UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM 10-Q
FOR QUARTERLY REPORTS UNDER SECTION 13 OR 15(d) OF
THE SECURITIES AND EXCHANGE ACT OF 1934
For the Quarter Ended August 31, 2005
Commission file number - 1-10635
NIKE, Inc.
(Exact name of registrant as specified in its charter)
OREGON 93-0584541
(State or other jurisdiction of (I.R.S. Employer
incorporation or organization) Identification No.)
One Bowerman Drive, Beaverton, Oregon 97005-6453
(Address of principal executive offices) (Zip Code)
Registrant's telephone number, including area code (503) 671-6453
Indicate by check mark whether the registrant is an accelerated filer (as
defined in Rule 12b-2 of the Exchange Act). Yes X No
___ ___
Indicate by check mark whether the registrant (1) has filed all reports
required to be filed by Section 13 or 15 (d) of the Securities Exchange
Act of 1934 during the preceding 12 months (or for such shorter period
that the registrant was required to file such reports), and (2) has been
subject to such filing requirements for the past 90 days
Yes X No .
___ ___
Indicate by check mark whether the registrant is a shell company (as defined
in Rule 12b-2 of the Exchange Act). Yes No X .
___ ___
Common Stock shares outstanding as of August 31, 2005 were:
_______________
Class A 65,676,484
Class B 194,730,407
_______________
260,406,891
===============
PART 1 - FINANCIAL INFORMATION
Item 1. FINANCIAL STATEMENTS
NIKE, Inc.
UNAUDITED CONDENSED CONSOLIDATED BALANCE SHEETS
August 31, May 31,
2005 2005
________ ________
(in millions)
ASSETS
Current assets:
Cash and equivalents $1,588.9 $1,388.1
Short-term investments 304.2 436.6
Accounts receivable, net 2,390.6 2,262.1
Inventories (Note 2) 1,850.6 1,811.1
Deferred income taxes 106.3 110.2
Prepaid expenses and other current assets 425.7 343.0
________ ________
Total current assets 6,666.3 6,351.1
Property, plant and equipment 3,186.5 3,179.2
Less accumulated depreciation 1,605.3 1,573.4
________ ________
Property, plant and equipment, net 1,581.2 1,605.8
Identifiable intangible assets, net (Note 3) 404.7 406.1
Goodwill (Note 3) 135.4 135.4
Deferred income taxes and other assets 328.1 295.2
________ ________
Total assets $9,115.7 $8,793.6
======== ========
LIABILITIES AND SHAREHOLDERS' EQUITY
Current liabilities:
Current portion of long-term debt $ 256.0 $ 6.2
Notes payable 64.3 69.8
Accounts payable 768.5 843.9
Accrued liabilities (Note 4) 996.6 984.3
Income taxes payable 148.1 95.0
________ ________
Total current liabilities 2,233.5 1,999.2
Long-term debt 428.4 687.3
Deferred income taxes and other liabilities 489.7 462.6
Commitments and contingencies (Note 9) -- --
Redeemable preferred stock 0.3 0.3
Shareholders' equity:
Common stock at stated value:
Class A convertible-65.7 and
71.9 shares outstanding 0.1 0.1
Class B-194.7 and 189.2 shares
outstanding 2.7 2.7
Capital in excess of stated value 1,254.9 1,182.9
Unearned stock compensation (14.4) (11.4)
Accumulated other comprehensive income (Note 5) 105.8 73.4
Retained earnings 4,614.7 4,396.5
________ ________
Total shareholders' equity 5,963.8 5,644.2
________ ________
Total liabilities and shareholders' equity $9,115.7 $8,793.6
======== ========
The accompanying Notes to Unaudited Condensed Consolidated Financial
Statements are an integral part of this statement.
NIKE, Inc.
UNAUDITED CONDENSED CONSOLIDATED STATEMENTS OF INCOME
Three Months Ended
August 31,
____________________
2005 2004
____ ____
(in millions, except per share data)
Revenues $3,862.0 $3,561.8
Cost of sales 2,113.9 1,976.0
_________ _________
Gross margin 1,748.1 1,585.8
Selling and administrative expense 1,104.4 1,073.6
Interest (income) expense, net (6.4) 4.8
Other (income) expense, net (9.9) 1.9
_________ _________
Income before income taxes 660.0 505.5
Income taxes 227.7 178.7
_________ _________
Net income $ 432.3 $ 326.8
========= =========
Basic earnings per common share (Note 7) $ 1.66 $ 1.24
========= =========
Diluted earnings per common share (Note 7) $ 1.61 $ 1.21
========= =========
Dividends declared per common share $ 0.25 $ 0.20
========= =========
The accompanying Notes to Unaudited Condensed Consolidated Financial Statements
are an integral part of this statement.
NIKE, Inc.
