SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM 10-Q
FOR QUARTERLY REPORTS UNDER SECTION 13 OR 15 (d) OF
THE SECURITIES AND EXCHANGE ACT OF 1934
For the Quarter Ended February 28, 1999 Commission file number - 1-10635
NIKE, Inc.
(Exact name of registrant as specified in its charter)
OREGON 93-0584541
(State or other jurisdiction of (I.R.S. Employer
incorporation or organization) Identification No.)
One Bowerman Drive, Beaverton, Oregon 97005-6453
(Address of principal executive offices) (Zip Code)
Registrant's telephone number, including area code (503) 671-6453
Indicate by check mark whether the registrant (1) has filed all reports
required to be filed by Section 13 or 15 (d) of the Securities Exchange
Act of 1934 during the preceding 12 months (or for such shorter period
that the registrant was required to file such reports), and (2) has been
subject to such filing requirements for the past 90 days
Yes X No .
___ ___
Common Stock shares outstanding as of February 28, 1999 were:
_________________
Class A 100,691,831
Class B 180,551,169
-----------
281,243,000
===========
PART 1 - FINANCIAL INFORMATION
Item 1. Financial Statements
NIKE, Inc.
CONDENSED CONSOLIDATED BALANCE SHEET
Feb. 28, May 31,
1999 1998
________ _______
(in millions)
ASSETS
Current assets:
Cash and equivalents $ 127.9 $ 108.6
Accounts receivable 1,737.7 1,674.4
Inventories (Note 4) 1,147.4 1,396.6
Deferred income taxes 178.1 156.8
Prepaid expenses 151.1 196.2
________ ________
Total current assets 3,342.2 3,532.6
Property, plant and equipment 2,006.9 1,819.6
Less accumulated depreciation 762.6 666.5
________ ________
1,244.3 1,153.1
Identifiable intangible assets and goodwill 431.4 435.8
Deferred income taxes and other assets 274.3 275.9
________ ________
$5,292.2 $5,397.4
======== ========
LIABILITIES AND SHAREHOLDERS' EQUITY
Current liabilities:
Current portion of long-term debt $ 0.9 $ 1.6
Notes payable 556.0 480.2
Accounts payable 329.8 584.6
Accrued liabilities 670.2 608.5
Income taxes payable 34.1 28.9
________ ________
Total current liabilities 1,591.0 1,703.8
Long-term debt 388.7 379.4
Deferred income taxes and other liabilities 54.1 52.3
Commitments and contingencies (Note 6) -- --
Redeemable preferred stock 0.3 0.3
Shareholders' equity:
Common stock at stated value:
Class A convertible-100.7 and
101.5 shares outstanding 0.2 0.2
Class B-180.6 and 185.5 shares
outstanding 2.7 2.7
Capital in excess of stated value 279.4 262.5
Accumulated other comprehensive income (66.8) (47.2)
Retained earnings 3,042.6 3,043.4
________ ________
3,258.1 3,261.6
________ ________
$5,292.2 $5,397.4
======== ========
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 28, February 28,
__________________ __________________
1999 1998 1999 1998
____ ____ ____ ____
(in millions, except per share data)
Revenues $2,176.8 $2,224.0 $6,594.6 $7,245.4
_________ _________ _________ _________
Costs and expenses:
Cost of sales 1,364.9 1,428.8 4,157.1 4,503.9
Selling and administrative 569.8 651.4 1,754.3 1,903.3
Interest 10.4 13.2 34.7 47.2
Other expense 26.3 8.0 58.4 27.5
_________ _________ _________ _________
1,971.4 2,101.4 6,004.5 6,481.9
________ __________ _________ _________
Income before income taxes 205.4 122.6 590.1 763.5
Income taxes 81.2 49.5 233.1 296.2
________ ________ _________ _________
Net income $ 124.2 $ 73.1 $ 357.0 $ 467.3
========= ========= ========== ==========
Basic earnings per common share $ 0.44 $ 0.25 $ 1.26 $ 1.61
(Note 3) ========= ========= ========== ==========
Diluted earnings per common share $ 0.44 $ 0.25 $ 1.24 $ 1.58
(Note 3) ========= ========= ========== ==========
Dividends declared per common share $ 0.12 $ 0.12 $ 0.36 $ 0.34
========= ========= ========== ==========
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 28,
_________________
1999 1998
____ ____
(in millions)
