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 November 30, 1999 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 .
___ ___
Common Stock shares outstanding as of November 30, 1999 were:
_________________
Class A 100,468,351
Class B 175,536,825
-----------
276,005,176
===========
PART 1 - FINANCIAL INFORMATION
Item 1. Financial Statements
NIKE, Inc.
CONDENSED CONSOLIDATED BALANCE SHEET
Nov. 30, May 31,
1999 1999
________ _______
(in millions)
ASSETS
Current assets:
Cash and equivalents $ 253.0 $ 198.1
Accounts receivable 1,510.0 1,540.1
Inventories (Note 4) 1,251.7 1,199.3
Deferred income taxes 109.6 120.6
Income taxes receivable - 15.9
Prepaid expenses 161.3 190.9
________ ________
Total current assets 3,285.6 3,264.9
Property, plant and equipment 2,355.0 2,001.3
Less accumulated depreciation 806.0 735.5
________ ________
1,549.0 1,265.8
Identifiable intangible assets and goodwill 417.3 426.6
Deferred income taxes and other assets 307.5 290.4
________ ________
$5,559.4 $5,247.7
======== ========
LIABILITIES AND SHAREHOLDERS' EQUITY
Current liabilities:
Current portion of long-term debt $ 50.2 $ 1.0
Notes payable 568.9 419.1
Accounts payable 491.4 373.2
Accrued liabilities 576.3 653.6
Income taxes payable 100.0 -
________ ________
Total current liabilities 1,786.8 1,446.9
Long-term debt 472.4 386.1
Deferred income taxes and other liabilities 87.6 79.8
Commitments and contingencies (Note 7) -- --
Redeemable preferred stock 0.3 0.3
Shareholders' equity:
Common stock at stated value:
Class A convertible-100.5 and
101.7 shares outstanding 0.2 0.2
Class B-175.5 and 181.6 shares
outstanding 2.7 2.7
Capital in excess of stated value 352.7 334.1
Accumulated other comprehensive income (84.4) (68.9)
Retained earnings 2,941.1 3,066.5
________ ________
3,212.3 3,334.6
________ ________
$5,559.4 $5,247.7
======== ========
The accompanying Notes to Condensed Consolidated Financial Statements are
an integral part of this statement.
NIKE, Inc.
CONDENSED CONSOLIDATED STATEMENT OF INCOME
Three Months Ended Six Months Ended
November 30, November 30,
__________________ _________________
1999 1998 1999 1998
____ ____ ____ ____
(in millions, except per share data)
Revenues $2,059.7 $1,913.0 $4,560.8 $4,417.9
_________ _________ _________ _________
Costs and expenses:
Cost of sales 1,238.0 1,229.6 2,772.6 2,792.3
Selling and administrative 624.8 531.9 1,251.4 1,184.5
Interest 6.7 10.1 16.7 24.3
Other expense 16.8 6.7 23.7 11.2
Restructuring Charge - 20.9 - 20.9
_________ _________ _________ __________
1,886.3 1,799.2 4,064.4 4,033.2
_________ _________ _________ __________
Income before income taxes 173.4 113.8 496.4 384.7
Income taxes 65.9 44.9 188.6 151.9
_________ __________ _________ __________
Net income $ 107.5 $ 68.9 $ 307.8 $ 232.8
========= ========== ========= ==========
Basic earnings per common share $ 0.39 $ 0.24 $ 1.10 $ 0.82
(Note 3) ========= ========= ========= ==========
Diluted earnings per common share $ 0.38 $ 0.24 $ 1.09 $ 0.80
(Note 3) ========= ========= ========= ==========
Dividends declared per common share $ 0.12 $ 0.12 $ 0.24 $ 0.24
========= ========= ========= ==========
The accompanying Notes to Condensed Consolidated Financial Statements are
an integral part of this statement.
NIKE, Inc.
CONDENSED CONSOLIDATED STATEMENT OF CASH FLOWS
Six Months Ended
November 30,
_________________
1999 1998
____ ____
(in millions)
Cash provided (used) by operations:
Net income $ 307.8 $232.8
Income charges (credits) not
affecting cash:
Depreciation 91.0 102.0
Deferred income taxes (.8) (18.4)
Amortization and other 20.4 16.8
Changes in other working capital
components 161.0 337.9
_______ _______
Cash provided by operations 579.4 671.1
_______ _______
Cash provided (used) by investing activities:
Additions to property, plant and
equipment (358.6) (173.6)
Disposals of property, plant and
equipment 12.0 11.7
Increase in other assets (13.8) (26.7)
Increase (decrease) in other liabilities 3.5 (6.4)
_______ _______
Cash used by investing activities (356.9) (195.0)
_______ _______
Cash provided (used) by financing activities:
Additions to long-term debt 109.0 -
Reductions in long-term debt
including current portion (1.4) (0.9)
Increase (decrease) in notes payable 149.8 (48.6)
Proceeds from exercise of options 27.2 9.3
Repurchase of stock (371.1) (194.0)
Dividends - common and preferred (67.5) (68.6)
_______ _______
Cash provided (used) by financing activities (154.0) (302.8)
_______ _______
Effect of exchange rate changes on cash (13.6) (27.3)
Net increase in cash and equivalents 54.9 146.0
Cash and equivalents, May 31, 1999 and 1998 198.1 108.6
_______ _______
Cash and equivalents, November 30, 1999
and 1998 $ 253.0 $254.6
======= =======
The accompanying Notes to Condensed Consolidated Financial Statements are
an integral part of this statement.
NIKE, Inc.