UNAUDITED CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS
Three Months Ended
August 31,
_____________________
2005 2004
____ ____
(in millions)
Cash provided (used) by operations:
Net income $ 432.3 $ 326.8
Income/charges not affecting cash:
Depreciation 68.9 58.4
Deferred income taxes (11.2) 11.6
Amortization and other 0.7 3.2
Income tax benefit from exercise of stock
options 15.9 13.4
Changes in certain working capital
components, net of the effect of
acquisition of subsidiary:
Increase in accounts receivable (132.8) (57.8)
(Increase) decrease in inventories (29.1) 25.9
(Increase) decrease in prepaid expenses
and other current assets (39.6) 1.9
Decrease in accounts payable, accrued
liabilities and income taxes payable (43.4) (15.0)
_________ ________
Cash provided by operations 261.7 368.4
_________ ________
Cash provided (used) by investing activities:
Purchases of short-term investments (261.6) (275.4)
Maturities of short-term investments 395.6 310.0
Additions to property, plant and
equipment (58.5) (53.8)
Disposals of property, plant and
equipment 0.4 1.4
Increase in other assets (2.5) (5.2)
Decrease in other liabilities (4.1) (2.2)
Acquisition of subsidiary, net of cash
acquired -- (47.2)
_________ ________
Cash provided (used) by investing activities 69.3 (72.4)
_________ ________
Cash provided (used) by financing activities:
Reductions in long-term debt,
including current portion (1.6) (4.3)
Increase (decrease) in notes payable 4.2 (48.4)
Proceeds from exercise of options and
other stock issuances 53.6 65.6
Repurchase of common stock (129.1) (145.8)
Dividends on common stock (65.3) (52.6)
_________ ________
Cash used by financing activities (138.2) (185.5)
_________ ________
Effect of exchange rate changes on cash 8.0 (6.4)
_________ ________
Net increase in cash and equivalents 200.8 104.1
Cash and equivalents, beginning of period 1,388.1 828.0
_________ ________
Cash and equivalents, end of period $1,588.9 $ 932.1
========= ========
The accompanying Notes to Unaudited Condensed Consolidated Financial
Statements are an integral part of this statement.
NIKE, Inc.
NOTES TO UNAUDITED CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
NOTE 1 - Summary of Significant Accounting Policies:
__________________________________________
Basis of presentation:
The accompanying unaudited condensed consolidated financial statements
reflect all adjustments (consisting of normal recurring accruals) which
are, in the opinion of management, necessary for a fair presentation of
the results of operations for the interim period. The interim financial
information and notes thereto should be read in conjunction with the
Company's latest Annual Report on Form 10-K. The results of operations
for the three (3) months ended August 31, 2005 are not necessarily
indicative of results to be expected for the entire year.
Certain prior year amounts have been reclassified to conform to fiscal
year 2006 presentation. These changes had no impact on previously reported
results of operations or shareholders' equity.
NOTE 2 - Inventories:
___________
Inventory balances of $1,850.6 million and $1,811.1 million at August 31,
2005 and May 31, 2005, respectively, were substantially all finished goods.
NOTE 3 - Identifiable Intangible Assets and Goodwill:
___________________________________________
The following table summarizes the Company's identifiable intangible
assets and goodwill balances as of August 31, 2005 and May 31, 2005:
August 31, 2005 May 31, 2005
______________________ ______________________
Gross Net Gross Net
Carrying Accumulated Carrying Carrying Accumulated Carrying
Amount Amortization Amount Amount Amortization Amount
________ ____________ ________ ________ ____________ ________
(in millions)
Amortized intangible assets:
Patents $ 30.1 $ (11.5) $ 18.6 $ 29.2 $ (10.9) $ 18.3
Trademarks 55.1 (17.8) 37.3 54.8 (16.4) 38.4
Other 21.3 (14.0) 7.3 21.4 (13.5) 7.9
________ ________ ________ ________ ________ _________
Total $ 106.5 $ (43.3) $ 63.2 $ 105.4 $ (40.8) $ 64.6
======== ======== ======== ========
Unamortized intangible assets - Trademarks $ 341.5 $ 341.5
________ ________
Identifiable intangible assets, net $ 404.7 $ 406.1
======== ========
Goodwill $ 135.4 $ 135.4
======== ========
Amortization expense, which is included in selling and administrative
expense, was $2.5 million and $1.5 million for the three-month periods ended
August 31, 2005 and 2004, respectively. The estimated amortization expense
for intangible assets subject to amortization for each of the succeeding years
ended May 31, 2006 through May 31, 2010 are as follows: 2006: $9.5 million;
2007: $8.6 million; 2008: $8.1 million; 2009: $7.4 million; 2010: $6.6
million.
NOTE 4 - Accrued Liabilities:
___________________
Accrued liabilities include the following:
August 31, 2005 May 31, 2005
_______________ ____________
(in millions)
Compensation and benefits, excluding taxes $276.1 $394.2
Taxes other than income taxes 145.6 96.8
Endorser compensation 122.4 93.0
Advertising and marketing 72.0 57.4
Fair value of derivatives 68.7 61.8
Dividends payable 65.1 65.3
Other1 246.7 215.8
_______ _______
$996.6 $984.3
======= =======
1 Other consists of various accrued expenses and no individual item accounted
for more than $50 million of the balance at August 31, 2005 and May 31, 2005.
NOTE 5 - Comprehensive Income:
____________________
Comprehensive income, net of taxes, is as follows:
Three Months Ended
August 31,
_____________________
2005 2004
____ ____
(in millions)
Net income $432.3 $326.8
Other comprehensive income:
Change in cumulative translation
adjustment and other, net of tax (17.3) (14.1)
Changes due to cash flow hedging
instruments:
Net gain on hedge derivatives, net of tax 42.0 6.9
Reclassification to net income of
previously deferred (gains) and losses
related to hedge derivative instruments,
net of tax 7.7 50.4
_______ _______
Other comprehensive income 32.4 43.2
_______ _______
Total comprehensive income $464.7 $370.0
======= =======
NOTE 6 - Stock-Based Compensation:
________________________
The Company uses the intrinsic value method to account for stock-based
compensation in accordance with Accounting Principles Board (APB) Opinion No.
25, "Accounting for Stock Issued to Employees" as permitted by Statement of
Financial Accounting Standards (SFAS) No. 123 "Accounting for Stock-Based
Compensation" (FAS 123). Substantially all options granted by the Company have
an exercise price equal to the market value at the date of grant, and
accordingly, no compensation expense is recognized. The Company also has an
Employee Stock Purchase Plan (ESPP) that qualifies as a non-compensatory
employee stock purchase plan under Section 423 of the Internal Revenue Code,
and accordingly, no compensation expense is recognized.
