions for operations participating in NIKE brand sales activity excluding
NIKE Golf and NIKE Bauer 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, Converse
Inc., Exeter Brands Group LLC, Hurley International LLC, NIKE Bauer Hockey
Inc., Hurley International LLC,and NIKE Golf, Converse Inc., 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 represents income before income taxes as shown in the Unaudited
Condensed Consolidated Statements of Income. Reconciling items for pre-tax
income represent corporate costs that are not allocated to the operating
segments for management reporting including corporate activity, stock-based
compensation expense, certain currency exchange rate gains and losses on
transactions, and intercompany eliminations for specific income statement
items in the Unaudited Condensed Consolidated Statements of Income.
Accounts receivable, net, inventories, and property, plant and equipment,
net for operating segments are regularly reviewed and therefore provided
below.
Three Months Ended
Nine Months Ended
February 28, February 28,
__________________ _________________August 31,
_____________________
2006 2005
2006 2005
_____ _____ _____ _____
Net Revenue____ ____
(in millions)
Revenues
U.S. $1,442.8 $1,268.2 $ 4,258.8 $ 3,801.9$1,601.9 $1,508.9
EUROPE, MIDDLE EAST, AFRICA 980.1 1,033.9 3,175.0 3,152.91,270.9 1,217.5
ASIA PACIFIC 532.3 472.8 1,495.2 1,362.3518.4 459.6
AMERICAS 203.1 143.7 668.9 494.7242.5 213.7
OTHER 454.5 389.6 1,351.6 1,206.5560.4 462.3
_________ _________
__________ __________
$3,612.8 $3,308.2 $10,949.5 $10,018.3$4,194.1 $3,862.0
========= =========
========== ==========
Pre-tax Incomeincome
U.S. $ 286.2338.9 $ 260.1 $ 897.1 $ 815.5345.2
EUROPE, MIDDLE EAST, AFRICA 208.7 219.3 733.1 663.3302.5 330.2
ASIA PACIFIC 119.6 100.4 326.2 275.898.9 91.4
AMERICAS 38.5 22.8 140.5 87.548.4 44.6
OTHER 43.6 23.0 106.6 84.087.9 40.0
CORPORATE (190.0) (212.2) (573.1) (604.2)(300.8) (191.4)
_________ _________
__________ __________
$ 506.6575.8 $ 413.4 $ 1,630.4 $ 1,321.9660.0
========= =========
========== ==========
Feb. 28,Aug. 31, May 31,
2006 20052006
_________ _________
(in millions)
Accounts receivable, net
U.S. $ 784.1755.6 $ 627.0717.2
EUROPE, MIDDLE EAST, AFRICA 699.7 723.6838.1 716.3
ASIA PACIFIC 294.3 309.8290.6 319.7
AMERICAS 182.8 168.7206.6 174.5
OTHER 339.5 394.0393.8 410.0
CORPORATE 51.2 39.084.4 58.2
_________ _________
$2,351.6 $2,262.1$2,569.1 $2,395.9
========= =========
Inventories
U.S. $ 686.3761.0 $ 639.9725.9
EUROPE, MIDDLE EAST, AFRICA 540.8 496.5573.3 590.1
ASIA PACIFIC 263.5 228.9242.9 238.3
AMERICAS 142.1 96.8160.4 147.6
OTHER 357.5 316.2342.6 330.5
CORPORATE 44.0 32.854.1 44.3
_________ _________
$2,034.2 $1,811.1$2,134.3 $2,076.7
========= =========
Property, plant and equipment, net
U.S. $ 211.5220.8 $ 216.0219.3
EUROPE, MIDDLE EAST, AFRICA 230.1 230.0271.6 266.6
ASIA PACIFIC 347.2 380.4337.7 354.8
AMERICAS 16.4 15.716.9 17.0
OTHER 96.1 93.499.4 98.2
CORPORATE 697.1 670.3702.3 701.8
_________ _________
$1,598.4 $1,605.8$1,648.7 $1,657.7
========= =========
NOTE 9 - Commitments and Contingencies:
___________________________________________________________
At February 28,August 31, 2006, the Company had letters of credit outstanding
totaling $381.8$177.3 million. These letters of credit were issued primarily for
the purchase of inventory.
There have been no other significant subsequent developments
relating to the commitments and contingencies reported on the
Company's latest Annual Report on Form 10-K.
Item 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND
RESULTS OF OPERATIONS
Overview
In the thirdfirst quarter of fiscal 2006,2007, our revenues grew 9% to $3.6$4.2
billion, net income grew 19%declined 13% to $325.8$377 million and we delivered diluted earnings per
share were $1.47, a 9% decrease compared to the first quarter of $1.24,fiscal 2006.
These reported results included a 23%$61.3 million charge, before taxes, related
to stock-based compensation expense now recognized in accordance with
Statement of Financial Accounting Standard ("SFAS") No. 123R "Share-Based
Payment," ("FAS 123R") which we adopted during the first quarter of fiscal
2007. See further discussion of the adoption of FAS 123R in Note 6 - Stock-
Based Compensation in the accompanying Notes to Unaudited Condensed
Consolidated Financial Statements. Excluding this charge, our net income
declined 3 percentage points and diluted earnings per share were $1.63, a 1%
increase versus the thirdfirst quarter of fiscal 2005. Strong demand for NIKE brand products in the U.S. Region drove over half
of the increase in revenues. The growth in net income was primarily driven by
the higher revenues and by lower selling and administrative expense as a
percentage of sales. Selling and administrative expense for the third quarter
decreased as a percentage of sales by 120 basis points.2006. For the quarter, our
consolidated gross margin percentage decreased 50declined 120 basis points to 43.6%44.1%,
driven largely byprimarily due to lower in-line net pricing margins (net revenue for current
product offerings minus landed product costs) for footwear. Diluted earnings per shareIncreased demand
creation spending in the third
quarter increased at a greater rate than net income primarily as a result of
our common share repurchases since the thirdfirst quarter of fiscal 2005.2007 compared to the first
quarter of fiscal 2006 also contributed to the pre-tax income decline in the
quarter and reflected increased spending on advertising and sports marketing
events, primarily around the global World Cup and Nike Air (registered)
campaigns.
