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 29, 2000 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 February 29, 2000 were:
_________________
Class A 100,433,999
Class B 173,017,858
___________
273,451,857
===========
PART 1 - FINANCIAL INFORMATION
Item 1. Financial Statements
NIKE, Inc.
CONDENSED CONSOLIDATED BALANCE SHEET
Feb. 29, May 31,
2000 1999
________ _______
(in millions)
ASSETS
Current assets:
Cash and equivalents $ 159.4 $ 198.1
Accounts receivable 1,637.1 1,540.1
Inventories (Note 4) 1,388.9 1,199.3
Deferred income taxes 111.9 120.6
Income taxes receivable - 15.9
Prepaid expenses 186.0 190.9
________ ________
Total current assets 3,483.3 3,264.9
Property, plant and equipment 2,348.7 2,001.3
Less accumulated depreciation 795.5 735.5
________ ________
1,553.2 1,265.8
Identifiable intangible assets and goodwill 413.6 426.6
Deferred income taxes and other assets 327.6 290.4
________ ________
$5,777.7 $5,247.7
======== ========
LIABILITIES AND SHAREHOLDERS' EQUITY
Current liabilities:
Current portion of long-term debt $ 50.1 $ 1.0
Notes payable 802.7 419.1
Accounts payable 474.9 373.2
Accrued liabilities 639.2 653.6
Income taxes payable 52.5 -
________ ________
Total current liabilities 2,019.4 1,446.9
Long-term debt 462.9 386.1
Deferred income taxes and other liabilities 91.3 79.8
Commitments and contingencies (Note 7) -- --
Redeemable preferred stock 0.3 0.3
Shareholders' equity:
Common stock at stated value:
Class A convertible-100.4 and
101.7 shares outstanding 0.2 0.2
Class B-173.0 and 181.6 shares
outstanding 2.7 2.7
Capital in excess of stated value 350.8 334.1
Accumulated other comprehensive income (78.6) (68.9)
Retained earnings 2,928.7 3,066.5
________ ________
3,203.8 3,334.6
________ ________
$5,777.7 $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 Nine Months Ended
February 29 and 28, February 29 and 28,
__________________ _________________
2000 1999 2000 1999
____ ____ ____ ____
(in millions, except per share data)
Revenues $2,161.6 $2,176.8 $6,722.4 $6,594.6
_________ _________ _________ _________
Costs and expenses:
Cost of sales 1,286.4 1,364.9 4,059.0 4,157.1
Selling and administrative 632.4 569.8 1,883.8 1,754.3
Interest 13.9 10.4 30.6 34.7
Other expense .2 25.5 24.2 36.7
Restructuring Charge (0.4) 0.8 (0.7) 21.7
_________ _________ _________ __________
1,932.5 1,971.4 5,996.9 6,004.5
_________ _________ _________ __________
Income before income taxes 229.1 205.4 725.5 590.1
Income taxes 83.8 81.2 272.4 233.1
_________ __________ _________ __________
Net income $ 145.3 $ 124.2 $ 453.1 $ 357.0
========= ========== ========= ==========
Basic earnings per common share $ 0.53 $ 0.44 $ 1.63 $ 1.26
(Note 3) ========= ========= ========= ==========
Diluted earnings per common share $ 0.52 $ 0.44 $ 1.61 $ 1.24
(Note 3) ========= ========= ========= ==========
Dividends declared per common share $ 0.12 $ 0.12 $ 0.36 $ 0.36
========= ========= ========= ==========
The accompanying Notes to Condensed Consolidated Financial Statements are
an integral part of this statement.
NIKE, Inc.