If the Company had accounted for stock options and ESPP purchase rights
issued to employees in accordance with FAS 123, the Company's pro forma net
income and pro forma earnings per share would have been reported as follows:
Three Months Ended
August 31,
____________________
2005 2004
____ ____
(in millions, except per share data)
Net income as reported $432.3 $326.8
Add: Stock-based compensation expense included
in reported net income, net of tax 0.1 --
Deduct: Total stock-based employee compensation
expense under fair value based method for all
awards, net of tax (18.9) (14.1)
_______ _______
Pro forma net income $413.5 $312.7
======= =======
Earnings per share:
Basic - as reported 1.66 1.24
Basic - pro forma 1.58 1.19
Diluted - as reported 1.61 1.21
Diluted - pro forma 1.55 1.17
The pro forma effects of applying FAS 123 may not be representative of
the effects on reported net income and earnings per share for future periods
as options vest over several years and additional awards are made each year.
As disclosed in the Company's Annual Report on Form 10-K as of May 31,
2005, the Company is currently evaluating SFAS No. 123R "Share-Based Payment"
(FAS 123R) and the Securities and Exchange Commission's Staff Accounting
Bulletin No. 107 (SAB 107) to determine the fair value method to measure
compensation expense, the appropriate assumptions to include in the fair value
model and the transition method to use upon adoption. The impact of the
adoption of FAS 123R is not known at this time due to these factors as well as
the unknown level of stock-based payments granted in future years. The effect
on the Company's results of operations of expensing stock options using the
Black-Scholes model is presented in the table above.
Under certain conditions, stock options granted by the Company are
eligible for accelerated vesting upon the retirement of the employee. The FASB
clarified in FAS 123R that the fair value of such stock options should be
expensed based on an accelerated vesting schedule or immediately, rather than
ratably over the vesting period stated in the grant. The Company's pro forma
disclosure above currently reflects the expense of such options ratably over
the stated vesting period, expensing all unvested shares upon actual
retirement. The SEC clarified that companies should continue to follow the
vesting method they have been using until adoption of FAS 123R, then apply the
accelerated vesting schedule to all subsequent grants to those employees
eligible for accelerated vesting upon retirement. Had the Company
been accounting for such stock options using the accelerated vesting schedule
for those employees eligible for accelerated vesting upon retirement, the
Company would have recognized additional stock-based compensation expense in
the above pro forma of $0.06 and $0.09 per diluted share for the three months
ended August 31, 2005 and August 31, 2004, respectively. The Company grants
the majority of stock options in a single grant in the first three months of
each fiscal year. As such, accelerated vesting would result in increased
expense recognition in the first three months of the fiscal year and a
reduction of expense recorded in the remaining nine months of the fiscal year,
as compared to the expense recorded by the Company under our current policy of
expensing such options ratably over the stated vesting period.
NOTE 7 - Earnings Per Common Share:
_________________________
The following represents a reconciliation from basic earnings per share
to diluted earnings per share. Options to purchase 5.7 million and 5.0
million shares of common stock were outstanding at August 31, 2005 and
August 31, 2004, respectively, but were not included in the computation of
diluted earnings per share because the options' exercise prices were
greater than the average market price of common shares and, therefore, the
effect would be antidilutive.
Three Months Ended
August 31,
_____________________
2005 2004
____ ____
(in millions, except per share data)
Determination of shares:
Average common shares
outstanding 260.9 262.7
Assumed conversion of
dilutive stock options
and awards 7.7 7.1
_______ _______
Diluted average common
shares outstanding 268.6 269.8
======= =======
Basic earnings per common share $ 1.66 $ 1.24
======= =======
Diluted earnings per common share $ 1.61 $ 1.21
======= =======
NOTE 8 - Operating Segments:
__________________
The Company's operating segments are evidence of the structure of the
Company's internal organization. The major segments are defined by geographic
regions for operations participating in NIKE brand sales activity excluding
NIKE Golf and Bauer NIKE Hockey. Each NIKE brand geographic segment operates
predominantly in one industry: the design, production, marketing and selling
of sports and fitness footwear, apparel, and equipment. The "Other" category
shown below represents activities of Cole Haan Holdings Incorporated, Bauer
NIKE Hockey Inc., Hurley International LLC, NIKE Golf, Converse Inc., and
Exeter Brands Group LLC (beginning August 11, 2004), which are considered
immaterial for individual disclosure based on the aggregation criteria in SFAS
No. 131 "Disclosures about Segments of an Enterprise and Related Information".
Where applicable, "Corporate" represents items necessary to reconcile to
the consolidated financial statements, which generally include corporate
activity and corporate eliminations.
Net revenues as shown below represent sales to external customers for
each segment. Intercompany revenues have been eliminated and are immaterial
for separate disclosure. The Company evaluates performance of individual
operating segments based on pre-tax income. On a consolidated basis, this
amount represents income before income taxes as shown in the Unaudited
Condensed Consolidated Statements of Income. Reconciling items for pre-tax
income represent corporate costs that are not allocated to the operating
segments for management reporting including corporate activity, certain
currency exchange rate gains and losses on transactions, and intercompany
eliminations for specific income statement items in the Unaudited Condensed
Consolidated Statements of Income.
Accounts receivable, net, inventories, and property, plant and equipment,
net for operating segments are regularly reviewed and therefore provided
below.