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
NOTE 1 - Summary of significant accounting policies:
___________________________________________
Basis of presentation:
The accompanying unaudited condensed consolidated financial statements
reflect all adjustments (consisting of normal recurring accruals) which
are, in the opinion of management, necessary for a fair presentation of
the results of operations for the interim period(s). The interim financial
information and notes thereto should be read in conjunction with the
Company's latest annual report to shareholders. The results of operations
for the six (6) months ended November 30, 1999 are not necessarily
indicative of results to be expected for the entire year.
Year 2000 costs:
Costs associated with the Company's efforts around Year 2000 issues are
expensed as incurred, unless they relate to the purchase of hardware and
software, and software development, in which case they are capitalized.
Capitalized software and hardware costs are depreciated from three to five
years.
NOTE 2 - Comprehensive Income:
__________________
Comprehensive income, net of taxes, is as
follows:
Three Months Ended Six Months Ended
November 30, November 30,
__________________ _________________
1999 1998 1999 1998
____ ____ ____ ____
(in millions)
Net Income $107.5 $ 68.9 $307.8 $232.8
Change in Cumulative
Translation Adjustment (4.0) (3.6) (15.5) (8.7)
_______ _______ _______ _______
Total Comprehensive Income $103.5 $ 65.3 $292.3 $224.1
======= ======= ======= =======
NOTE 3 - Net income per common share:
___________________________
Basic and diluted earnings per share are calculated in accordance with SFAS
128, "Earnings per Share." This standard requires that basic earnings per share
be calculated using the average common shares outstanding. Diluted earnings
per share are calculated by taking into consideration the dilutive effect of
issued and outstanding stock options. The following represents a
reconciliation from basic earnings per share to diluted earnings per share:
Three Months Ended Six Months Ended
November 30, November 30
__________________ ___________________
1999 1998 1999 1998
____ ____ ____ _____
(in millions, except per share data)
Determination of shares:
Average common shares
outstanding 277.3 283.0 279.2 284.9
Assumed conversion of
stock options 3.9 4.7 4.2 4.9
______ ______ ______ _____
Diluted average common
shares outstanding 281.2 287.7 283.4 289.8
====== ====== ====== ======
Basic earnings per
common share $ 0.39 $ 0.24 $ 1.10 $ 0.82
====== ====== ====== ======
Diluted earnings per
common share $ 0.38 $ 0.24 $ 1.09 $ 0.80
====== ====== ====== ======
NOTE 4 - Inventories:
___________
Inventories by major classification are as follows:
Nov. 30, May 31,
1999 1999
________ ________
(in millions)
Finished goods $1,177.7 $1,132.7
Work-in-progress 59.2 44.8
Raw materials 14.8 21.8
________ ________
$1,251.7 $1,199.3
======== ========
NOTE 5 - Operating Segments:
The Company's major operating segments are defined by geographic regions
for subsidiaries participating in NIKE Brand sales activity. Other Brands as
shown below represent activity for non-NIKE brand subsidiaries (Cole-Haan
Holdings, Inc., Bauer NIKE Hockey, Inc., and NIKE IHM, Inc.) and are considered
immaterial for individual disclosure. Where applicable, "Corporate and Other"
represents items necessary to reconcile to the consolidated financial
statements which generally include corporate activity and corporate
eliminations. The segments are evidence of the structure of the enterprise's
internal organization. Each NIKE Brand geographic segment operates
predominantly in one industry: the design, production, marketing and selling
of sports and fitness footwear, apparel, and equipment.
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 Contribution Profit before Corporate Allocations, Interest
Expense and Income Taxes. On a consolidated basis, this amount represents
Income Before Taxes less Interest Expense as shown in the Consolidated
Statement of Income. Other reconciling items for Contribution Profit represent
corporate costs that are not allocated to the operating segments for management
reporting and intercompany eliminations for specific income statement items.
Accounts receivable, inventory, and fixed assets for operating segments
are regularly reviewed and therefore provided:
Three Months Ended Six Months Ended
November 30, November 30,
__________________ __________________
1999 1998 1999 1998
____ ____ ____ ____
Net Revenue
USA $1,078.6 $1,054.6 $2,410.3 $2,411.7
EURORE 484.7 430.2 1,202.5 1,111.1
ASIA PACIFIC 242.6 196.9 433.5 388.3
AMERICAS 145.1 119.7 288.7 272.3
OTHER BRANDS 108.7 111.6 225.8 234.5
_________ _________ _________ _________
$2,059.7 $1,913.0 $4,560.8 $4,417.9
========= ========= ========= =========
Contribution Profit
USA $ 197.4 $ 179.2 $ 472.3 $ 465.8
EUROPE 63.6 31.4 215.5 158.4
ASIA PACIFIC 44.3 9.8 68.4 17.5
AMERICAS 22.8 20.2 43.2 47.2
OTHER BRANDS 19.8 9.5 39.8 14.6
CORPORATE & OTHER (167.8) (126.2) (326.1) (294.5)
_________ _________ _________ _________
$ 180.1 $ 123.9 $ 513.1 $ 409.0
========= ========= ========= =========
Nov 30, May 31,
1999 1999
_________ __________
Accounts Receivable, net
USA $ 536.1 $ 578.2
EUROPE 484.9 551.6
ASIA PACIFIC 180.0 141.5
AMERICAS 140.5 119.2
OTHER BRANDS 135.6 104.6
CORPORATE & OTHER 32.9 45.0
_________ _________
$1,510.0 $1,540.1
========= =========
Inventories, net
USA $ 666.3 $ 565.5
EUROPE 265.0 316.3
ASIA PACIFIC 97.1 81.5
AMERICAS 65.1 73.1
OTHER BRANDS 127.5 137.5
CORPORATE & OTHER 30.7 25.4
_________ _________
$1,251.7 $1,199.3
======== =========
Property, Plant and Equipment, net
USA $ 279.8 $ 293.0
EUROPE 281.3 271.4
ASIA PACIFIC 400.4 148.0
AMERICAS 20.6 21.5
OTHER BRANDS 109.7 111.7
CORPORATE & OTHER 457.2 420.2
_________ _________
$1,549.0 $1,265.8
========= =========
Note 6 - Restructuring Charges:
1998 Charge
During the fourth quarter of fiscal 1998 the Company recorded a
restructuring charge of $129.9 million as a result of certain of the Company's
actions to better align its cost structure with expected revenue growth rates.