Results of Operations
Three Months Ended
Nine Months Ended
February 28, February 28,August 31,
___________________
__________________
% %
2006 2005 change
2006 2005 change
______ ______ ________
______ ______ ________
(in(dollars in millions, except per share data)
Revenues $3,612.8 $3,308.2 9% $10,949.5 $10,018.3$4,194.1 $3,862.0 9%
Cost of sales 2,038.7 1,849.4 10% 6,115.9 5,585.6 9%
_________ _________ __________ __________2,344.9 2,113.9 11%
Gross margin 1,574.1 1,458.8 8% 4,833.6 4,432.7 9%1,849.2 1,748.1 6%
Gross margin % 43.6% 44.1% 44.1% 44.2%
Demand creation expense 428.3 371.6 15% 1,226.9 1,188.8 3%
Operating overhead expense 658.3 664.1 -1% 2,018.8 1,893.7 7%
_________ _________ __________ __________45.3%
Selling and administrative expense 1,086.6 1,035.7 5% 3,245.7 3,082.5 5%1,289.7 1,104.4 17%
% of revenue 30.1% 31.3% 29.6%revenues 30.8% 28.6%
Income before income taxes 506.6 413.4 23% 1,630.4 1,321.9 23%575.8 660.0 -13%
Net income 325.8 273.4 19% 1,059.2 862.1 23%377.2 432.3 -13%
Diluted earnings per share 1.24 1.01 23% 4.00 3.18 26%1.47 1.61 -9%
Reconciliation of Net Income and Diluted Earnings Per Share ("EPS")
Excluding Stock-Based Compensation Expense
Three Months Ended
August 31,
___________________
%
2006 2005 change
______ ______ ________
(dollars in millions, except per share data)
Net income, as reported $377.2 $432.3 -13%
Stock-based compensation expense1,
net of tax of $20.5 40.8 -- -
________ ________
Net income, excluding stock-
based compensation expense2 $418.0 $432.3 -3%
Diluted EPS, as reported $ 1.47 $ 1.61 -9%
Diluted EPS, excluding stock-
based compensation expense $ 1.63 $ 1.61 1%
1 This charge relates to stock-based compensation associated with stock
options and Employee Stock Purchase Plan ("ESPP") shares issued to
employees and expensed in accordance with FAS 123R. We adopted FAS
123R on June 1, 2006 using the modified prospective transition method.
While this expense was not reflected in our results of operations for
the first quarter of fiscal 2006, it will continue to be reflected in
future accounting periods.
2 This schedule is intended to satisfy the quantitative reconciliation
for non-GAAP financial measures in accordance with Regulation G of the
Securities and Exchange Commission. In addition, this schedule is
provided to enhance the visibility of the underlying business trends
by presenting our results for the first quarter of fiscal 2007 using
the same accounting policy for stock-based compensation expense
applied during the first quarter of fiscal 2006.
Consolidated Operating Results
Revenues
Three Months Ended
August 31,
___________________
%
2006 2005 change
______ ______ ________
(dollars in millions)
Revenues $4,194.1 $3,862.0 9%
In both the thirdfirst quarter and first nine months of fiscal 2006,
consolidated revenues grew 9% versus the comparable periods of fiscal 2005.
Changes2007, changes in currency exchange rates,
reducedprimarily the reported revenue growth by
three percentage points for the quarter and did not have a material impact on
the reported revenue growth for the first nine months of fiscal 2006. The U.S.
Region contributed 5 percentage points ofstronger euro, increased the consolidated revenue growth for
both the third quarter and first nine months of fiscal 2006.by 2
percentage points. Excluding the impact of changes in foreign currency, revenue growth in our
international regions contributed 5 percentage points of the consolidated revenue growth for
the third quarter andapproximately 3 percentage points of the
consolidated revenue growth for the first nine months, quarter of fiscal 2007,as all three
of our international regions posted higher revenues. The U.S. region
contributed 2 percentage points of the consolidated revenue growth for the
first quarter of fiscal 2007. Sales in our Other businesses drove the balance
of the consolidated revenue growthimprovement for the quarter. Revenues for our Other businesses are
comprised substantially of results from Cole Haan Holdings Incorporated,
Converse Inc., Exeter Brands Group LLC, Hurley International LLC, NIKE Bauer
Hockey, Inc., and NIKE Golf.
Gross Margin
Three Months Ended
August 31,
___________________
%
2006 2005 change
______ ______ ________
(dollars in millions)
Gross margin $1,849.2 $1,748.1 6%
Gross margin % 44.1% 45.3% -120 bps
In the first quarter and year-to-date period.
Ourof fiscal 2007, our consolidated gross margin
percentage declined 50120 basis points and 10
basis points forcompared to the thirdfirst quarter and first nine months of fiscal 2006,
respectively, versus the comparable prior year periods.2006.
The primary factors contributing to these changes in the reduced gross margin percentage for
the thirdfirst quarter and year-to-date periodof 2007 were loweras follows:
(1) Lower footwear in-line net pricing margins due to:
- additional costs incurred to meet strong footwear demand in the
U.S., EMEA (Europe, region;
- higher sales incentives, primarily in the Europe, Middle East and
Africa)Africa ("EMEA") and Asia Pacific regionsregions;
- strategies to improve consumer value in EMEA;
- overall higher product costs, primarily the result of higher
labor costs and oil prices; and
- a shift in the mix of footwear models sold from higher margin
models toward those with lower margins, most notably in EMEA;
(2) Higher third party royalty costs driven by increased sales of team-
endorsed soccer apparel.
These factors were partially offset by improvements in year-over-year foreign currency hedge rates, as
discussed below:
(1) A lower gross margin percentage in the U.S. Region, primarily due to
lower in-line net pricing margins for footwear, reduced the
consolidated gross margin percentage by approximately 20 and 40
basis points for the third quarter and first nine months of
fiscal 2006, respectively.
(2) Our international regions reduced the consolidated gross margin
percentage by approximately 30 basis points for the third quarter of
fiscal 2006 and increased the consolidated gross margin by
approximately 10 basis points for the year-to-date period due to the
following factors:
(a) Lower in-line net pricing margins for footwear and apparel
sales in the EMEA and Asia Pacific regions decreased the
consolidated gross margin by approximately 50 basis points
and 120 basis points for the third quarter and year-to-date
period, respectively.
(b) For the third quarter and year-to-date period, year-over-
year currency hedge rate improvements, primarily the euro,
contributed approximately 20 basis points and 140 basis
points of consolidated gross margin improvement,
respectively.
(3) Improvedimproved gross margin percentages
in our Other businesses increased
the consolidated gross margin percentagedriven primarily by approximately 20 basis
points for both the quarter and year-to-date period.NIKE Bauer Hockey, NIKE Golf, and
Converse, droveoffset by a decline at Exeter.
Selling and Administrative Expense
Three Months Ended
August 31,
___________________
%
2006 2005 change
______ ______ ________
(dollars in millions)
Operating overhead expense, excluding
stock-based compensation expense1 $ 726.4 $ 682.8 6%
Stock-based compensation expense2 61.3 -- -
________ ________
Operating overhead expense, as reported 787.7 682.8 15%
Demand creation expense3 502.0 421.6 19%
_________ _________
Selling and administrative expense $1,289.7 $1,104.4 17%
% of revenues 30.8% 28.6% 220 bps
1 This schedule is intended to satisfy the majorityquantitative reconciliation
for non-GAAP financial measures in accordance with Regulation G of the
gross margin improvementSecurities and Exchange Commission. In addition, this schedule is
provided to enhance the visibility of the underlying business trends
excluding this identifiable expense by presenting our results for both
the
quarter and year-to-date period.
We expect continued pressure on gross margins in the fourthfirst quarter of fiscal year 2006 as compared to2007 using the fourth quarter of fiscal 2005 due tosame accounting policy for stock-
based compensation expense applied during the factors discussed above. Hedge rates for the fourth quarter are expected to be
slightly better than the fourth quarter of fiscal 2005, and the year-over-year
improvement will be comparable with the level reported for the thirdfirst quarter of fiscal
2006.