Three Months Ended
August 31,
_____________________
2005 2004
____ ____
(in millions)
Revenues
U.S. $1,508.9 $1,401.7
EUROPE, MIDDLE EAST, AFRICA 1,217.5 1,157.9
ASIA PACIFIC 459.6 406.0
AMERICAS 213.7 161.7
OTHER 462.3 434.5
_________ _________
$3,862.0 $3,561.8
========= =========
Pre-tax income
U.S. $ 345.2 $ 322.3
EUROPE, MIDDLE EAST, AFRICA 330.2 246.4
ASIA PACIFIC 91.4 63.4
AMERICAS 44.6 20.4
OTHER 40.0 40.2
CORPORATE (191.4) (187.2)
_________ _________
$ 660.0 $ 505.5
========= =========
Aug. 31, May 31,
2005 2005
_________ _________
(in millions)
Accounts receivable, net
U.S. $ 682.9 $ 627.0
EUROPE, MIDDLE EAST, AFRICA 826.7 723.6
ASIA PACIFIC 284.6 309.8
AMERICAS 177.7 165.3
OTHER 361.6 394.0
CORPORATE 57.1 42.4
_________ _________
$2,390.6 $2,262.1
========= =========
Inventories
U.S. $ 637.5 $ 639.9
EUROPE, MIDDLE EAST, AFRICA 509.3 496.5
ASIA PACIFIC 252.4 228.9
AMERICAS 111.5 94.4
OTHER 299.8 316.2
CORPORATE 40.1 35.2
_________ _________
$1,850.6 $1,811.1
========= =========
Property, plant and equipment, net
U.S. $ 218.8 $ 216.0
EUROPE, MIDDLE EAST, AFRICA 221.1 230.0
ASIA PACIFIC 366.5 380.4
AMERICAS 16.2 15.7
OTHER 92.7 93.4
CORPORATE 665.9 670.3
_________ _________
$1,581.2 $1,605.8
========= =========
NOTE 9 - Commitments and Contingencies:
_____________________________
At August 31, 2005, the Company had letters of credit outstanding
totaling $452.8 million. These letters of credit were issued primarily for
the purchase of inventory.
There have been no other significant subsequent developments
relating to the commitments and contingencies reported on the
Company's latest Annual Report on Form 10-K.
Item 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND
RESULTS OF OPERATIONS
Overview
In the first quarter of fiscal 2006, our revenues grew 8% to $3.9
billion, net income grew 32% to $432.3 million and we delivered diluted
earnings per share of $1.61, a 33% increase versus the first quarter of fiscal
2005. For the quarter, our consolidated gross margin percentage increased 80
basis points to 45.3%, driven largely by foreign currency transaction
benefits. Lower demand creation spending in the first quarter of fiscal 2006
compared to the first quarter of fiscal 2005 also drove profit growth in the
quarter. The lower demand creation expense reflected shifts in the timing of
spending in fiscal 2006 versus fiscal 2005.
Results of Operations
Three Months Ended
August 31,
___________________
%
2005 2004 change
______ ______ ________
(dollars in millions, except per share data)
Revenues $3,862.0 $3,561.8 8%
Cost of sales 2,113.9 1,976.0 7%
Gross margin 1,748.1 1,585.8 10%
Gross margin % 45.3% 44.5%
Selling and administrative expense 1,104.4 1,073.6 3%
% of revenues 28.6% 30.1%
Income before income taxes 660.0 505.5 31%
Net income 432.3 326.8 32%
Diluted earnings per share 1.61 1.21 33%
Consolidated Operating Results
In the first quarter of fiscal 2006, consolidated revenues grew 8% versus
the first quarter of fiscal 2005; one percentage point of this growth was
attributable to changes in currency exchange rates, primarily the stronger
euro. Excluding the impact of changes in foreign currency, revenue growth in
our international regions contributed 3 percentage points of the consolidated
revenue growth for the first quarter of fiscal 2006, as all three of our
international regions posted higher revenues. The U.S. Region contributed 3
percentage points of the consolidated revenue growth for the first quarter.
Sales in our Other businesses drove the balance of the improvement for the
quarter.
In the first quarter of fiscal 2006, our consolidated gross margin
percentage improved 80 basis points compared to the prior year's first
quarter, from 44.5% to 45.3%. The primary factors contributing to the improved
gross margin percentage for the first quarter were as follows:
(1) Higher gross margins in our international regions contributed
approximately 80 basis points to the consolidated gross margin
improvement in the first quarter. This improvement reflected higher
gross margins in the Europe, Middle East and Africa (EMEA) and
Americas regions that were partially offset by gross margin declines
in our Asia Pacific Region. This improvement was driven by changes
in the year-over-year euro hedge rates, partially offset by the
impact of lower in-line pricing margins (net revenue for current
product offerings minus product costs) in our EMEA and Asia Pacific
regions (as discussed below):
(a) For the first quarter of fiscal 2006, year-over-year currency
hedge rate improvements, primarily the euro, contributed
approximately 180 basis points to our consolidated gross margin
percentage.
(b) Lower in-line pricing margins on wholesale products in the EMEA
and Asia Pacific regions resulted in a reduction in the
consolidated gross margin percentage of approximately 110 basis
points for the quarter. The lower in-line pricing margins
related primarily to footwear and were due to strategies to
improve consumer value, higher product costs due in part to
higher oil prices and a shift in the mix of products sold in
EMEA toward products with lower margins.
(2) A lower gross margin percentage in the U.S. Region accounted for
approximately 20 basis points of decline to the consolidated gross
margin improvement for the first quarter. The U.S. Region gross
margin decline was due primarily to lower in-line pricing margins in
footwear. Higher product costs (due in part to higher oil prices)
and additional costs incurred to meet strong footwear unit demand
drove the lower U.S. Region footwear margins during the first
quarter.