The restructuring activities (shown below in tabular format) primarily related
to: 1) the elimination of job responsibilities company-wide, resulting in
costs to sever employees and related asset write-downs and lease abandonments
related to the affected employees; 2) the relocation of, and elimination of,
certain job responsibilities of the Asia Pacific headquarters in Hong Kong,
resulting in reduction in workforce, lease abandonments and other costs of
downsizing the Hong Kong headquarters; 3) the downsizing of the Company's Japan
distribution center, resulting in the write-down of assets no longer in use;
4) the cancellation of certain non-strategic long-term endorsement contracts,
resulting in one-time termination fees; and 5) the decision to exit certain
manufacturing operations of the Bauer subsidiary, resulting in the reduction in
manufacturing related jobs, the write-down of assets no longer in use, and the
estimated loss on divestiture of certain manufacturing plants.
Employees were terminated from almost all areas of the Company, including
marketing, sales and administrative areas. The total number of employees
terminated was 1,208, with 1,203 having left the Company as of November 30,
1999.
No increases to the 1998 restructuring charge have been made. A total of
$15 million of the restructuring charge was reversed in fiscal year 1999.
During the first two quarters of fiscal year 2000 continuing cash payments were
made against the reserve liability as shown in the table below. The remaining
accrual will be relieved throughout fiscal 2000, as leases expire and severance
payments, some of which are paid on a monthly basis, are completed.
Detail of the 1998 restructuring charge is as follows:
(in millions)
FY98 FY99
DESCRIPTION CASH/NON- RESTRUCTURING ACTIVITY RESERVE ACTIVITY RESERVE
CASH CHARGE BALANCE AT BALANCE AT
5/31/99 11/30/99
___________________________________________________________________________________________________________
ELIMINATION OF JOB
RESPONSIBILITES COMPANY-
WIDE $(49.8) $46.5 $ (3.3) $ 1.7 $(1.6)
Severance packages cash (29.1) 28.2 (0.9) 0.5 (0.4)
Lease cancellations &
commitments cash (10.8) 8.4 (2.4) 1.2 (1.2)
Write-down of assets non-cash (9.6) 9.6 - - -
Other cash (0.3) 0.3 - - -
___________________________________________________________________________________________________________
DOWNSIZING THE ASIA PACIFIC
HEADQUARTERS IN HONG KONG $(13.1) $13.0 $(0.1) $0.1 $ -
Severance packages cash (4.6) 4.6 - - -
Lease cancellations &
commitments cash (5.5) 5.4 (0.1) 0.1 -
Write-down of assets non-cash (3.0) 3.0 - - -
____________________________________________________________________________________________________________
DOWNSIZING THE JAPAN
DISTRIBUTION CENTER $(31.6) $30.5 $(1.1) $1.1 $ -
Write-off of assets non-cash (12.5) 12.5 - - -
Software development costs cash/non (19.1) 18.0 (1.1) 1.1 -
cash
____________________________________________________________________________________________________________
CANCELLATION OF ENDORSEMENT
CONTRACTS cash $(5.6) $5.3 $(0.3) $ - $(0.3)
____________________________________________________________________________________________________________
EXITING CERTAIN MANUFACTURING
OPERATIONS AT BAUER $(22.7) $21.7 $(1.0) $0.6 $(0.4)
Write-down of assets non-cash (14.7) 14.7 - - -
Divestiture of manufacturing
facilities non-cash (5.2) 5.2 - - -
Lease cancellations &
commitments cash (1.6) 0.9 (0.7) 0.3 (0.4)
Severance packages cash (1.2) 0.9 (0.3) 0.3 -
____________________________________________________________________________________________________________
OTHER $(7.1) $6.4 $(0.7) $0.2 $(0.5)
Cash cash (0.6) 0.6 - - -
Non-cash non-cash (6.5) 5.8 (0.7) 0.2 (0.5)
____________________________________________________________________________________________________________
Effect of foreign currency
translation - $0.2 $0.2 $(0.3) $(0.1)
____________________________________________________________________________________________________________
____________________________________________________________________________________________________________
TOTAL $(129.9) $123.6 $(6.3) $3.4 $(2.9)
____________________________________________________________________________________________________________
</TABLE
1999 Charge
During fiscal 1999, a $60.1 million charge was taken due to further cost
realignment programs. The charge (shown below in tabular format) was primarily
for costs of severing employees, including severance packages, lease
abandonments and the write down of assets no longer in use. Employees were
terminated in Europe, Asia Pacific, and in the United States, and included
employees affected by the Company's shift to outsourcing certain of its
information technology functions. The original number of employees to be
terminated was 1,291. As of November 30, 1999, 13 employees have found
positions elsewhere in the Company and 1,105 have left the Company, leaving 173
still to be terminated. Due to the change in the number of employees that will
be terminated, $0.3 million of the reserve was reversed during the second
quarter.