Selling2 This charge relates to stock-based compensation associated with stock
options and administrativeESPP shares issued to employees and expensed in accordance
with FAS 123R. We adopted FAS 123R on June 1, 2006 using the modified
prospective transition method. While this expense comprisedwas not reflected in
our results of demand creation
(advertising and promotion) and operating overhead, grew 5%operations for both the thirdfirst quarter and first nine months of fiscal 2006.2006, it will
continue to be reflected in future accounting periods.
3 Demand creation consists of advertising and promotion expenses, including
costs of endorsement contracts.
Changes in currency exchange rates reduced theincreased selling and administrative
expense growth by three
percentage points for the quarter and one1 percentage point forin the year-to-
date period.
Selling and administrative expenses decreased as a percentagefirst quarter of sales by
120 basis points and 110 basis points forfiscal 2007 compared to
the thirdprior year.
In the first quarter and year-to-date
period, respectively.
Demandof fiscal 2007, demand creation expense increased 15% in the third quarter and 3% for the
first nine months of fiscal 2006. Changes in currency exchange rates reduced
the rate of growth in demand creation by 419
percentage points forover the third
quarter and 1 percentage point for the first nine months of fiscal 2006.
Excluding the impact of changes in currency exchange rates, the increase in
demand creation spending for the third quarter was primarily due to increased
advertising spending, primarily for the global Air Max 360 footwear launch and
the global Winder Olympics and World Cup campaigns, and increased spending on
sports marketing endorsement contracts and events. Excluding the impact of
changes in currency exchange rates, the increase in demand creation spending
for the first nine months of fiscal 2006 was primarilyprior year due to increased spending on advertising
and sports marketing endorsement contractsevents, primarily associated with the global World Cup and
events and incremental
investments in retail marketing programs, partially offset by lower
advertising spending as compared to the prior year, which is the result of a
changeNike Air (registered) campaigns. In addition, demand creation expense was
particularly light in the timing of advertising spending to the second half of fiscal 2006.
The level of demand creation spending for the first nine months of fiscal
2006 was not indicative of what we currently expect for the full year.
Spending is expected to increase in the fourth quarter of fiscal 2006 compared to both the fourth quarterreflecting a greater
concentration of fiscal 2005 and the third quarter of
fiscal 2006, as a result of investmentsadvertising later in advertising and marketing programs,
most notably those relating to the 2006 World Cup campaign. During fiscal
2005, advertising spending was particularly heavy in the first quarter due to
marketing programs centered on global sporting events that took place in the
summer of 2004.
Operating overhead for the third quarter of fiscal 2006 decreased 1%
and grew 7% for the first nine months of fiscal 2006.year.
Excluding changes in currency exchange rates,stock-based compensation expense, operating overhead expense increased
1% in the third quarter of fiscal 2006,6 percentage points, a much lower rate of growth than revenue. Excluding the effects of currency, the
changeThe increase in
operating overhead in the third quarter of fiscal 2006 reflected the
following:
- Increasedwas mainly attributable to higher wages and benefits;
increased spending to support the growth of NIKE-owned retail, primarily
related to new stores.
- Increasedstores; and increased spending to support the growth of our
Other businesses.
- Severance costs associated withOther Income, net
Three Months Ended
August 31,
___________________
%
2006 2005 change
______ ______ ________
(dollars in millions)
Other income, net $ 3.2 $ 9.9 -68%
The reduction in Other income, net for the resignationfirst quarter of our former Chief
Executive Officer during the third quarter.
- Lower travel and meeting expenses.
- Personnel costs were flatfiscal 2007
compared to the thirdprior year was primarily driven by foreign currency hedge
losses in the first quarter of fiscal 2005, excluding NIKE-owned retail and our Other businesses.
Changes in foreign currency exchange rates did not have a material impact
on the operating overhead growth for the first nine months of fiscal 2006.
The operating overhead increase for the first nine months of fiscal 2006 was
mainly attributable to:
- Higher personnel costs, due primarily2007, compared to increased headcount and
higher wages and benefits.
- Increased spending to support the growth of our Other businesses.
- Increased spending to support the growth of NIKE-owned retail,
primarily related to new stores.
In the third quarter and first nine months of fiscal 2006, foreign currency hedge
gains werein the most significant componentfirst quarter of Other income,
net,fiscal 2006, more than offset by a benefit from
a favorable settlement of $10.7 millionthe previously disclosed Converse arbitration. The
hedge losses and $22.0 million, respectively. These hedge gains are reflected in the Corporate line in our segment
presentation of pre-tax income, and the Converse arbitration settlement is
reflected in the Other line in our segment presentation of pre-tax income in
the Notes to Unaudited Condensed Consolidated Financial Statements (Note 8 -
Operating Segments).
In the thirdIncome Taxes
Three Months Ended
August 31,
___________________
%
2006 2005 change
______ ______ ________
Effective tax rate 34.5% 34.5% -
The effective tax rate for the first quarter of fiscal 2007 is consistent
with the first quarter of fiscal
2006, we estimate that the combination of net foreign currency gains in
Other (income) expense, net, and the unfavorable translation of foreign
currency denominated profits, most significantly in EMEA, did not result
in a material year-over-year increase to consolidated income before income
taxes. For the first nine months of fiscal 2006 these factors resulted in
a year-over-year increase in consolidated income before income taxes of
approximately $37 million.
In the third quarter of fiscal 2006, we adjusted our year-to-date
effective tax rate to 35.0%, our estimate of our effective rate for full
fiscal year 2006.
The effective tax rate for fiscal 2006 is consistent
with the 34.9% rate reported for the full year of fiscal 2005.
Futures Orders
Worldwide futures and advance orders for our footwear and apparel
scheduled for delivery from MarchSeptember 2006 through July 2006January 2007 were 2.9%6%
higher than such orders reported for the comparable period of fiscal 2005.2006.
This futures growth rate is calculated based upon our forecasts of the actual
exchange rates under which our revenues will be translated during this period,
which approximate current spot rates. This increase was reduced by
2.5 percentage points due toThe net effect from changes in currency
exchange rates improved this reported increase by 0.5 percentage points versus
the same period last year. Excluding this currency impact, higher average
selling pricesUnit sales volume increases for both footwear and
apparel contributed approximately 1more than 4 percentage pointpoints of the growth in overall
futures and advance orders. The remaining 4
percentage points of the increase werewas due to volume increaseshigher average
selling prices for both footwear and apparel. The reported futures and advance
orders growth is not necessarily indicative of our expectation of revenue
growth during this period. This is because the mix of orders can shift
between advance/futures and at-once orders. In addition, exchange rate
fluctuations as well as differing levels of order cancellations and discounts
can cause differences in the comparisons between futures and advance orders,
and actual revenues. Moreover, a significant portion of our revenue is not
derived from futures and advance orders, including at-
onceat-once and closeout sales
of NIKE footwear and apparel, wholesale sales of equipment, U.S. licensed team
apparel, Cole Haan, Converse, Exeter Brands Group, Hurley, NIKE Bauer Hockey,
Cole Haan,
Converse, NIKE Golf Hurley, Exeter Brands and retail sales across all brands.