(3) Improved gross margin percentages in our Other businesses
represented 20 basis points of improvement to the consolidated gross
margin percentage for the quarter. Exeter Brands (a unit formed in
August of fiscal 2005 to develop our business in retail channels
serving value-conscious consumers) and Converse drove the majority
of the gross margin improvement, reflecting increased revenues from
their respective licensing businesses, which carry higher gross
margins than the balance of our Other businesses.
We have hedged the majority of product purchases for the remainder of
fiscal 2006 and a significant portion of those are at more favorable rates
than product purchases in fiscal 2005. Based on these known rates, we expect
hedge rates to continue to have a positive impact on our gross margin
percentage in fiscal 2006 as compared to fiscal 2005. For the remainder of the
year, we expect the greatest benefit to occur in the second quarter with
minimal impact in the second half of the year.
These benefits from currency hedge rates are expected to be largely
offset by the impact of strategies to improve consumer value in EMEA and Asia
Pacific and higher product costs as discussed above. Based on these factors,
we currently expect minimal gross margin improvement for the full fiscal year
2006 as compared to fiscal 2005.
Selling and administrative expense, comprised of demand creation
(advertising and promotion) and operating overhead, grew 3% for the first
quarter of fiscal 2006 as compared to the prior year. One percentage point of
the increase for the first quarter was due to changes in currency exchange
rates.
Demand creation expense decreased 10% to $421.6 million in the first
quarter of fiscal 2006. Excluding changes in currency exchange rates,
demand creation expense decreased 11% in the first quarter. The decrease in
demand creation spending for the first quarter of fiscal 2006 is not
indicative of what we currently expect for the full year and was primarily
attributable to a change in the timing of advertising spending versus fiscal
2005. Advertising spending was particularly heavy in the prior year's first
quarter due to marketing programs centered on global sporting events that took
place in the summer of 2004. In addition, an advertising campaign scheduled
for the first quarter of fiscal 2006 was delayed to the second quarter of the
year.
Operating overhead for the first quarter of fiscal 2006 grew 12% to
$682.8 million. Changes in currency exchange rates contributed 1 percentage
point of the increase for the first quarter. Excluding the effects of
currency, operating overhead increases for the quarter were mainly
attributable to higher personnel costs due to increased headcount, higher
wages and benefits, and higher incentive-based compensation (6 percentage
points for the quarter); investments in infrastructure to support the growth
of our Other businesses (2 percentage points for the quarter); and continued
investments in NIKE-owned retail stores (1 percentage point for the quarter).
In the first quarter of fiscal 2006, foreign currency hedge gains were
the most significant component of other income, net, of $9.9 million. These
gains are reflected in the Corporate line in our segment presentation of pre-
tax income in the Notes to Unaudited Condensed Consolidated Financial
Statements (Note 8 - Operating Segments). The hedge gains in the first quarter
of fiscal 2006 reflect that the euro has weakened since we entered into these
hedge contracts. In the first quarter of fiscal 2005, foreign currency hedge
losses were the most significant component of other expense, net, and the
comparison of these foreign currency hedge losses to foreign currency hedge
gains in the first quarter of fiscal 2006 drove the year-over-year improvement
in other (income) expense, net.
In the first quarter of fiscal 2006, we estimate that the combination of
net foreign currency gains in other (income) expense, net, and the favorable
translation of foreign currency denominated profits, most significantly in
EMEA, resulted in a year-over-year increase in consolidated income before
income taxes of $17 million. If current exchange rates remain constant, we do
not expect a significant impact on our consolidated income before income taxes
related to the combination of foreign currency gains or losses and the
translation of foreign currency denominated profits for the remainder of
fiscal 2006 compared to fiscal 2005.
The effective tax rate for the first quarter of fiscal 2006 and the
expected effective tax rate for the full year of 34.5% is slightly lower than
the effective tax rate for the full year of fiscal 2005 of 34.9%. The decrease
in the effective tax rate is primarily due to a lower effective rate for U.S.
state taxes.
Worldwide futures and advance orders for our footwear and apparel
scheduled for delivery from September 2005 through January 2006 were 11.0%
higher than such orders reported for the comparable period of fiscal 2005. The
net effect from changes in currency exchange rates did not have a significant
impact on this reported increase versus the same period last year. Higher
average selling prices for footwear and apparel contributed 5 percentage
points of the growth in overall futures and advance orders. The remaining
increase was due to volume increases for both footwear and apparel. As always,
the reported futures and advance orders growth is not necessarily indicative
of our expectation of revenue growth during this period. This is because the
mix of orders can shift between advance/futures and at-once orders. In
addition, exchange rate fluctuations as well as differing levels of order
cancellations and discounts can cause differences in the comparisons between
futures and advance orders, and actual revenues. Moreover, a significant
portion of our revenue is not derived from futures and advance orders,
including at-once and closeout sales of NIKE footwear and apparel, wholesale
sales of equipment, U.S. licensed team apparel, Bauer NIKE Hockey, Cole Haan,
Converse, NIKE Golf, Hurley, Exeter Brands and retail sales across all brands.