Also included in the charge was a $20.2 write-off of certain assets related
to the change in strategies around the Company's warehouse distribution
facilities in the United States.
The remaining accrual balance will be relieved throughout fiscal 2000 and
early 2001, as leases expire and severance payments are completed.
Detail of the 1999 restructuring charge is as follows:
(in millions)
FY99 FY99
DESCRIPTION CASH/NON- RESTRUCTURING ACTIVITY RESERVE ACTIVITY RESERVE
CASH CHARGE BALANCE AT BALANCE AT
5/31/99 11/30/99
____________________________________________________________________________________________________________
ELIMINATION OF JOB
RESPONSIBILITES $(39.9) $21.9 $(18.0) $9.4 $(8.6)
Severance packages cash (28.0) 11.7 (16.3) 8.5 (7.8)
Lease cancellations &
commitments cash (2.4) 1.6 (0.8) 0.5 (0.3)
Write-down of assets non-cash (7.8) 7.8 - - -
Other cash/non- (1.7) 0.8 (0.9) 0.4 (0.5)
cash
____________________________________________________________________________________________________________
CHANGE IN WAREHOUSE
DISTRIBUTION STRATEGY $(20.2) $20.2 $ - $ - $ -
Write-down of assets non-cash (20.2) 20.2 - - -
____________________________________________________________________________________________________________
Effect of foreign currency
translation - $0.1 $0.1 $(0.9) $(0.8)
____________________________________________________________________________________________________________
____________________________________________________________________________________________________________
TOTAL $(60.1) $42.2 $(17.9) $8.5 $(9.4)
____________________________________________________________________________________________________________
<Table/
NOTE 7 - Commitments and contingencies:
_____________________________
At November 30, 1999, the Company had letters of credit outstanding
totalling $47.4 million. These letters of credit were issued for the purchase
of inventory.
There have been no other significant subsequent developments
relating to the commitments and contingencies reported on the
Company's most recent Form 10-K.
Item 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF RESULTS OF OPERATIONS AND
FINANCIAL CONDITION
Operating Results
_________________
Net income for the second quarter of fiscal year 2000 was $107.5 million,
an increase of 56% over the prior year's second quarter. Year-to-date net
income increased 32% over the prior year, to $307.8 million. Excluding last
year's second quarter net pre-tax restructuring charge of $20.9 million, net
income increased 32% and 25% for the quarter and year-to-date, respectively.
Quarterly earnings were driven by an increase in revenues of 8%, representing
our first consolidated revenue increase in two years, a 420 basis point increase
in gross margin percentage, due to better margins on close-out sales relative to
the prior year, offset by an increase in selling and administrative costs as
percentage of revenues. In addition, earnings improved as our effective tax
rate fell to 38.0% from 39.5% in the prior year. Diluted earnings per share
increased 58% to $0.38, and 36% to $1.09, for the quarter and year-to-date,
respectively, slightly better than net income, as a result of share repurchases.
Consolidated revenues increased 8% to $2.1 billion in the second quarter
compared to the prior year and increased 3% year-to-date to $4.6 billion. Had
the dollar remained constant with that of the prior year, revenues would have
increased 9% for the quarter and 4% for the year. NIKE brand revenue increases
were experienced in all regions during the second quarter. By region, the U.S.
increased 2%, Europe increased 13% (22% in constant dollars), Asia Pacific
increased 23% (9% in constant dollars) and Americas and Africa increased 21%
(28% in constant dollars). Our consolidated footwear revenues increased 16%
(18% in constant dollars) while apparel was down 4% (3% in constant dollars),
primarily as a result of the U.S. apparel business which was down 10%.
U.S. NIKE brand footwear revenues increased over the prior year 9% and 5%
for the second quarter and year-to-date, respectively. U.S. footwear represents
more than 35% of our total revenues. Major categories showing revenue
increases for the quarter included Running, up 23% (19% year-to-date),
basketball, up 22% (10% year-to-date), Cross Training, up 8% (6% year-to-date),
and Kids, up 22% (5% year-to-date). A notable category that experienced a
revenue reduction for the quarter was Brand Jordan, down 42% (down 3% year-to-
date). U.S. NIKE brand apparel business decreased 10% in the second quarter and
11% year-to-date. All apparel categories experienced reductions except our
largest single category, Branded Athletic, which increased 8% (down 3% year-to-
date).
Revenue growth continued outside the U.S. In constant dollars, our
footwear business in Europe was up 29% for the quarter (17% year-to-date), and
apparel was up 15% (12% year-to-date). Of the major markets in the region, the
United Kingdom increased 37% for the quarter (19% year-to-date), France
increased 12% (19% year-to-date), Italy increased 17% (21% year-to-date), while
Spain was flat and Germany was down 3% for the quarter (down 1% and 3%, year-to-
date, respectively).
In constant dollars, revenues in our Asia Pacific region were up 9% for the
quarter and were flat on a year-to-date basis. Our footwear business in the
second quarter increased 29% (17% year-to-date), offset by a decrease in apparel
of 9%, (down 17% year-to-date). The significant decrease in apparel was
primarily due to the high volume of closeout product sold during the prior year
to reduce high inventory levels, which are not present this year. The most
significant market in that region for us is Japan, which increased 35% in
constant dollars for the quarter (19% year-to-date). In addition, Korea doubled
its revenues in the second quarter compared with the prior year (up 25% year-to-
date), primarily as a result of the lower revenues experienced in the prior year
due to the significant economic issues affecting the region at that time.