CONDENSED CONSOLIDATED STATEMENT OF CASH FLOWS
Nine Months Ended
February 29 and 28,
_________________
2000 1999
____ ____
(in millions)
Cash provided (used) by operations:
Net income $ 453.1 $357.0
Income charges (credits) not
affecting cash:
Depreciation 138.3 151.2
Deferred income taxes (3.5) 0.1
Amortization and other 29.1 36.7
Changes in other working capital
components (145.4) 69.1
_______ _______
Cash provided by operations 471.6 614.1
_______ _______
Cash provided (used) by investing activities:
Additions to property, plant and
equipment (447.7) (265.4)
Disposals of property, plant and
equipment 27.8 16.9
Increase in other assets (40.8) (46.9)
Increase (decrease) in other liabilities 5.3 (6.5)
_______ _______
Cash used by investing activities (455.4) (301.9)
_______ _______
Cash provided (used) by financing activities:
Additions to long-term debt 109.0 -
Reductions in long-term debt
including current portion (1.6) (1.4)
Increase in notes payable 383.6 75.8
Proceeds from exercise of options 29.5 18.2
Repurchase of stock (483.7) (262.6)
Dividends - common and preferred (100.5) (102.3)
_______ _______
Cash used by financing activities (63.7) (272.3)
_______ _______
Effect of exchange rate changes on cash 8.8 (20.6)
Net (decrease) increase in cash and equivalents (38.7) 19.3
Cash and equivalents, May 31, 1999 and 1998 198.1 108.6
_______ _______
Cash and equivalents, February 29 and 28, 2000
and 1999 $ 159.4 $127.9
======= =======
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 nine (9) months ended February 29, 2000 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 Nine Months Ended
February 29 and 28, February 29 and 28,
__________________ _________________
2000 1999 2000 1999
____ ____ ____ ____
(in millions)
Net Income $145.3 $124.2 $453.1 $357.0
Change in Cumulative
Translation Adjustment (6.3) (10.9) (21.8) (19.6)
Change in Unrealized Gains
on Securities 12.1 - 12.1 -
_______ _______ _______ _______
Total Comprehensive Income $151.1 $113.3 $443.4 $337.4
======= ======= ======= =======
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 Nine Months Ended
February 29 and 28, February 29 and 28,
__________________ _________________
2000 1999 2000 1999
____ ____ ____ _____
(in millions, except per share data)
Determination of shares:
Average common shares
outstanding 276.1 281.3 278.2 283.7
Assumed conversion of
stock options 0.8 4.8 3.0 4.9
______ ______ ______ _____
Diluted average common
shares outstanding 276.9 286.1 281.2 288.6
====== ====== ====== ======
Basic earnings per
common share $ 0.53 $ 0.44 $ 1.63 $ 1.26
====== ====== ====== ======
Diluted earnings per
common share $ 0.52 $ 0.44 $ 1.61 $ 1.24
====== ====== ====== ======
NOTE 4 - Inventories:
___________
Inventories by major classification are as follows:
Feb. 29, May 31,
2000 1999
________ ________
(in millions)
Finished goods $1,326.1 $1,132.7
Work-in-progress 47.6 44.8
Raw materials 15.2 21.8
________ ________
$1,388.9 $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 Nine Months Ended
February 29 and 28, February 29 and 28,
__________________ __________________
2000 1999 2000 1999
____ ____ ____ ____
Net Revenue
USA $1,161.1 $1,165.9 $3,571.4 $3,577.7
EUROPE 558.5 599.8 1,761.0 1,710.8
ASIA PACIFIC 254.1 222.5 687.6 610.8
AMERICAS 110.0 104.7 398.7 377.0
OTHER BRANDS 77.9 83.9 303.7 318.3
_________ _________ _________ _________
$2,161.6 $2,176.8 $6,722.4 $6,594.6
========= ========= ========= =========
Contribution Profit
USA $ 237.2 $ 227.1 $ 709.5 $ 692.8
EUROPE 116.0 118.8 331.5 277.2
ASIA PACIFIC 38.2 30.2 106.6 47.7
AMERICAS 8.3 9.1 51.6 56.4
OTHER BRANDS 16.4 2.5 56.2 17.1
CORPORATE & OTHER (173.1) (171.9) (499.3) (466.4)
_________ _________ _________ _________
$ 243.0 $ 215.8 $ 756.1 $ 624.8
========= ========= ========= =========
Feb 29, May 31,
2000 1999
_________ __________
Accounts Receivable, net
USA $ 642.1 $ 578.2
EUROPE 568.2 551.6
ASIA PACIFIC 169.5 141.5
AMERICAS 111.0 119.2
OTHER BRANDS 114.8 104.6
CORPORATE & OTHER 31.5 45.0
_________ _________
$1,637.1 $1,540.1
========= =========
Inventories, net
USA $ 679.6 $ 565.5
EUROPE 327.1 316.3
ASIA PACIFIC 125.9 81.5
AMERICAS 85.1 73.1
OTHER BRANDS 144.2 137.5
CORPORATE & OTHER 27.0 25.4
_________ _________
$1,388.9 $1,199.3
======== =========
Property, Plant and Equipment, net
USA $ 272.5 $ 293.0
EUROPE 256.9 271.4
ASIA PACIFIC 405.9 148.0
AMERICAS 20.0 21.5
OTHER BRANDS 112.0 111.7
CORPORATE & OTHER 485.9 420.2
_________ _________
$1,553.2 $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 February 29,
2000.