Operating Segments
The breakdown of revenues follows:
Three Months Ended
August 31,
__________________
%
2005 2004 change
______ ______ ________
(dollars in millions)
U.S. REGION
FOOTWEAR $1,021.1 $ 921.4 11%
APPAREL 395.5 391.3 1%
EQUIPMENT 92.3 89.0 4%
________ ________
TOTAL U.S. 1,508.9 1,401.7 8%
EMEA REGION
FOOTWEAR 685.1 663.3 3%
APPAREL 435.2 409.7 6%
EQUIPMENT 97.2 84.9 14%
________ ________
TOTAL EMEA 1,217.5 1,157.9 5%
ASIA PACIFIC REGION
FOOTWEAR 237.4 218.6 9%
APPAREL 176.5 148.8 19%
EQUIPMENT 45.7 38.6 18%
________ ________
TOTAL ASIA PACIFIC 459.6 406.0 13%
AMERICAS REGION
FOOTWEAR 156.9 114.8 37%
APPAREL 40.7 35.5 15%
EQUIPMENT 16.1 11.4 41%
________ ________
TOTAL AMERICAS 213.7 161.7 32%
________ ________
3,399.7 3,127.3 9%
OTHER 462.3 434.5 6%
________ ________
TOTAL REVENUES $3,862.0 $3,561.8 8%
======== ========
The discussion following includes disclosure of "pre-tax income" for
our operating segments. We have reported pre-tax income for each of our
operating segments in accordance with Statement of Financial Accounting
Standard No. 131, "Disclosures about Segments of an Enterprise and Related
Information." As discussed in Note 8 - Operating Segments in the
accompanying Notes to Unaudited Condensed Consolidated Financial Statements,
certain corporate costs are not included in pre-tax income of our operating
segments.
In the U.S. Region, revenues for the first quarter of fiscal 2006 grew
8% versus the first quarter of fiscal 2005, as revenues increased in each
product business unit (footwear, apparel and equipment). The increase in
footwear revenue for the first quarter was due to a 7 percentage point
increase in unit sales and a 4 percentage point increase in the average
selling price per pair. The increase in unit sales and the average price per
pair are primarily due to increased consumer demand for performance
products, especially those with a suggested retail price over $100.
The increase in apparel sales for the first quarter of fiscal 2006 was
driven by volume increases in branded apparel, partially offset by declines
in the volume and average selling price per unit of licensed apparel. The
declines in both the volume and average selling price of licensed apparel
were primarily due to the expiration of our license agreement with the NBA
in the second quarter of fiscal 2005.
For the first quarter of fiscal 2006, U.S. Region pre-tax income was
$345.2 million, a 7% increase versus the first quarter of fiscal 2005. For
the quarter, higher revenues drove the increase, more than offsetting a
lower gross margin percentage and higher selling and administrative costs.
The lower gross margin percentage, which reduced the consolidated gross
margin percentage by approximately 20 basis points for the first quarter,
was primarily the result of lower in-line pricing margins for footwear due
to higher product costs and additional costs incurred to meet strong unit
demand, as discussed above. The higher selling and administrative costs were
due to increases in operating overhead, primarily the result of higher
personnel costs, and slightly higher demand creation expenses.
For EMEA, changes in currency exchange rates accounted for 1 percentage
point of the reported revenue growth for the first quarter of fiscal 2006.
Excluding the changes in currency exchange rates, sales in each product
business unit grew in the first quarter. The increase in footwear revenue
over the prior year was primarily driven by increased unit sales, partially
offset by declines in the average selling prices due in part to strategies
to improve consumer value and changes in the mix of products sold. The
increase in apparel revenue was driven by increased unit sales. Sales
increases in the UK, Italy and the emerging markets in our Central Europe,
Middle East and Africa unit drove the growth.
EMEA pre-tax income for the first quarter of fiscal 2006 was $330.2
million, up 34% versus the prior year quarter. Higher revenues, gross margin
improvements and lower selling and administrative costs drove the increase.
The improved gross margins, which contributed approximately 80 basis points
of growth to the consolidated gross margin percentage, were primarily the
result of improved year-over-year euro hedge rates partially offset by
reduced in-line pricing margins primarily in footwear. The reduced in-line
margins were due to the investments in consumer value, a shift in the mix of
products sold and higher product costs, as discussed above. The lower
selling and administrative costs were driven by decreases in demand creation
expense (resulting from lower advertising spending), partially offset by
increased operating overhead expense (primarily driven by increased
personnel costs).
In the Asia Pacific Region, 3 percentage points of reported revenue
growth for the first quarter of fiscal 2006 were due to changes in currency
exchange rates. Excluding the changes in currency exchange rates, sales in
each Asia Pacific business unit grew. The increase over the prior year was
primarily driven by increased unit sales of footwear and apparel. A
significant revenue increase in China (driven by expansion of retail
distribution and strong consumer demand) was the primary growth driver
for the quarter.
Pre-tax income for the Asia Pacific Region increased 44% in the first
quarter of fiscal 2006 versus the first quarter of fiscal 2005 to $91.4
million. Higher revenues, lower selling and administrative costs and a
slight benefit from changes in currency exchange rates were partially offset
by a reduction in the gross margin percentage. The reduced gross margin
percentage, which reduced the consolidated gross margin by approximately 20
basis points, was primarily attributable to lower in-line pricing margins
due to strategies to improve consumer value and higher product costs. The
lower selling and administrative costs were driven by decreases in demand
creation expense, primarily due to lower advertising spending in the first
quarter.
In the Americas Region, 12 percentage points of the revenue growth for
the first quarter of fiscal 2006 were due to changes in currency exchange
rates. Excluding the changes in currency exchange rates, sales in each
product business unit grew in the first quarter. The revenue growth for the
quarter was driven primarily by higher sales in Canada and South America.
In the first quarter of fiscal 2006, pre-tax income for the Americas
Region increased 119% from the prior year quarter, to $44.6 million. The
increase in pre-tax income for the first quarter was attributable to higher
revenues, an improved gross margin percentage and a benefit from changes in
currency exchange rates, partially offset by higher selling and
administrative costs. The improved gross margin percentage contributed
approximately 20 basis points to the growth of the consolidated gross margin
percentage for the quarter.
Revenues and pre-tax income for our Other businesses in the first
quarter of fiscal 2006 include results from Bauer NIKE Hockey Inc., Cole
Haan Holdings Incorporated, Converse Inc., Hurley International LLC, NIKE
Golf, and Exeter Brands Group LLC. For the first quarter, the increase in
Other revenues was primarily driven by growth at Converse and Cole Haan.