Revenue of the combined Americas and Africa regions increased 28% in
constant dollars for the quarter (11% year-to-date), with footwear increasing
48% for the quarter, (20% year-to-date) and apparel decreasing 5%, (down 11% for
the quarter). Other Brands business decreased 3% for the quarter and was down
4% for the year.
The breakdown of revenues follows:
Three Months Ended Six Months Ended
November 30, November 30,
___________________ _________________
% %
1999 1998 change 1999 1998 change
______ ______ _______ ______ ______ _______
(in millions)
U.S.A. REGION
FOOTWEAR $722.9 $665.9 9% $1,663.9 $1,583.3 5%
APPAREL 307.0 343.0 -10% 639.0 717.7 -11%
EQUIPMENT AND OTHER 48.7 45.7 7% 107.4 110.7 -3%
_______ _______ ________ ________
TOTAL U.S.A. 1,078.6 1,054.6 2% 2,410.3 2,411.7 0%
EUROPE REGION
FOOTWEAR 235.4 197.7 19% 610.7 551.9 11%
APPAREL 231.7 215.7 7% 560.2 526.5 6%
EQUIPMENT AND OTHER 17.6 16.8 5% 31.6 32.7 -3%
_______ _______ ________ ________
TOTAL EUROPE 484.7 430.2 13% 1,202.5 1,111.1 8%
ASIA PACIFIC REGION
FOOTWEAR 129.9 90.7 43% 253.1 197.1 28%
APPAREL 105.8 101.4 4% 168.3 180.7 -7%
EQUIPMENT AND OTHER 6.9 4.8 44% 12.1 10.5 15%
_______ _______ ________ ________
TOTAL ASIA PACIFIC 242.6 196.9 23% 433.5 388.3 12%
AMERICAS REGION
FOOTWEAR 102.0 73.7 38% 202.6 176.3 15%
APPAREL 41.0 42.5 -4% 79.7 89.5 -11%
EQUIPMENT AND OTHER 2.1 3.5 -40% 6.4 6.5 -2%
_______ _______ ________ ________
TOTAL AMERICAS 145.1 119.7 21% 288.7 272.3 6%
_______ _______ ________ ________
TOTAL NIKE BRAND 1,951.0 1,801.4 8% 4,335.0 4,183.4 4%
OTHER & OTHER BRANDS 108.7 111.6 -3% 225.8 234.5 -4%
_______ _______ ________ ________
TOTAL REVENUES $2,059.7 $1,913.0 8% $4,560.8 $4,417.9 3%
======== ======== ======== ========
Consolidated gross margins as a percentage of revenues increased
significantly in the second quarter and for the year compared with the prior
year. As with the first quarter of this fiscal year, the quality of our
revenues improved significantly relative to a year ago. While our total
closeout sales were about the same as last year, the margins generated on those
sales were greatly improved primarily as a result of the significant inventory
liquidation efforts in place around the world last year. This quarter was the
first in over a year that reflected the total margin impact of those efforts.
In addition, virtually all of our revenue increases for the quarter were from
in-line product sales that carried higher margins. The increase in margins can
also be attributed to the leveraging of fixed warehousing and distribution costs
over increasing revenue volumes, and increased comparative pricing margins on
both in-line and closeout product sales.
Selling and administrative expenses increased $93 million over last year's
second quarter, an increase of 17%, representing 30.3% of revenues compared with
27.8% in the prior year. For the year, selling and administrative expenses
increased $67 million or 6%. A significant portion of the quarter on quarter
increase relates to incremental and certain one-time expenses. Incremental
spending relates to infrastructure investments such as our Supply Chain and
NIKE.com initiatives, incentive compensation enhancements that tie to our
revenue and earnings growth goals and additional costs incurred to support an
expanded corporate headquarters. One-time charges reflect increases to our bad
debt reserves in the U.S. and certain transition costs of moving our employees
in the U.S. and Europe into larger and expanded centralized campuses. In
Europe, these moves reflect the centralization of certain shared services from
individual country locations to our European headquarters. In addition,
increased demand creation spending accounted for a portion of the increase,
particularly in print and TV advertising in the U.S. and Europe. Growth of our
retail operations around the world also increased our selling and administrative
costs. Over the last 12 months, we have added four new NIKEtowns, four new in-
line stores and 31 new factory outlet stores. The return on our investment in
retail is demonstrated in our improved margins on closeout sales discussed
above. Our spending can be characterized as being directed at growing our
infrastructure to meet the demands of the future. Investments in NIKE.com and
Supply Chain are clear examples of this.
Interest expense decreased in the second quarter and year-to-date, compared
to last year, primarily due to our restructured operating agreement with Nissho
Iwai Corporation, resulting in improved interest rates. Offsetting this was
increased interest due to higher levels of short and long term debt, as
discussed under Liquidity and Capital Resources section below.
Other expense increased over the prior year, for both the quarter and year-
to-date, mainly due to increased profit share expense, costs associated with
moving and outsourcing certain operations in the U.S., foreign currency
transaction losses, and other one-time non-operating charges.
Our tax expense for the first six months of this fiscal year decreased to
an effective rate of 38%, compared to 39.5% last year. The drop was primarily
due to reduced state taxes and the utilization of tax loss carryforwards of
certain foreign operations that have recently turned profitable.
Worldwide futures and advance orders for NIKE brand athletic footwear and
apparel scheduled for delivery between December 1999 and April 2000 totaled $3.8
billion, 4% higher than such orders for the same period last year. These orders
and the percentage change in these orders are not necessarily indicative of the
change in revenues that we will experience for subsequent periods. This is due
to potential shifts in the mix of advance orders in relation to at-once orders
and varying cancellation rates. Finally exchange rate fluctuations will also
cause differences in the comparisons.