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 three quarters of fiscal year 2000 continuing cash payments
were made against the reserve liability as shown in the table below. $0.2
million of the reserve was reversed due to a change in an outstanding lease
commitment. 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
DESCRIPTION CASH/NON- RESTRUCTURING FY99 RESERVE FY00 RESERVE
CASH CHARGE ACTIVITY BALANCE AT ACTIVITY BALANCE AT
5/31/99 2/29/00
___________________________________________________________________________________________________________
ELIMINATION OF JOB
RESPONSIBILITES COMPANY-
WIDE $(49.8) $46.5 $(3.3) $ 2.4 $(0.9)
Severance packages cash (29.1) 28.2 (0.9) 0.6 (0.3)
Lease cancellations &
commitments cash (10.8) 8.4 (2.4) 1.8 (0.6)
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) $0.4 $(0.3)
Cash cash (0.6) 0.6 - - -
Non-cash non-cash (6.5) 5.8 (0.7) 0.4 (0.3)
____________________________________________________________________________________________________________
Effect of foreign currency
translation - $0.2 $0.2 $(0.2) $ -
____________________________________________________________________________________________________________
____________________________________________________________________________________________________________
TOTAL $(129.9) $123.6 $(6.3) $4.4 $(1.9)
____________________________________________________________________________________________________________
</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 February 29, 2000, 42 employees have found
positions elsewhere in the Company and 1,140 have left the Company, leaving 109
still to be terminated. Due to the change in the number of employees that will
be terminated, $0.5 million of the reserve has been reversed during the current
fiscal year.
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
DESCRIPTION CASH/NON- RESTRUCTURING FY99 RESERVE FY00 RESERVE
CASH CHARGE ACTIVITY BALANCE AT ACTIVITY BALANCE AT
5/31/99 2/29/00
____________________________________________________________________________________________________________
ELIMINATION OF JOB
RESPONSIBILITES $(39.9) $21.9 $(18.0) $11.2 $(6.8)
Severance packages cash (28.0) 11.7 (16.3) 9.7 (6.6)
Lease cancellations &
commitments cash (2.4) 1.6 (0.8) 0.6 (0.2)
Write-down of assets non-cash (7.8) 7.8 - - -
Other cash/non- (1.7) 0.8 (0.9) 0.9 -
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 $0.2 $ 0.3
____________________________________________________________________________________________________________
____________________________________________________________________________________________________________
TOTAL $(60.1) $42.2 $(17.9) $11.4 $(6.5)
____________________________________________________________________________________________________________
<Table/
NOTE 7 - Commitments and contingencies:
_____________________________
At February 29, 2000, the Company had letters of credit outstanding
totalling $874.5 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 third quarter of fiscal year 2000 was $145.3 million, a
17% increase over the prior year's third quarter earnings of $124.3 million.
Year-to-date net income increased 27% to $453.1 million, 20% excluding the 1999
restructuring charge. The increase reflected our improved gross margin, which
was up 3.2% points from the prior year third quarter and up 2.6% points on a
year-to-date basis, which more than offset increased selling and administrative
expenses. In addition, quarterly earnings were improved due to a $25.3 million
decrease in other expense and our improved effective tax rate, which was down
2.9% points for the quarter and 2.0% points for the year-to-date period.
Diluted earnings per share increased 18% in the quarter and 30% year-to-date,
slightly better than net income, as a result of share repurchases.
Consolidated revenues decreased 1% for the quarter, compared to last year,
and increased 2% for the year-to-date period. On a constant dollar basis,
quarterly revenues increased 3% and year-to-date revenues increased 4%. The
lower real dollar amounts reflected the impact of the continued strength of the
U.S. dollar against the euro, the effect of which was slightly offset by the
strength of the yen against the U.S. dollar.
U.S. overall NIKE brand revenues remained flat for the quarter and year-to-
date. U.S. footwear revenues continued to grow, with a 4% increase this quarter
compared to the same quarter last year and a 5% growth rate year-to-date. The
growth reflected an increase in pairs sold equal to the dollar growth rate, 4%
for the quarter and 5% year-to-date, while the average price per pair remained
the same as last year. Apparel revenues decreased 12% quarter over quarter, and
11% for the year-to-date period compared to last year. There was a contraction
of athletic sportswear retail space in the current year that slowed quarterly
and year-to-date revenue growth. Although we expect that this contraction will
continue to affect revenue growth through the first quarter of next year, we
believe the ultimate impact of a smaller retail market will be to strengthen the
remaining retail entities and thereby improve our opportunities for revenue
growth in the U.S. over the long-term.