Pre-tax income from the Other businesses was essentially unchanged at
$40.0 million in the first quarter of fiscal 2006 as increased demand
creation investments in NIKE Golf offset profit growth in most of the Other
businesses.
Liquidity and Capital Resources
Cash Flow Activity
Cash provided by operations was $261.7 million for the first three
months of fiscal 2006, compared to $368.4 million for the first three months
of fiscal 2005. Net income provided $432.3 million of cash flow over the
first three months of the current year, compared to $326.8 million in the
first three months of last year, partially offset by a greater net increase
in working capital for the current year versus the prior year. In the first
three months of fiscal 2006, our net investment in working capital increased
primarily due to an increase in accounts receivable and inventories. The
increase in accounts receivable primarily reflects our revenue growth
across the Company, the extension of credit terms in China to a level
consistent with our other regions, and an extension of credit terms in
countries in Asia for products we shipped early due to the implementation
of new supply chain systems in July 2005. The increase in inventories
largely reflects our reported futures orders growth and is in part the
result of changes in the timing of receipts and shipments of products as
compared to the prior year.
In the current quarter, we purchased approximately 1.8 million shares
of NIKE's Class B common stock for $150.6 million, bringing purchases to
date under the program to 8.7 million shares for $706.8 million. The share
repurchases were part of a $1.5 billion share repurchase program that was
approved by the Board of Directors in June 2004. We expect to continue to
fund this program from operating cash flow. The timing and the amount of
shares purchased will be dictated by our capital needs and stock market
conditions.
Dividends declared per share of common stock for the first quarter of
fiscal 2006 were $0.25, compared to $0.20 in the first quarter of fiscal
2005.
Capital Resources
No amounts are currently outstanding under our committed credit facility.
The terms of our facility have not changed from those described in our Annual
Report on Form 10-K for the fiscal year ended May 31, 2005.
Our long-term senior unsecured debt ratings remain at A+ and A2 from
Standard and Poor's Corporation and Moody's Investor Services, respectively.
Liquidity is also provided by our commercial paper program, under which
there was no amount outstanding at August 31, 2005 or May 31, 2005. We
currently have short-term debt ratings of A1 and P1 from Standard and Poor's
Corporation and Moody's Investor Services, respectively.
We currently believe that cash generated by operations, together with
access to external sources of funds as described above and in our Annual
Report on Form 10-K for the fiscal year ended May 31, 2005, will be
sufficient to meet our operating and capital needs in the foreseeable
future.
Critical Accounting Policies
Our discussion and analysis of our financial condition and results of
operations are based upon our consolidated financial statements, which have
been prepared in accordance with accounting principles generally accepted in
the United States. The preparation of these financial statements requires us
to make estimates and judgments that affect the reported amounts of assets,
liabilities, revenues and expenses, and related disclosure of contingent
assets and liabilities.
We believe that the estimates, assumptions and judgments involved in
the accounting policies described in the "Management's Discussion and
Analysis of Financial Condition and Results of Operations" section of our
most recent Annual Report on Form 10-K have the greatest potential impact on
our financial statements, so we consider these to be our critical accounting
policies. Because of the uncertainty inherent in these matters, actual
results could differ from the estimates we use in applying the critical
accounting policies. Certain of these critical accounting policies affect
working capital account balances, including the policies for revenue
recognition, the reserve for uncollectible accounts receivable, inventory
reserves, and contingent payments under endorsement contracts. These
policies require that we make estimates in the preparation of our financial
statements as of a given date. However, since our business cycle is
relatively short, actual results related to these estimates are generally
known within the six-month period following the financial statement date.
Thus, these policies generally affect only the timing of reported amounts
across two to three quarters.
Within the context of these critical accounting policies, we are not
currently aware of any reasonably likely events or circumstances that would
result in materially different amounts being reported.
Item 3. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK
There have been no material changes from the information previously
reported under Item 7A of the Company's Annual Report on Form 10-K for the
fiscal year ended May 31, 2005.
Item 4. CONTROLS AND PROCEDURES
The Company maintains disclosure controls and procedures that are
designed to ensure that information required to be disclosed in the Company's
Exchange Act reports is recorded, processed, summarized and reported within
the time periods specified in the Securities and Exchange Commission's rules
and forms and that such information is accumulated and communicated to the
Company's management, including its Chief Executive Officer and Chief
Financial Officer, as appropriate, to allow for timely decisions regarding
required disclosure. In designing and evaluating the disclosure controls and
procedures, management recognizes that any controls and procedures, no matter
how well designed and operated, can provide only reasonable assurance of
achieving the desired control objectives, and management is required to apply
its judgment in evaluating the cost-benefit relationship of possible controls
and procedures.
The Company carries out a variety of on-going procedures, under the
supervision and with the participation of the Company's management, including
the Company's Chief Executive Officer and the Company's Chief Financial
Officer, to evaluate the effectiveness of the design and operation of the
Company's disclosure controls and procedures. Based on the foregoing, the
Company's Chief Executive Officer and Chief Financial Officer concluded that
the Company's disclosure controls and procedures were effective at the
reasonable assurance level as of August 31, 2005.
There has been no change in the Company's internal controls over
financial reporting during the Company's most recent fiscal quarter that has
materially affected, or is reasonable likely to materially affect, the
Company's internal controls over financial reporting.