Restructuring charges
1998 Charge
During the fourth quarter of fiscal 1998 the Company recorded a
restructuring charge of $129.9 million as a result of certain of the Company's
actions to better align its cost structure with expected revenue growth rates.
The restructuring activities (shown below in tabular format) primarily related
to: 1) the elimination of job responsibilities company-wide, resulting in costs
to sever employees and related asset write-downs and lease abandonments related
to the affected employees; 2) the relocation of, and elimination of, certain job
responsibilities of the Asia Pacific headquarters in Hong Kong, resulting in
reduction in workforce, lease abandonments and other costs of downsizing the
Hong Kong headquarters; 3) the downsizing of the Company's Japan distribution
center, resulting in the write-down of assets no longer in use; 4) the
cancellation of certain non-strategic long-term endorsement contracts, resulting
in one-time termination fees; and 5) the decision to exit certain manufacturing
operations of the Bauer subsidiary, resulting in the reduction in manufacturing
related jobs, the write-down of assets no longer in use, and the estimated loss
on divestiture of certain manufacturing plants.
Employees were terminated from almost all areas of the Company, including
marketing, sales and administrative areas. The total number of employees
terminated was 1,208, with 1,203 having left the Company as of November 30,
1999.
No increases to the 1998 restructuring charge have been made. A total of
$15 million of the restructuring charge was reversed in fiscal year 1999.
During the first two quarters of fiscal year 2000 continuing cash payments were
made against the reserve liability as shown in the table below. The remaining
accrual will be relieved throughout fiscal 2000, as leases expire and severance
payments, some of which are paid on a monthly basis, are completed.
Detail of the 1998 restructuring charge is as follows:
(in millions)
FY98 FY99
DESCRIPTION CASH/NON- RESTRUCTURING ACTIVITY RESERVE ACTIVITY RESERVE
CASH CHARGE BALANCE AT BALANCE AT
5/31/99 11/30/99
___________________________________________________________________________________________________________
ELIMINATION OF JOB
RESPONSIBILITES COMPANY-
WIDE $(49.8) $46.5 $ (3.3) $ 1.7 $(1.6)
Severance packages cash (29.1) 28.2 (0.9) 0.5 (0.4)
Lease cancellations &
commitments cash (10.8) 8.4 (2.4) 1.2 (1.2)
Write-down of assets non-cash (9.6) 9.6 - - -
Other cash (0.3) 0.3 - - -
___________________________________________________________________________________________________________
DOWNSIZING THE ASIA PACIFIC
HEADQUARTERS IN HONG KONG $(13.1) $13.0 $(0.1) $0.1 $ -
Severance packages cash (4.6) 4.6 - - -
Lease cancellations &
commitments cash (5.5) 5.4 (0.1) 0.1 -
Write-down of assets non-cash (3.0) 3.0 - - -
____________________________________________________________________________________________________________
DOWNSIZING THE JAPAN
DISTRIBUTION CENTER $(31.6) $30.5 $(1.1) $1.1 $ -
Write-off of assets non-cash (12.5) 12.5 - - -
Software development costs cash/non (19.1) 18.0 (1.1) 1.1 -
cash
____________________________________________________________________________________________________________
CANCELLATION OF ENDORSEMENT
CONTRACTS cash $(5.6) $5.3 $(0.3) $ - $(0.3)
____________________________________________________________________________________________________________
EXITING CERTAIN MANUFACTURING
OPERATIONS AT BAUER $(22.7) $21.7 $(1.0) $0.6 $(0.4)
Write-down of assets non-cash (14.7) 14.7 - - -
Divestiture of manufacturing
facilities non-cash (5.2) 5.2 - - -
Lease cancellations &
commitments cash (1.6) 0.9 (0.7) 0.3 (0.4)
Severance packages cash (1.2) 0.9 (0.3) 0.3 -
____________________________________________________________________________________________________________
OTHER $(7.1) $6.4 $(0.7) $0.2 $(0.5)
Cash cash (0.6) 0.6 - - -
Non-cash non-cash (6.5) 5.8 (0.7) 0.2 (0.5)
____________________________________________________________________________________________________________
Effect of foreign currency
translation - $0.2 $0.2 $(0.3) $(0.1)
____________________________________________________________________________________________________________
____________________________________________________________________________________________________________
TOTAL $(129.9) $123.6 $(6.3) $3.4 $(2.9)
____________________________________________________________________________________________________________
</TABLE
1999 Charge
During fiscal 1999, a $60.1 million charge was taken due to further cost
realignment programs. The charge (shown below in tabular format) was primarily
for costs of severing employees, including severance packages, lease
abandonments and the write down of assets no longer in use. Employees were
terminated in Europe, Asia Pacific, and in the United States, and included
employees affected by the Company's shift to outsourcing certain of its
information technology functions. The original number of employees to be
terminated was 1,291. As of November 30, 1999, 13 employees have found
positions elsewhere in the Company and 1,105 have left the Company, leaving 173
still to be terminated. Due to the change in the number of employees that will
be terminated, $0.3 million of the reserve was reversed during the second
quarter.
Also included in the charge was a $20.2 write-off of certain assets related
to the change in strategies around the Company's warehouse distribution
facilities in the United States.
The remaining accrual balance will be relieved throughout fiscal 2000 and
early 2001, as leases expire and severance payments are completed.