Operating Segments
The breakdown of revenues follows:
Three Months Ended
August 31,
__________________
%
2006 2005 change
______ ______ ________
(dollars in millions)
U.S. Region
Footwear $1,079.1 $1,021.1 6%
Apparel 431.5 395.5 9%
Equipment 91.3 92.3 -1%
________ ________
Total U.S. 1,601.9 1,508.9 6%
EMEA Region
Footwear 679.5 685.1 -1%
Apparel 487.0 435.2 12%
Equipment 104.4 97.2 7%
________ ________
Total EMEA 1,270.9 1,217.5 4%
Asia Pacific Region
Footwear 266.0 237.4 12%
Apparel 200.9 176.5 14%
Equipment 51.5 45.7 13%
________ ________
Total Asia Pacific 518.4 459.6 13%
Americas Region
Footwear 172.3 156.9 10%
Apparel 51.2 40.7 26%
Equipment 19.0 16.1 18%
________ ________
Total Americas 242.5 213.7 13%
________ ________
3,633.7 3,399.7 7%
Other 560.4 462.3 21%
________ ________
Total revenues $4,194.1 $3,862.0 9%
======== ========
The breakdown of income before income taxes ("pre-tax income") follows:
Three Months Ended
Nine Months Ended
February 28, February 28,
___________________ ____________________August 31,
__________________
% %
2006 2005 change
2006 2005 change
______ ______ _______________
(dollars in millions)
U.S. Region $ 338.9 $ 345.2 -2%
EMEA Region 302.5 330.2 -8%
Asia Pacific Region 98.9 91.4 8%
Americas Region 48.4 44.6 9%
Other 87.9 40.0 120%
Corporate (300.8) (191.4) -57%
________ ________
Total pre-tax income $ 575.8 $ 660.0 -13%
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 SFAS No. 131, "Disclosures about
Segments of an Enterprise and Related Information." As discussed in Note 8 -
Operating Segments in the accompanying Notes to Unaudited Condensed
Consolidated Financial Statements, certain corporate costs are not included
in pre-tax income of our operating segments.
U.S. Region
Three Months Ended
August 31,
__________________
%
2006 2005 change
______ ______ ______
(in________
(dollars in millions)
U.S. REGION
FOOTWEAR $1,005.9 $ 849.6 18% $ 2,838.5 $ 2,451.0 16%
APPAREL 366.6 345.8Revenues
Footwear $1,079.1 $1,021.1 6%
1,195.9 1,121.8 7%
EQUIPMENT 70.3 72.8 -3% 224.4 229.1 -2%Apparel 431.5 395.5 9%
Equipment 91.3 92.3 -1%
________ ________
_________ _________
TOTALTotal revenues $1,601.9 $1,508.9 6%
Pre-tax income $ 338.9 $ 345.2 -2%
The increase in U.S. 1,442.8 1,268.2 14% 4,258.8 3,801.9footwear revenue for the first quarter of fiscal
2007 was due to increases in both unit sales and average selling price per
pair. The increase in units sold was driven by increased consumer demand for
our Brand Jordan and Nike brand sport culture products. The higher average
selling price per pair reflected increased consumer demand for higher priced
sport performance and NIKE brand sport culture products.
The increase in U.S. apparel revenues for the first quarter of fiscal
2007 was driven by increased unit sales, primarily NIKE brand sport
performance apparel, as well as an increase in average selling prices,
driven by NIKE brand sport performance and Brand Jordan apparel.
The decrease in the U.S. region pre-tax income in the first quarter of
fiscal 2007 reflected higher selling and administrative expenses and a lower
gross margin percentage. The lower gross margin percentage was primarily the
result of lower in-line pricing margins for footwear attributable to
additional costs incurred to meet strong footwear unit demand and higher
product costs. Selling and administrative costs increased as a result of
higher demand creation spending around the World Cup and Nike Air (registered)
campaigns as well as an increase in operating overhead expense, driven by
increased spending for new NIKE-owned retail stores and expected annual
increases in wages and benefits.
EMEA Region
Three Months Ended
August 31,
__________________
%
2006 2005 change
______ ______ ________
(dollars in millions)
Revenues
Footwear $ 679.5 $ 685.1 -1%
Apparel 487.0 435.2 12%
EMEA REGION
FOOTWEAR 563.8 615.3 -8% 1,782.1 1,810.4 -2%
APPAREL 347.1 351.3 -1% 1,161.9 1,131.0 3%
EQUIPMENT 69.2 67.3 3% 231.0 211.5 9%Equipment 104.4 97.2 7%
________ ________
_________ _________
TOTALTotal revenues $1,270.9 $1,217.5 4%
Pre-tax income $ 302.5 $ 330.2 -8%
For the EMEA 980.1 1,033.9 -5% 3,175.0 3,152.9 1%
ASIA PACIFIC REGION
FOOTWEAR 284.1 237.9 19% 766.9 693.1 11%
APPAREL 199.0 188.3 6% 590.1 544.9 8%
EQUIPMENT 49.2 46.6 6% 138.2 124.3 11%region, changes in currency exchange rates increased
revenue growth by 3 percentage points in the first quarter of fiscal 2007.
Excluding changes in currency exchange rates, sales increases in our Central
Europe, Middle East and Africa unit led the revenue growth, offset by a
decline in the U.K. The decline in footwear revenue reflected decreased
unit sales and a slight decline in the average selling price per pair. The
decreased unit sales of footwear reflected lower demand resulting from the
difficult retail environment, most notably in the U.K., offset by increased
demand for sport culture products across the rest of the region. The decline
in the average selling price per pair was due in part to changes in the mix
of in-line products sold towards products with a lower average selling
price, and higher sales incentives as a result of the difficult retail
environment mentioned above. The increase in EMEA apparel revenue was driven
by increased unit sales and average selling prices of NIKE brand apparel,
primarily sport performance products.
The decrease in EMEA pre-tax income for the first quarter of fiscal
2007 was driven by a lower gross margin percentage and higher selling and
administrative costs more than offsetting higher revenues and favorable
foreign currency translation compared to the prior year. The lower gross
margin percentage was primarily the result of lower in-line net pricing
margins in footwear as well as higher third party royalty costs driven by
increased sales of team-endorsed soccer apparel, partially offset by
improved year-over-year euro hedge rates. The lower in-line net pricing
margins in footwear were due to higher product costs, primarily the result
of increased labor costs and higher oil prices, higher sales incentives,
strategies to improve consumer value, and a shift in the mix of footwear
models sold from models with higher margins towards models with lower
margins. Excluding changes in foreign currency exchange rates, selling and
administrative expenses in the first quarter of 2007 were higher than in the
first quarter of 2006 driven primarily by higher demand creation spending
around the World Cup and NIKE Air (registered) campaigns. Operating overhead
expense increased slightly, due primarily to expected annual increases in
wages and benefits.
Asia Pacific Region
Three Months Ended
August 31,
__________________
%
2006 2005 change
______ ______ ________
(dollars in millions)
Revenues
Footwear $ 266.0 $ 237.4 12%
Apparel 200.9 176.5 14%
Equipment 51.5 45.7 13%
________ ________
_________ _________
TOTAL ASIA PACIFIC 532.3 472.8Total revenues $ 518.4 $ 459.6 13%
1,495.2 1,362.3Pre-tax income $ 98.9 $ 91.4 8%
In the Asia Pacific region, changes in currency exchange rates did not
have a significant impact on revenues for the first quarter of fiscal 2007
compared to the prior year. Footwear revenue growth reflected increased unit
sales, partially offset by lower average selling prices, due primarily to
strategies to improve consumer value in Japan. The increase in apparel
revenues was driven primarily by increased demand for sport performance
products, particularly related to the World Cup, as well as increased demand
for sport culture products. Revenues increased in almost all countries. China
was the primary growth driver for the quarter due to retail distribution
expansion coupled with strong consumer demand.