In Europe, revenues were down 7% for the quarter; however, on a constant
dollar basis, revenues grew 8%. Year-to-date, European revenues increased 3%,
which represented 12% in constant dollars. The growth in constant dollars was
indicative of the continued momentum of business in this region, which has been
sustained over the past 5 years. Given that our European market penetration is
significantly less than that of the U.S., we are well-positioned to continue to
achieve significant growth in this region going-forward.
In the Asia Pacific region, quarterly revenues increased 14%, or 8% on a
constant-dollar basis. Year-to-date revenues increased 13%, or 3% on a
constant-dollar basis. These increases reflected continued recovery of the
economies in that region, the introduction of innovative footwear products in
Japan, and development of products specifically for emerging markets. These
factors should continue to fuel Asia Pacific revenue growth in the future.
In the Americas and Africa regions, quarterly revenues increased 5%, or 6%
in constant dollars, compared to the prior year. Year-to-date revenues
increased by 6%, or 9% in constant dollars. Other Brands revenue, which
includes Bauer NIKE Hockey and Cole Haan, decreased 7% for the quarter and 5%
for the year-to-date period, as compared to last year.
The breakdown of revenues follows:
Three Months Ended Nine Months Ended
February 29 and 28, February 29 and 28,
___________________ _________________
% %
2000 1999 change 2000 1999 change
______ ______ _______ ______ ______ _______
(in millions)
U.S.A. REGION
FOOTWEAR $858.9 $828.5 4% $2,522.8 $2,411.9 5%
APPAREL 251.8 287.0 -12% 890.8 1,004.7 -11%
EQUIPMENT AND OTHER 50.4 50.4 0% 157.8 161.1 -2%
_______ _______ ________ ________
TOTAL U.S.A. 1,161.1 1,165.9 0% 3,571.4 3,577.7 0%
EUROPE REGION
FOOTWEAR 303.9 311.4 -2% 914.6 863.2 6%
APPAREL 241.1 273.7 -12% 801.2 800.2 0%
EQUIPMENT AND OTHER 13.5 14.7 -8% 45.2 47.4 -5%
_______ _______ ________ ________
TOTAL EUROPE 558.5 599.8 -7% 1,761.0 1,710.8 3%
ASIA PACIFIC REGION
FOOTWEAR 151.1 124.4 21% 404.2 321.4 26%
APPAREL 96.2 92.3 4% 264.4 273.0 -3%
EQUIPMENT AND OTHER 6.8 5.8 17% 19.0 16.4 16%
_______ _______ ________ ________
TOTAL ASIA PACIFIC 254.1 222.5 14% 687.6 610.8 13%
AMERICAS REGION
FOOTWEAR 75.2 72.6 4% 277.8 248.9 12%
APPAREL 32.2 29.9 8% 111.9 119.3 -6%
EQUIPMENT AND OTHER 2.6 2.2 18% 9.0 8.8 2%
_______ _______ ________ ________
TOTAL AMERICAS 110.0 104.7 5% 398.7 377.0 6%
_______ _______ ________ ________
TOTAL NIKE BRAND 2,083.7 2,092.9 0% 6,418.7 6,276.3 2%
OTHER & OTHER BRANDS 77.9 83.9 -7% 303.7 318.3 -5%
_______ _______ ________ ________
TOTAL REVENUES $2,161.6 $2,176.8 -1% $6,722.4 $6,594.6 2%
======== ======== ======== ========
Gross margins were significantly improved in the quarter, up from 37.3% in
the prior year to 40.5% in the current year. The improvement is consistent with
that of the year-to-date period, which improved from 37.0% last year to 39.6%
this year. The improved margin is our highest quarterly gross margin since the
third quarter of 1997, and it came from all regions. The key factors in the
improvement of margins were as follows:
1) Improved pricing on in-line products, particularly in
apparel and equipment.
2) Reduced levels of lower margin close-out sales, reflecting lower
inventories of out-of-season product.
3) Higher margins on close-out sales, driven by the expansion of our network
of outlet stores.