Detail of the 1999 restructuring charge is as follows:
(in millions)
FY99 FY99
DESCRIPTION CASH/NON- RESTRUCTURING ACTIVITY RESERVE ACTIVITY RESERVE
CASH CHARGE BALANCE AT BALANCE AT
5/31/99 11/30/99
____________________________________________________________________________________________________________
ELIMINATION OF JOB
RESPONSIBILITES $(39.9) $21.9 $(18.0) $9.4 $(8.6)
Severance packages cash (28.0) 11.7 (16.3) 8.5 (7.8)
Lease cancellations &
commitments cash (2.4) 1.6 (0.8) 0.5 (0.3)
Write-down of assets non-cash (7.8) 7.8 - - -
Other cash/non- (1.7) 0.8 (0.9) 0.4 (0.5)
cash
____________________________________________________________________________________________________________
CHANGE IN WAREHOUSE
DISTRIBUTION STRATEGY $(20.2) $20.2 $ - $ - $ -
Write-down of assets non-cash (20.2) 20.2 - - -
____________________________________________________________________________________________________________
Effect of foreign currency
translation - $0.1 $0.1 $(0.9) $(0.8)
____________________________________________________________________________________________________________
____________________________________________________________________________________________________________
TOTAL $(60.1) $42.2 $(17.9) $8.5 $(9.4)
____________________________________________________________________________________________________________
<Table/>
Euro Conversion
On January 1, 1999, eleven of the fifteen member countries of the European
Union established permanent, fixed conversion rates between their existing
currencies and the European Union's new common currency, the euro. During the
transition period ending December 31, 2001, public and private parties may pay
for goods and services using either the euro or the participating country's
legacy currency. Beginning January 1, 2002, euro denominated bills and coins
will be issued, with the legacy currencies being completely withdrawn from
circulation on June 30, 2002.
We have had a dedicated project team working on euro strategy since January
1998. We are in the process of making modifications to information technology
systems including marketing, order management, purchasing, invoicing, payroll,
and cash management. Many of our systems are already euro compliant. Our plan
is to have most systems converted to euro compliance by the end of calendar year
2000, well ahead of the end of the transitional period.
We believe the introduction of the euro may create a move towards a greater
level of price harmonization, although differing country costs and value added
tax rates will continue to result in price differences at a retail level. We
have a process in place to analyze price trends among countries. Currency
exchange and hedging costs could be reduced, due to the introduction of the
euro.
The costs of implementing the euro are generally related to modification of
existing systems, and are estimated to be approximately $14 million. These
costs will be expensed as incurred. We believe that the conversion to the euro
will not be material to our financial condition or results of operations.
Year 2000 Readiness Disclosure
Since May 1997, a corporate-wide project team has overseen, monitored, and
performed the remediation or replacement of date-sensitive computer software
programs and systems that might fail because the programs use two digits rather
than four to define the applicable year (the "Year 2000" issue). The risks to
NIKE, and our mitigation efforts and contingency plans have been described in
our most recent annual and quarterly reports on Forms 10-K and 10-Q. Those
disclosures are still current. The following information updates those
disclosures.
We have completed all major Year 2000 projects. With the passage of most
critical dates, including the commencement of NIKE's 2000 fiscal year, and
January 1, 2000, we and our significant suppliers and customers have experienced
no significant disruptions due to the Year 2000 issue. Based on this
experience, we currently expect no significant disruptions in the future as a
result of the Year 2000 issue or the fact that 2000 is a leap year.
Accordingly, the Year 2000 issue has not had, and is not currently expected to
have, any material adverse effect on our financial condition, results of
operations or liquidity.
Our total costs related to the Year 2000 issue will be approximately $100
million, of which approximately $98 million have been incurred as of November
30, 1999. Of the $98 million, approximately $41 million were external expenses,
$18 million internal costs and $39 million replacement projects. Approximately
$10 million of the non-replacement expenses will be capitalized; the remainder
has been expensed as incurred. NIKE has funded Year 2000 costs through
operating cash flows.
This information is subject to the same risks and uncertainties outlined in
prior disclosures. The above section, even if incorporated by reference into
other documents or disclosures, is a Year 2000 Readiness Disclosure as defined
under the Year 2000 Information and Readiness Disclosure Act of 1998.
Liquidity and Capital Resources
The Company's financial position remained strong at November 30, 1999.
Compared to May 31, 1999, shareholders' equity decreased slightly to $3.2
billion. Working capital decreased 18% to $1.5 billion and the current ratio
was 1.84:1 at November 30, 1999 compared to 2.26:1 at May 31, 1999.
Cash provided by operations was $579 million for the first half of fiscal
2000, a decrease of $92 million compared to last year. The changes in working
capital components primarily drove this decrease, offset by increased net
income. The reduction in the change in working capital relative to a year ago is
primarily due to the effects of the slow down in the business experienced during
the first half of last year. As a result, inventory and accounts receivable
levels in the prior year had been significantly reduced during the first half of
last year, generating positive cash flows, while this year our business is
improving, reflecting more comparable inventory and receivable levels to fiscal
year end. The reduction in inventories during the first half of last year were
a result of our efforts to liquidate high closeout levels around the world to
more normalized levels. In addition, the timing of income tax payments has
positively affected working capital as of November 30, 1999.
During the first quarter of this fiscal year, we restructured our operating
arrangement with Nissho Iwai Corporation, which allows us, among other things,
to take over the financing of inventory purchases previously performed by
Nissho. This will have the effect of placing USA inventory on our balance sheet
fifteen to twenty-five days earlier than in the past. Although the net working
capital impact of this new arrangement is minimal, as of November 30, 1999,
approximately $110 million of inventory was in transit to the U.S. and on our
books, compared to zero at May 31, 1999. In addition, we are now responsible
for issuing letters of credit for the purchase of inventories, which used to be
performed by Nissho. At November 30, 1999, we had letters of credit outstanding
of $47.4 million for the purchase of inventory.