The increase in pre-tax income for the Asia Pacific region in the first
quarter of fiscal 2007 was driven by higher revenues partially offset by
increased selling and administrative expenses. Changes in currency exchange
rates increased pre-tax income by 1 percentage point. The gross margin
percentage remained relatively flat compared to the prior year. Demand
creation spending around the World Cup drove the increase in selling and
administrative expenses while operating overhead spending remained
consistent with the prior year.
Americas Region
Three Months Ended
August 31,
__________________
%
2006 2005 change
______ ______ ________
(dollars in millions)
Revenues
Footwear $ 172.3 $ 156.9 10%
AMERICAS REGION
FOOTWEAR 143.7 99.6 44% 478.7 344.2 39%
APPAREL 44.4 33.5 33% 140.5 115.9 21%
EQUIPMENT 15.0 10.6 42% 49.7 34.6 44%Apparel 51.2 40.7 26%
Equipment 19.0 16.1 18%
________ ________
_________ _________
TOTAL AMERICAS 203.1 143.7 41% 668.9 494.7 35%
________ ________ _________ _________
3,158.3 2,918.6 8% 9,597.9 8,811.8Total revenues $ 242.5 $ 213.7 13%
Pre-tax income $ 48.4 $ 44.6 9%
OTHER 454.5 389.6 17% 1,351.6 1,206.5 12%
________ ________ _________ _________
TOTAL REVENUES $3,612.8 $3,308.2 9% $10,949.5 $10,018.3 9%
======== ======== ========= =========
The discussion following includes disclosure of "pre-tax income" for
operating segments. We have reported pre-tax income for each of our
operating segments in accordance with Statement of Financial Accounting
Standard No. 131, "Disclosures about Segments of an Enterprise and Related
Information." As discussed in Note 8 - Operating Segments in the
accompanying Notes to Unaudited Condensed Consolidated Financial Statements,
certain corporate costs are not included in pre-tax income of our operating
segments.
In the U.S. Region, a strong increase in unit sales accounted for 12
percentage points and 13 percentage points of the U.S. footwear revenue
growth for the third quarter and first nine months of fiscal 2006,
respectively. An increase in the average selling price per pair accounted
for 6 and 3 percentage points of the footwear revenue growth for the third
quarter and year-to-date period, respectively. The strong unit increase was
driven by increased consumer demand across a majority of the footwear
categories for both the third quarter and year-to-date period. The higher
average selling price per pair for the third quarter and first nine months
was primarily due to increased consumer demand for products with a suggested
retail price over $100. Increased consumer demand for our Jordan brand was a
significant driver of the overall footwear revenue growth.
The increase in U.S. apparel sales for the third quarter and first nine
months of fiscal 2006 was driven by increases in NIKE and Jordan branded
apparel. For the year-to-date period, the NIKE and Jordan branded apparel
increases were partially offset by sales declines as a result of the
expiration of our license agreement with the NBA in the second quarter of
fiscal 2005.
For the third quarter of fiscal 2006, U.S. Region pre-tax income was
$286.2 million, a 10% increase versus the third quarter of fiscal 2005. Pre-
tax income for the first nine months of fiscal 2006 increased 10% to $897.1
million. For the quarter, higher revenues drove the increase, more than
offsetting a lower gross margin percentage and higher selling and
administrative expenses as a percentage of revenue. For the year-to-date
period, lower selling and administrative expense as a percentage of revenue
also contributed to the pre-tax income improvement.
For the quarter and year-to-date period of fiscal 2006, the lower gross
margin percentage in the U.S. Region was primarily the result of lower in-
line net pricing margins for footwear due to higher product costs, primarily
the result of higher oil prices. For the year-to-date period, additional
costs incurred to meet strong footwear unit demand contributed to the margin
decline. Higher selling and administrative costs were due to increases in
both demand creation and operating overhead. The increase in demand creation
for both the quarter and year-to-date period was primarily driven by
increased advertising, primarily due to the global campaigns discussed
above, and sports marketing investments. For the third quarter and year-to-
date period, the increase in operating overhead was driven by increased
spending to support the growth of our NIKE-owned retail stores, primarily
related to new stores. Non-retail personnel costs were lower than the third
quarter of fiscal 2005 but higher for the year-to-date period. For the year-
to-date period, higher travel and meeting expenses contributed to the
operating overhead increase.
For the EMEA Region, changes in currency exchange rates reduced revenue
growth 9 percentage points and 2 percentage points for the third quarter and
first nine months of fiscal 2006, respectively, primarily due to the
strengthening of the U.S. dollar compared to the euro. Excluding changes in
currency exchange rates, footwear revenues for the third quarter were
comparable to fiscal 2005; for the year-to-date period footwear revenues
were up slightly. These results reflected increased unit sales offset by
declines in the average selling price per pair due in part to changes in the
mix of in-line products sold and higher customer discounts. The increase in
EMEA apparel revenue for the quarter and year-to-date period was driven by
increased unit sales and average selling prices of NIKE branded apparel.
Excluding changes in currency exchange rates, EMEA sales increases in
the emerging markets of our Central Europe, Middle East and Africa unit,
drove the EMEA sales growth for the third quarter and first nine months of
fiscal 2006.
EMEA pre-tax income for the third quarter of fiscal 2006 was $208.7
million, down 5% versus the prior year quarter. For the first nine months of
fiscal 2006, pre-tax income grew 11% to $733.1 million. A significant driver
of the decline in reported pre-tax income for the third quarter versus the
prior year was the change in currency exchange rates year-over-year.
Excluding the effects of changes in currency exchange rates, higher revenues
and lower selling and administrative costs drove pre-tax income growth for
the third quarter partially offset by a lower gross margin percentage. For
the nine-month period, higher revenues, a higher gross margin percentage
and lower selling and administrative costs all contributed to reported pre-
tax income growth, more than offsetting a negative impact from changes in
currency exchange rates.
For the third quarter, the lower gross margin percentage was primarily
the result of reduced in-line net pricing margins for footwear and apparel
partially offset by slightly improved year-over-year euro hedge rates. The
improved gross margin percentage during the nine-month period was primarily
the result of improved year-over-year euro hedge rates, partially offset by
reduced in-line net pricing margins in footwear and apparel. For both the
quarter and year-to-date period, the reduced in-line pricing margins for
footwear were due to higher discounts; higher product costs, primarily the
result of higher oil prices; and a shift in the mix of products sold toward
products with lower margins. The reduced in-line net pricing margins for
apparel were primarily due to higher product costs and higher discounts.