Selling and administrative expenses were up for both the quarter and year-
to-date period compared to the prior year. For the quarter, these expenses
were up 11% to $632.4 million, and year-to-date they were up 7% to $1,883.8
million. The increases, for both the quarter and the year-to-date period,
were driven primarily by incremental spending for initiatives undertaken to
achieve future revenue growth and profitability. These include investments in
new retail stores; conversions of certain geographic markets from
distributorships to direct NIKE ownership; e-commerce; and new operational
systems and processes, primarily our comprehensive initiative to shorten and
streamline our supply chain. An additional factor contributing to higher
selling and administrative expenses was higher bad debt expense incurred as
compared to last year, primarily as a result of the bankruptcy filing of one of
our customers in the U.S. region.
Third quarter interest expense was up 34% over the prior year, growing
from $10.4 million last year to $13.9 million this year. Interest expense was
down 12% year-to-date compared to last year. The increase in the current
quarter was due to increased levels of debt recorded in the quarter as compared
to last year. See the Liquidity and Capital Resources discussion following for
more information on debt balances. The year-to-date decrease in interest
expense was a result of income associated with our intercompany hedging
program, lower interest rates outside of the U.S., and our restructured
operating agreement with our trading partner, Nissho Iwai American Corporation
(NIAC), which resulted in a lower rate paid to NIAC.
Included in other expense are interest income, profit sharing expense,
foreign currency conversion gain or loss, goodwill amortization, and various
nonrecurring charges. Other expense decreased for the quarter and year-to-date
period as compared to last year. This decrease was primarily due to a
fluctuation in foreign currency conversion gain/loss between periods and the
impact of a nonrecurring charge in the 3rd quarter of last year due to an asset
write-down.
Our current year-to-date tax rate was significantly lower than the prior
year, moving from 39.5% to 37.5%. This year-to-date amount reflected our
expected annual tax rate of 37.5% for fiscal 2000, which is down from last
year's rate of 39.5%. The decrease was primarily due to reduced state taxes,
the utilization of tax loss carryforwards of certain foreign operations that
have recently turned profitable, and increased profits derived in our European
and Asian regions, where our effective tax rate is lower than in the U.S. In
addition, the 36.6% effective tax rate for the third quarter 2000 was reduced by
an adjustment to reflect the change in our estimate of the effective rate for
the year to 37.5%.
Worldwide futures and advance orders for NIKE brand athletic footwear and
apparel scheduled for delivery between March and July 2000 totaled $3.9 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 which we will experience for subsequent periods. Variances between
futures growth and actual revenue growth may be the result of 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 we recorded a restructuring charge
of $129.9 million as a result of certain of our actions to better align our 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 our 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 as of February 29, 2000.
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 three quarters of fiscal year 2000 continuing cash payments
were made against the reserve liability as shown in the table below. $0.2
million of the reserve was reversed due to a change in an outstanding lease
commitment. 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
DESCRIPTION CASH/NON- RESTRUCTURING FY99 RESERVE FY00 RESERVE
CASH CHARGE ACTIVITY BALANCE AT ACTIVITY BALANCE AT
5/31/99 2/29/00
___________________________________________________________________________________________________________
ELIMINATION OF JOB
RESPONSIBILITES COMPANY-
WIDE $(49.8) $46.5 $(3.3) $2.4 $(0.9)
Severance packages cash (29.1) 28.2 (0.9) 0.6 (0.3)
Lease cancellations &
commitments cash (10.8) 8.4 (2.4) 1.8 (0.6)
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) $0.4 $(0.3)
Cash cash (0.6) 0.6 - - -
Non-cash non-cash (6.5) 5.8 (0.7) 0.4 (0.3)
____________________________________________________________________________________________________________
Effect of foreign currency
translation - $0.2 $0.2 $(0.2) $ -
____________________________________________________________________________________________________________
____________________________________________________________________________________________________________
TOTAL $(129.9) $123.6 $(6.3) $4.4 $(1.9)
____________________________________________________________________________________________________________
</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 our shift to outsourcing certain of our information
technology functions. The original number of employees to be terminated was
1,291. As of February 29, 2000, 42 employees have found positions elsewhere in
the Company and 1,140 have left the Company, leaving 109 still to be terminated.
Due to the change in the number of employees that will be terminated, $0.5
million of the reserve has been reversed during the current fiscal year.