Special Note Regarding Forward-Looking Statements
and Analyst Reports
Certain written and oral statements, other than purely historical
information including estimates, projections, statements relating to NIKE's
business plans, objectives and expected operating results, and the assumptions
upon which those statements are based, made or incorporated by reference from
time to time by NIKE or its representatives in this report, other reports,
filings with the Securities and Exchange Commission, press releases,
conferences, or otherwise, are "forward-looking statements" within the meaning
of the Private Securities Litigation Reform Act of 1995 and Section 21E of the
Securities Exchange Act of 1934. Forward-looking statements include, without
limitation, any statement that may predict, forecast, indicate, or imply
future results, performance, or achievements, and may contain the words
"believe," "anticipate," "expect," "estimate," "project," "will be," "will
continue," "will likely result," or words or phrases of similar meaning.
Forward-looking statements involve risks and uncertainties which may cause
actual results to differ materially from the forward-looking statements. The
risks and uncertainties are detailed from time to time in reports filed by
NIKE with the S.E.C., including Forms 8-K, 10-Q, and 10-K, and include, among
others, the following: international, national and local general economic and
market conditions; the size and growth of the overall athletic footwear,
apparel, and equipment markets; intense competition among designers,
marketers, distributors and sellers of athletic footwear, apparel, and
equipment for consumers and endorsers; demographic changes; changes in
consumer preferences; popularity of particular designs, categories of
products, and sports; seasonal and geographic demand for NIKE products;
difficulties in anticipating or forecasting changes in consumer preferences,
consumer demand for NIKE products, and the various market factors described
above; difficulties in implementing, operating, and maintaining NIKE's
increasingly complex information systems and controls, including, without
limitation, the systems related to demand and supply planning, and inventory
control; fluctuations and difficulty in forecasting operating results,
including, without limitation, the fact that advance "futures" orders may not
be indicative of future revenues due to the changing mix of futures and at-
once orders; the ability of NIKE to sustain, manage or forecast its growth and
inventories; the size, timing and mix of purchases of NIKE's products; new
product development and introduction; the ability to secure and protect
trademarks, patents, and other intellectual property performance and
reliability of products; customer service; adverse publicity; the loss of
significant customers or suppliers; dependence on distributors; business
disruptions; increased costs of freight and transportation to meet delivery
deadlines; changes in business strategy or development plans; general risks
associated with doing business outside the United States, including, without
limitation, exchange rate fluctuations, import duties, tariffs, quotas and
political and economic instability; changes in government regulations;
liability and other claims asserted against NIKE; the ability to attract and
retain qualified personnel; and other factors referenced or incorporated by
reference in this report and other reports.
The risks included here are not exhaustive. Other sections of this report
may include additional factors which could adversely affect NIKE's business
and financial performance. Moreover, NIKE operates in a very competitive and
rapidly changing environment. New risk factors emerge from time to time and it
is not possible for management to predict all such risk factors, nor can it
assess the impact of all such risk factors on NIKE's business or the extent to
which any factor, or combination of factors, may cause actual results to
differ materially from those contained in any forward-looking statements.
Given these risks and uncertainties, investors should not place undue reliance
on forward-looking statements as a prediction of actual results.
Investors should also be aware that while NIKE does, from time to time,
communicate with securities analysts, it is against NIKE's policy to disclose
to them any material non-public information or other confidential commercial
information. Accordingly, shareholders should not assume that NIKE agrees with
any statement or report issued by any analyst irrespective of the content of
the statement or report. Furthermore, NIKE has a policy against issuing or
confirming financial forecasts or projections issued by others. Thus, to the
extent that reports issued by securities analysts contain any projections,
forecasts or opinions, such reports are not the responsibility of NIKE.
Part II - Other Information
Item 1.
Legal Proceedings
There have been no significant developments with respect to the
information previously reported under Item 4 of the Company's Annual Report on
Form 10-K for the fiscal year ended May 31, 2005.
Item 2. Changes in Securities, Use of Proceeds and Issuer Purchases of Equity
Securities
The following table presents a summary of share repurchases made by NIKE
during the quarter ended August 31, 2005 under the four-year $1.5 billion
share repurchase program authorized by our Board of Directors and announced in
June 2004.
Total Number of Maximum Dollar Value
Shares Purchased as of Shares that May
Total Number Average Part of Publicly Yet Be Purchased
Of Shares Price Paid Announced Plans Under the Plans
Period Purchased Per Share or Programs or Programs
______ ____________ __________ ___________________ ____________________
(in millions)
June 1 - 30, 2005 --- --- --- $ 943.8
July 1 - 31, 2005 498,500 $ 86.02 498,500 $ 901.0
August 1 - 31, 2005 1,334,000 $ 80.80 1,334,000 $ 793.2
_________ _______ _________
Total 1,832,500 $ 82.22 1,832,500
========= ======= =========
Item 6. Exhibits
(a) EXHIBITS:
3.1 Restated Articles of Incorporation, as amended.
3.2 Third Restated Bylaws, as amended (incorporated by reference
from Exhibit 3.2 to the Company's Current Report on Form 8-K
filed November 18, 2004).
4.1 Restated Articles of Incorporation, as amended (see Exhibit
3.1).
4.2 Third Restated Bylaws, as amended (see Exhibit 3.2).
12.1 Computation of Ratio of Earnings to Fixed Charges.
31.1 Rule 13(a)-14(a) Certification of Chief Executive Officer.
31.2 Rule 13(a)-14(a) Certification of Chief Financial Officer.
32.1 Section 1350 Certificate of Chief Executive Officer.
32.2 Section 1350 Certificate of Chief Financial Officer.
* Management contract or compensatory plan or arrangement.
SIGNATURES
Pursuant to the requirements of the Securities Exchange Act of 1934,
the registrant has duly caused this report to be signed on its behalf by
the undersigned thereunto duly authorized.
NIKE, Inc.
an Oregon Corporation
/s/ Donald W. Blair
________________________
Donald W. Blair
Chief Financial Officer
DATED: October 3, 2005