The following analysis excludes the impact of changes in foreign
currency exchange rates. Lower selling and administrative costs in the
third quarter were driven by decreases in operating overhead expenses
partially offset by a slight increase in demand creation. Operating overhead
expenses decreased in the third quarter due to slightly lower personnel
costs and lower spending on travel and meeting expenses, partially offset by
increased spending to support the growth of NIKE-owned retail, primarily
related to new stores. Demand creation expense slightly increased in the
third quarter primarily due to increased advertising and retail marketing
programs versus the comparable period of the prior year. The increased
advertising was the result of the global campaigns discussed above. For the
nine-month period, selling and administrative expense was lower than the
previous year, driven by reduced demand creation expense, partially offset
by higher operating overhead expenses. The lower demand creation spending
was driven by a shift in timing of campaigns to the second half of fiscal
2006 versus fiscal 2005, reflecting the timing of global sporting events as
discussed above. Operating overhead increased in the first nine months of
fiscal 2006 due to increases in personnel costs and increased spending to
support the growth of NIKE-owned retail, primarily related to new stores,
partially offset by lower spending on travel and meeting expenses.
In the Asia Pacific Region, changes in currency exchange rates reduced
the reported revenue growth by 4 percentage points for the third quarter and
did not have a material impact on the reported revenue growth for the first
nine months of fiscal 2006. Excluding the changes in currency exchange
rates, revenues for each Asia Pacific product business unit (footwear,
apparel and equipment) were higher in both the third quarter and year-to-date
period. Increased revenue from China (driven by expansion of retail
distribution and strong consumer demand) was the primary growth driver for
both the third quarter and year-to-date period. Excluding changes in currency
exchange rates, increased sales in Japan and Korea also contributed to the
revenue growth for the third quarter. For the year-to-date period, sales in
Japan and Australia were lower than the prior year due to weak market
conditions, investments in consumer value and higher customer discounts.
Third quarter pre-tax income for the Asia Pacific Region increased 19%
versus the third quarter of fiscal 2005 to $119.6 million; year-to-date pre-
tax income increased 18% to $326.2 million. For the quarter and year-to-date
period, higher revenues and lower selling and administrative expenses as a
percentage of revenues were partially offset by reduced gross margins.
The reduced gross margin percentage for both the quarter and year-to-
date period was primarily attributable to lower in-line net pricing margins
for footwear and apparel due to higher footwear product costs, primarily the
result of higher oil prices; higher discounts; strategies to improve
consumer value in Japan; and a shift in the mix of products sold toward
products with lower margins in Japan. Selling and administrative expenses
were a lower percentage of revenues in the third quarter, but higher in
amount than the third quarter of fiscal 2005. The increased selling and
administrative expenses for the quarter were due to higher demand creation
spending associated with the global campaigns discussed above, partially
offset by lower operating overhead expenses. The reduction in selling and
administrative expenses for the first nine months of fiscal 2006 was
due to lower demand creation spending, driven by a shift in timing of
campaigns to the second half of fiscal 2006 versus fiscal 2005, reflecting
the timing of global sporting events as discussed above, and lower operating
overhead expense, partially offset by increased spending to support growth
in China.
In the Americas Region, 11 percentage points of the revenue growth for
the third quarter and 12region, 3 percentage points of the revenue growth for
the first nine monthsquarter of fiscal 20062007 were due to changes in foreign currency
exchange rates. Even excludingExcluding the changes in foreign currency exchange rates,
sales in each Americas product business unit grew in both the third quarter and year-to-date
period.first quarter. The
revenue growth for both the third quarter and first nine months was driven primarily by increased sales in
nearly every country in the region, with significant sales increases in
Argentina and Mexico offset by sales declines in Brazil and Argentina.
In the third quarter of fiscal 2006, pre-tax income for the Americas
Region increased 69% from the prior year quarter,as we respond to $38.5 million. For the
first nine months of fiscal 2006, pre-tax income increased 61%a
shift in consumer preferences to $140.5
million.sport culture products.
The increase in pre-tax income for the thirdAmericas region in the first
quarter and year-to-
date periodof fiscal 2007 was attributable to higher revenues, an improved
gross margins,
lowermargin percentage, and favorable foreign currency translation
partially offset by higher selling and administrative expenses as a percentage of revenues and
favorable currency translation. Although selling and administrative expenses
were a lower percentage of revenues in the third quarter and first nine
months, selling and administrative expenses were higher than the comparable
periods of fiscal 2005.expenses. The
increased selling and administrative expenses were due to increases in both
demand creation (due tospending, primarily around the World Cup campaign, as well
as increased sports
marketing endorsement contracts and retail marketing programs) and operating overhead expenses (drivenexpense driven by increased personnelwages and
benefits and costs as a resultincurred for the implementation of continued expansion ofnew supply chain
systems in the business across the region).region.
Other Businesses
Three Months Ended
August 31,
__________________
%
2006 2005 change
______ ______ ________
(dollars in millions)
Revenues and pre-tax$ 560.4 $ 462.3 21%
Pre-tax income for our Other businesses are comprised
substantially of results from NIKE Bauer Hockey, Inc., Cole Haan Holdings
Incorporated, Converse Inc., Hurley International LLC, NIKE Golf, and Exeter
Brands Group LLC. For the third quarter and year-to-date period, the87.9 40.0 120%
The increase in Other business revenues for the first quarter of fiscal
2007 was primarily driven by growth at
Converse,higher revenues across every business, most notably NIKE
Golf and Cole Haan.NIKE Bauer Hockey in addition to the wholesale business expansion
at Exeter.
Pre-tax income from the Other businesses improved 90% to $43.6 million
in the thirdfirst quarter of fiscal
2007 increased 120 percentage points as compared to the first quarter of
fiscal 2006 and improved 27% to $106.6included a $14.2 million inbenefit resulting from the year-to-date period versus the same period of last year. For the third
quarter and first nine months of fiscal 2006, major driversfinal
settlement of the increase
were improved profitability frompreviously disclosed arbitration ruling involving Converse
and NIKE Golf, partially offset bya former South American licensee. Excluding the Converse arbitration
settlement benefit, the pre-tax income improvement was attributable to
higher losses at NIKE Bauer Hockey. The lossrevenues and an improved gross margin percentage, most notably at
NIKE Bauer Hockey, is largely
a result of costs incurred in connection with a re-branding initiativeNIKE Golf, and advertising related to the Winter Olympics.Converse.
Liquidity and Capital Resources
Cash Flow Activity
Cash provided by operations was $953.1$231.8 million for the first nine
monthsquarter of
fiscal 2006,2007, compared to $1,081.1$261.7 million for the first nine
monthsquarter of fiscal
2005. Net income provided $1,059.2 million2006. Our primary source of operating cash flow overfor the first nine monthsquarter of
the current year, compared to $862.1fiscal 2007 was net income of $377.2 million
in the first nine months of last year, partially offset by a larger increase
in working capital in fiscal 2006 than in fiscal 2005. In the first nine
months of fiscal 2006, our net investment in working capital increased
$393.6 million as compared to an increase of only $56.6 million in the
corresponding period of fiscal 2005. This increased
investment in working capital to support growth in the business. The
increased investment in working capital over the first quarter of fiscal
2006 was largely attributabledue to a largeran increase in inventories which reflects our
business growth driven by futures and prepaid expensesat once order growth, early product
ordering to optimize factory capacity, a market slowdown primarily in EMEA,
and other current assets.an increase in replenishment business.
Cash provided by investing activities was $584.1 million for the first
quarter of fiscal 2007, compared to $69.3 million for the first quarter of
fiscal 2006. The increase in inventories
reflects our reported futures orders growth, higher in transit inventoriesover fiscal 2006 was primarily due to earlier product ordering as compared to last year, and higher inventories to supportnet
maturities of short-term investments (maturities net of purchases).