Additions to property, plant and equipment for the first half of fiscal
2000 were $359 million. Approximately $246 million related to the purchase of
our distribution facility in Japan, discussed below. The other significant
expenditures were related to the continued expansion of our world headquarters
and additions to computer equipment and software.
During the first quarter of fiscal 2000, we finalized the purchase of our
distribution facility in Japan from Nissho. We financed the purchase by
assuming Nissho's Japanese development bank loans, along with some short-term
debt that we currently intend to roll to long-term within the next few months.
This is the primary reason for the increase in notes payable and long-term debt
compared to May 31, 1999.
Management believes that significant funds generated by operations,
together with access to sufficient sources of funds, will adequately meet its
anticipated operating, global infrastructure expansion and capital needs.
Significant short and long-term lines of credit are maintained with banks,
which, along with cash on hand, provide adequate operating liquidity. Liquidity
is also provided by the Company's commercial paper program, under which there
was $390 outstanding at November 30, 1999.
Dividends per share of common stock for the second quarter of fiscal 2000
remained at $.12 per share, the same level as the previous year.
As of November 30, 1999, the Company purchased a total of 15.8 million
shares of NIKE's Class B common stock for $731 million in the open market since
the $1 billion share repurchase program was approved in December 1997. During
the first six months of fiscal year 2000, the Company purchased a total of 7.2
million shares for $375 million. Funding has, and is expected to continue to,
come from operating cash flow in conjunction with short-term borrowings. The
timing and the amount of shares purchased will be dictated by working capital
needs and stock market conditions.
Special Note Regarding Forward-Looking Statements
and Reports Analyst Reports
Certain written and oral statements 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 ("the Act"). 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 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; the size, timing and mix of purchases
of NIKE's products; 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; 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; disruptions due to Year 2000 noncompliance by NIKE, its suppliers
or customers (or their suppliers or customers); 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, 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 impact 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 material changes from the information previously
reported under Item 3 of the Company's Annual Report on Form 10-K for the
fiscal year ended May 31, 1999.
Item 6. Exhibits and Reports on Form 8-K:
(a) EXHIBITS:
3.1 Restated Articles of Incorporation, as amended (incorporated by
reference from Exhibit 3.1 to the Company's Quarterly Report on
Form 10-Q for the fiscal quarter ended August 31, 1995).
3.2 Third Restated Bylaws, as amended (incorporated by reference
from Exhibit 3.2 to the Company's Quarterly Report on Form 10-Q for
the fiscal quarter ended August 31, 1995).
4.1 Restated Articles of Incorporation, as amended (see Exhibit 3.1).
4.2 Third Restated Bylaws, as amended (see Exhibit 3.2).
4.3 Form of Indenture between the Company and The First National Bank
of Chicago, as Trustee (incorporated by reference from Exhibit
4.01 to Amendment No. 1 to Registration Statement No. 333-15953
filed by the Company on November 26, 1996).
10.1 Credit Agreement dated as of September 15, 1995 among NIKE, Inc.,
Bank of America National Trust & Savings Association,
individually and as Agent, and the other banks party thereto
(incorporated by reference from the Company's Quarterly Report
on Form 10-Q for the fiscal quarter ended August 31, 1995).
10.2 Form of non-employee director Stock Option Agreement (incorporated
by reference from Exhibit 10.3 to the Company's Annual Report on
Form 10-K for the fiscal year ended May 31, 1993).*
10.3 Form of Indemnity Agreement entered into between the Company and
each of its officers and directors (incorporated by reference from
the Company's definitive proxy statement filed in connection with
its annual meeting of shareholders held on September 21, 1987).
10.4 NIKE, Inc. Restated Employee Incentive Compensation Plan
(incorporated by reference from Registration Statement No. 33-29262
on Form S-8 filed by the Company on June 16, 1989).*
10.5 NIKE, Inc. 1990 Stock Incentive Plan (incorporated by reference
from the Company's definitive proxy statement filed in connection
with its annual meeting of shareholders held on September 22, 1997).*
10.6 NIKE, Inc. Executive Performance Sharing Plan (incorporated
by reference from the Company's definitive proxy statement filed
in connection with its annual meeting of shareholders held on
September 18, 1995).*
10.7 NIKE, Inc. Long-Term Incentive Plan (incorporated by reference
from the Company's definitive proxy statement filed in connection
with its annual meeting of shareholders held on September 22, 1997).*
10.8 Collateral Assignment Split-Dollar Agreement between NIKE, Inc.
and Philip H. Knight dated March 10, 1994 (incorporated by
reference from Exhibit 10.7 to the Company's Annual Report on
Form 10-K for he fiscal year ended May 31, 1994).*
12.1 Computation of Ratio of Earnings to Charges.
27 Financial Data Schedule.
* Management contract or compensatory plan or arrangement.
(b) Reports on Form 8-K:
No reports on Form 8-K were filed during the fiscal quarter ending
November 30, 1999.
SIGNATURES
Pursuant to the requirements of the Securities Exchange Act of 1934,
the registrant has duly caused this report to be signed on its behalf by
the undersigned thereunto duly authorized.
NIKE, Inc.
An Oregon Corporation
BY:/s/Donald W. Blair
________________________
Donald W. Blair
Chief Financial Officer
DATED: January 14, 2000