Also included in the charge was a $20.2 write-off of certain assets related
to the change in strategies around our 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
DESCRIPTION CASH/NON- RESTRUCTURING FY99 RESERVE FY00 RESERVE
CASH CHARGE ACTIVITY BALANCE AT ACTIVITY BALANCE AT
5/31/99 2/29/00
____________________________________________________________________________________________________________
ELIMINATION OF JOB
RESPONSIBILITES $(39.9) $21.9 $(18.0) $11.2 $(6.8)
Severance packages cash (28.0) 11.7 (16.3) 9.7 (6.6)
Lease cancellations &
commitments cash (2.4) 1.6 (0.8) 0.6 (0.2)
Write-down of assets non-cash (7.8) 7.8 - - -
Other cash/non- (1.7) 0.8 (0.9) 0.9 -
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 $0.2 $ 0.3
____________________________________________________________________________________________________________
____________________________________________________________________________________________________________
TOTAL $(60.1) $42.2 $(17.9) $11.4 $(6.5)
____________________________________________________________________________________________________________
<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.
LIQUIDITY AND CAPITAL RESOURCES
_______________________________
Our financial position remained strong at February 29, 2000. Compared to
May 31, 1999, shareholders' equity decreased slightly to $3.2 billion. Working
capital decreased 19% to $1.5 billion and the current ratio was 1.72:1 at
February 29, 2000 compared to 2.26:1 at May 31, 1999. The decrease in working
capital and the current ratio resulted from the increase in short-term debt
since May 31, 1999. See the discussion of short-term debt following.
Cash provided by operations for the nine-month period ended February 29,
2000 was $471.6 million, which was a decrease of $142.5 million from the same
period last year, despite increased net income of $96 million in the current
period. The decrease in operating cash flow was driven by three factors, each
of which created a change in our inventory levels:
1) We liquidated significant levels of close-out inventory during the
nine-month period in fiscal 1999, which generated an increase in cash
flows from operations in that fiscal year. The current fiscal year began
with much lower, cleaner levels of inventory; therefore, there was no
cash inflow from decreasing inventory levels during the year. The
decrease in inventory levels in 1999 highlighted our successful
initiative to reduce close-out inventories undertaken to significantly
improve our margins and profitability in the short-term as well as into
the future.
2) During fiscal year 1999 our business experienced a slow-down
leading us to further decrease our inventory levels, whereas in fiscal
year 2000 our business has been accelerating from last year's level.
This difference has resulted in additional use of cash as compared to
last year to fund increasing levels of operations.
3) Finally, we restructured our operating arrangement with NIAC in the first
quarter of this year. The restructured agreement enables us, among other
things, to take over financing of inventory purchases previously
performed by NIAC. This has resulted in the recording of 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 February 29, 2000, approximately $130 million of inventory
was in-transit to the U.S. and on our balance sheet, compared to zero at
May 31, 1999.
Total cash flows used by investing activities during the nine month period
were $455.4 million. The primary driver of this use was the purchase of
property, plant and equipment throughout the year. The largest purchase during
the year was our distribution center 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, primarily
relating to our supply chain initiative.
Net cash flows used by financing activities for the nine months ended
February 29, 2000 were $63.7 million. This amount included uses of cash for
stock repurchases and dividends to shareholders, partially offset by increases
to our debt balances.
The increase in debt was used in part to purchase our distribution facility
in Japan from NIAC for approximately $246 million. We financed the first
quarter purchase by assuming NIAC's Japanese development bank loans, along with
some short-term debt, which we currently intend to convert to long-term.
The level of short-term debt rose also due to our financing of inventory
purchases previously financed by NIAC.
Another significant driver of the increase in short-term debt was our
continued repurchases of NIKE stock under the $1 billion share repurchase
program approved by the company's board of directors in December 1997. During
the first nine months of fiscal 2000, we purchased a total of 10.6 million
shares for $504 million under the program. From the inception of the program
through February 29, 2000, we had purchased a total of 19.3 million shares of
NIKE's Class B common stock for $860 million in the open market. 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.
Management believes that significant funds generated by operations,
together with access to sufficient sources of funds, will adequately meet our
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 our commercial paper program, under which there was $596.6
million outstanding at February 29, 2000.
As a result of the restructuring of the NIAC agreement, we are now
responsible for issuing letters of credit for the purchases of inventories. At
February 29, 2000, letters of credit of $874.5 million were outstanding for the
purchase of inventories.
Dividends per share of common stock for the third quarter of fiscal 2000
remained at $.12 per share, the same level as the previous year.
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; 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
February 29, 2000.
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: April 14, 2000