Cash used by financing activities was $751.9 million for the expansionfirst
quarter of NIKE-owned retail stores.fiscal 2007, an increase of $613.7 million from the first quarter
of fiscal 2006. The increase in prepaid expenses and other current assets isover fiscal 2006 was primarily due to the timing$250
million repayment of payments compared to the prior year, including earlier
payments of income taxes.corporate bonds and an increase in share
repurchases, as discussed below.
In the current quarter, we purchased approximately 1.56.0 million shares of NIKE's Class
B common stock for $127.9 million, bringing purchases for$476.7 million. During the first nine months of fiscal 2006 to 6.2 million shares at a cost of
$518.3 million. The share repurchases were part of aquarter, we completed the
previous four-year, $1.5 billion four-year
share repurchase program that was approved by the
Board of Directors in June 2004. Since2004 and started repurchasing shares under the
inceptionCompany's new four-year, $3 billion share repurchase program approved by the
Board of this program, we have repurchased 13.1Directors in June 2006. As of the end of the first quarter of
fiscal 2007, the Company had purchased 4.0 million shares at a total cost of $1.1 billion.for $314.1 million
under the new $3 billion program. We expect to continue to fund this
programshare repurchases from
operating cash flow.flow, excess cash, and/or debt. The timing and the amount of
shares purchased will be dictated by our capital needs and stock market
conditions.
Dividends declared per share of common stock for the thirdfirst quarter of
fiscal 20062007 were $0.31, compared to $0.25 in the thirdfirst quarter of fiscal
2005.2006.
Contractual Obligations
As a result of renewals and additions to outstanding endorsement
contracts, the cash payments due under our endorsement contracts have
changed from what was previously reported in our Annual Report on Form 10-K
as of May 31, 2006.
Endorsement contract obligations as of August 31, 2006 are as follows:
Cash Payments Due During the Fiscal Year Ending
May 31,
_______________________________________________
Remaining
Description of Commitment 2007 2008 2009 2010 2011 Thereafter Total
__________________________ ______ ______ ______ ______ ______ __________ _______
(in millions)
Endorsement Contracts $ 326.6 370.9 293.4 218.6 166.7 525.2 $1,901.4
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.
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 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.
Capital Resources
No amounts are currently outstanding under our committed revolving credit
facility. The terms of our facility have not changed from those described in
our Annual Report on Form 10-K for the fiscal year ended May 31, 2005.2006.
Our long-term senior unsecured debt ratings remain at A+ and A2 from
Standard and Poor's Corporation and Moody's Investor Services, respectively.
Liquidity is also provided by our commercial paper program, under which
there was no amount outstanding at February 28,August 31, 2006 or May 31, 2005.2006. We
currently have short-term debt ratings of A1 and P1 from Standard and Poor's
Corporation and Moody's Investor Services, respectively.
We currently believe that cash generated by operations, together with
access to external sources of funds as described above and in our Annual
Report on Form 10-K for the fiscal year ended May 31, 2005,2006, will be
sufficient to meet our operating and capital needs in the foreseeable
future.
Recently Issued Accounting Standards
In June 2006, the Financial Accounting Standards Board ("FASB") issued
FASB Interpretation No. 48, "Accounting for Uncertainty in Income Taxes"
("FIN 48"). FIN 48 clarifies the accounting for uncertainty in income taxes
recognized in our financial statements in accordance with FASB Statement No.
109, "Accounting for Income Taxes". The provisions of FIN 48 are effective
for our fiscal year beginning June 1, 2007. We are currently evaluating the
impact of the provisions of FIN 48.
In September 2006, the FASB issued SFAS No. 157, "Fair Value
Measurements" ("FAS 157"). FAS 157 defines fair value, establishes a
framework for measuring fair value in generally accepted accounting
principles, and expands disclosures about fair value measurements. The
provisions of FAS 157 are effective for our fiscal year beginning June 1,
2008. We are currently evaluating the impact of the provisions of FAS 157.
In September 2006, the FASB issued SFAS No. 158. "Employers' Accounting
for Defined Benefit Pension and Other Postretirement Plans" ("FAS 158").
FAS 158 requires employers to fully recognize the obligations associated
with single-employer defined benefit pension, retiree healthcare and other
postretirement plans in their financial statements. The provisions of FAS
158 are effective as of the end of the fiscal year ending May 31, 2007. We
are currently evaluating the impact of the provisions of FAS 158.
Critical Accounting Policies
Our discussion and analysis of our financial condition and results of
operations are based upon our consolidated financial statements, which have
been prepared in accordance with accounting principles generally accepted in
the United States. The preparation of these financial statements requires us
to make estimates and judgments that affect the reported amounts of assets,
liabilities, revenues and expenses, and related disclosure of contingent
assets and liabilities.
We believe that the estimates, assumptions and judgments involved in
the accounting policies described in the "Management's Discussion and
Analysis of Financial Condition and Results of Operations" section of our
most recent Annual Report on Form 10-K have the greatest potential impact on
our financial statements, so we consider these to be our critical accounting
policies. BecauseWith the adoption of FAS 123R at the beginning of the uncertainty inherent in these matters, actualfirst
quarter of fiscal 2007, we have added "Stock-based Compensation" as a
critical accounting policy as described below. 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.
Stock-based Compensation
As of the first quarter of fiscal 2007, we account for stock-based
compensation in accordance with FAS 123R. Under the provisions of FAS 123R,
the fair value of stock-based compensation is estimated on the date of grant
using the Black-Scholes fair value model. The Black-Scholes option pricing
model requires the input of highly subjective assumptions including
volatility. Expected volatility is estimated based on implied volatility in
market traded options on the Company's common stock, with a term greater than
one year. Our decision to use implied volatility was based on the
availability of actively traded options on our common stock and our assessment
that implied volatility is more representative of future stock price trends
than historical volatility. If factors change and we use different
assumptions for estimating stock-based compensation expense in future periods,
stock-based compensation expense may differ materially in the future from that
recorded in the current period.
Item 3. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK
There have been no material changes from the information previously
reported under Item 7A of the Company's Annual Report on Form 10-K for the
fiscal year ended May 31, 2005.2006.
Item 4. CONTROLS AND PROCEDURES
The Company maintains disclosure controls and procedures that are
designed to ensure that information required to be disclosed in the Company's
Exchange Act reports is recorded, processed, summarized and reported within
the time periods specified in the Securities and Exchange Commission's rules
and forms and that such information is accumulated and communicated to the
Company's management, including its Chief Executive Officer and Chief
Financial Officer, as appropriate, to allow for timely decisions regarding
required disclosure. In designing and evaluating the disclosure controls and
procedures, management recognizes that any controls and procedures, no matter
how well designed and operated, can provide only reasonable assurance of
achieving the desired control objectives, and management is required to apply
its judgment in evaluating the cost-benefit relationship of possible controls
and procedures.
The Company carries out a variety of on-going procedures, under the
supervision and with the participation of the Company's management, including
the Company's Chief Executive Officer and the Company's Chief Financial
Officer, to evaluate the effectiveness of the design and operation of the
Company's disclosure controls and procedures. Based on the foregoing, the
Company's Chief Executive Officer and Chief Financial Officer concluded that
the Company's disclosure controls and procedures were effective at the
reasonable assurance level as of February 28,August 31, 2006.
There has been no change in the Company's internal controls over
financial reporting during the Company's most recent fiscal quarter that has
materially affected, or is reasonable likely to materially affect, the
Company's internal controls over financial reporting.
Special Note Regarding Forward-Looking Statements
and Analyst Reports
Certain written and oral statements, other than purely historical
information including estimates, projections, statements relating to NIKE's
business plans, objectives and expected operating results, and the assumptions
upon which those statements are based, made or incorporated by reference from
time to time by NIKE or its representatives in this report, other reports,
filings with the Securities and Exchange Commission, press releases,
conferences, or otherwise, are "forward-looking statements" within the meaning
of the Private Securities Litigation Reform Act of 1995 and Section 21E of the
Securities Exchange Act of 1934. Forward-looking statements include, without
limitation, any statement that may predict, forecast, indicate, or imply
future results, performance, or achievements, and may contain the words
"believe," "anticipate," "expect," "estimate," "project," "will be," "will
continue," "will likely result," or words or phrases of similar meaning.
Forward-looking statements involve risks and uncertainties which may cause
actual results to differ materially from the forward-looking statements. The
risks and uncertainties are detailed from time to time in reports filed by
NIKE with the S.E.C., including Forms 8-K, 10-Q, and 10-K, and include, among
others, the following: international, national and local general economic and
market conditions; the size and growth of the overall athletic footwear,
apparel, and equipment markets; intense competition among designers,
marketers, distributors and sellers of athletic footwear, apparel, and
equipment for consumers and endorsers; demographic changes; changes in
consumer preferences; popularity of particular designs, categories of
products, and sports; seasonal and geographic demand for NIKE products;
difficulties in anticipating or forecasting changes in consumer preferences,
consumer demand for NIKE products, and the various market factors described
above; difficulties in implementing, operating, and maintaining NIKE's
increasingly complex information systems and controls, including, without
limitation, the systems related to demand and supply planning, and inventory
control; fluctuations and difficulty in forecasting operating results,
including, without limitation, the fact that advance "futures" orders may not
be indicative of future revenues due to the changing mix of futures and at-
once orders; the ability of NIKE to sustain, manage or forecast its growth and
inventories; the size, timing and mix of purchases of NIKE's products; new
product development and introduction; the ability to secure and protect
trademarks, patents, and other intellectual property performance and
reliability of products; customer service; adverse publicity; the loss of
significant customers or suppliers; dependence on distributors; business
disruptions; increased costs of freight and transportation to meet delivery
deadlines; changes in business strategy or development plans; general risks
associated with doing business outside the United States, including, without
limitation, exchange rate fluctuations, import duties, tariffs, quotas and
political and economic instability; changes in government regulations;
liability and other claims asserted against NIKE; the ability to attract and
retain qualified personnel; and other factors referenced or incorporated by
reference in this report and other reports.
The risks included here are not exhaustive. Other sections of this report
may include additional factors which could adversely affect NIKE's business
and financial performance. Moreover, NIKE operates in a very competitive and
rapidly changing environment. New risk factors emerge from time to time and it
is not possible for management to predict all such risk factors, nor can it
assess the impact of all such risk factors on NIKE's business or the extent to
which any factor, or combination of factors, may cause actual results to
differ materially from those contained in any forward-looking statements.
Given these risks and uncertainties, investors should not place undue reliance
on forward-looking statements as a prediction of actual results.
Investors should also be aware that while NIKE does, from time to time,
communicate with securities analysts, it is against NIKE's policy to disclose
to them any material non-public information or other confidential commercial
information. Accordingly, shareholders should not assume that NIKE agrees with
any statement or report issued by any analyst irrespective of the content of
the statement or report. Furthermore, NIKE has a policy against issuing or
confirming financial forecasts or projections issued by others. Thus, to the
extent that reports issued by securities analysts contain any projections,
forecasts or opinions, such reports are not the responsibility of NIKE.
Part II - Other Information
Item 1. Legal Proceedings
There have been no significant developments with respect to the
information previously reported under Item 4 of the Company's Annual Report on
Form 10-K for the fiscal year ended May 31, 2005.2006.
Item 1A. Risk Factors
There have been no material changes in our risk factors from those
disclosed in Part I, Item 1A, of our Annual Report on Form 10-K for the fiscal
year ended May 31, 2006.
Item 2. Unregistered SaleSales of Equity Securities and Use of Proceeds
The following table presents a summary of share repurchases made by NIKE
during the quarter ended February 28,August 31, 2006. In June 2006, underour Board of
Directors approved a new four-year $3.0 billion share repurchase program.
During the four-yearquarter ended August 31, 2006, we completed the previous $1.5
billion share repurchase program authorized by ourthe Board of Directors and announced
in June 2004.
Total Number of Maximum Dollar Value
Shares Purchased as of Shares that May
Total Number Average Part of Publicly Yet Be Purchased
Of Shares Price Paid Announced Plans Under the Plans
Period Purchased Per Share or Programs or Programs
______ ____________ __________ ___________________ ____________________
(in millions)
DecemberJune 1 - 31, 2005 568,20030, 2006 1,360,000 $ 87.36 568,200 $ 503.8
January81.60 1,360,000 $3,051.6
July 1 - 31, 2006 319,3001,930,700 $ 84.51 319,300 $ 476.8
February79.44 1,930,700 $2,898.2
August 1 - 28,31, 2006 606,5002,736,600 $ 84.66 606,500 $ 425.577.60 2,736,600 $2,685.9
_________ _______ _________
Total 1,494,0006,027,300 $ 85.66 1,494,00079.09 6,027,300
========= ======= =========
Item 3. Defaults Upon Senior Securities
None
Item 4. Submissions of Matters to a Vote of Security Holders
None
Item 5. Other Information
None
Item 6. Exhibits
(a) EXHIBITS:
3.1 Restated Articles of Incorporation, as amended (incorporated
by reference fromto Exhibit 3.1 to the Company's Quarterly Report
on Form 10-Q for the fiscal quarter ended August 31, 2005).
3.2 Third Restated Bylaws, as amended (incorporated by reference
from Exhibit 3.2 to the Company's Current Report on Form 8-K
filed November 18, 2004).
4.1 Restated Articles of Incorporation, as amended (see Exhibit
3.1).
4.2 Third Restated Bylaws, as amended (see Exhibit 3.2).
12.1 Computation of Ratio of Earnings to Fixed Charges.
31.1 Rule 13(a)-14(a) Certification of Chief Executive Officer.
31.2 Rule 13(a)-14(a) Certification of Chief Financial Officer.
32.1 Section 1350 Certificate of Chief Executive Officer.
32.2 Section 1350 Certificate of Chief Financial Officer.
SIGNATURES
Pursuant to the requirements of the Securities Exchange Act of 1934,
the registrant has duly caused this report to be signed on its behalf by
the undersigned thereunto duly authorized.
NIKE, Inc.
an Oregon Corporation
/s/Donald W. Blair
________________________
Donald W. Blair
Chief Financial Officer
DATED: April 7,October 3, 2006