Cash provided (used) by operations:
Net income $ 357.0 $467.3
Income charges (credits) not
affecting cash:
Depreciation 151.2 133.0
Deferred income taxes .1 (6.7)
Amortization and other 36.7 26.1
Changes in other working capital
components 69.1 (458.9)
_______ _______
Cash provided by operations 614.1 160.8
_______ _______
Cash provided (used) by investing activities:
Additions to property, plant and
equipment (265.4) (352.1)
Disposals of property, plant and
equipment 16.9 10.6
Increase in other assets (46.9) (59.5)
Decrease in other liabilities (6.5) (17.8)
_______ _______
Cash used by investing activities (301.9) (418.8)
_______ _______
Cash provided (used) by financing activities:
Additions to long-term debt - 101.4
Reductions in long-term debt
including current portion (1.4) (1.7)
Decrease in notes payable 75.8 76.5
Proceeds from exercise of options 18.2 24.4
Repurchase of stock (262.6) (152.0)
Dividends - common and preferred (102.3) (92.8)
_______ _______
Cash used by financing activities (272.3) (44.2)
_______ _______
Effect of exchange rate changes on cash (20.6) 7.1
Net increase (decrease) in cash and equivalents 19.3 (295.1)
Cash and equivalents, May 31, 1998 and 1997 108.6 445.4
_______ _______
Cash and equivalents, February 28, 1999
and 1998 $ 127.9 $150.3
======= =======
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 28, 1999 are not necessarily
indicative of results to be expected for the entire year.
Year 2000 costs:
Costs associated with the Company's efforts around Year 2000 issues are
expensed as incurred, unless they relate to the purchase of hardware and
software, and software development, in which case they are capitalized.
Capitalized software and hardware costs are depreciated from three to five
years.
NOTE 2 - Comprehensive Income:
__________________
In the first quarter of fiscal 1999, the Company adopted Statement of
Financial Accounting Standards No. 130, "Reporting Comprehensive Income".
This statement establishes standards for reporting and display of
comprehensive income and its components in a full set of general purpose
financial statements. Comprehensive income is generally defined as all changes
in shareholders' equity except those resulting from investments by and
distributions to shareholders. Comprehensive income, net of taxes, is as
follows:
Three Months Ended Nine Months Ended
February 28, February 28,
__________________ _________________
1999 1998 1999 1998
____ ____ ____ ____
(in millions)
Net Income $124.2 $ 73.1 $357.0 $467.3
Change in Cumulative
Translation Adjustment (10.9) (3.8) (19.6) (30.7)
_______ _______ _______ _______
Total Comprehensive Income $113.3 $ 69.3 337.4 436.6
======= ======= ======= =======
NOTE 3 - Net income per common share:
___________________________
SFAS 128, "Earnings per Share," replaces primary and fully diluted
earnings per share with basic and diluted earnings per share. Under the new
requirements, the dilutive effect of stock options is excluded from the
calculation of basic earnings per share. Diluted earnings per share is
calculated similarly to fully diluted earnings per share as required under
APB 15. SFAS 128 became effective for the Company's fiscal 1998 financial
statements. All prior period earnings per share data presented have been
restated to conform to the provisions of this statement. The following
represents a reconciliation from basic earnings per share to diluted earnings
per share:
Three Months Ended Nine Months Ended
February 28, February 28,
__________________ _________________
1999 1998 1999 1998
____ ____ ____ ____
(in millions, except per share data)
Determination of shares:
Average common shares
outstanding 281.3 287.6 283.7 289.3
Assumed conversion of
stock options 4.8 5.6 4.9 6.5
______ ______ ______ ______
Diluted average common
shares outstanding 286.1 293.2 288.6 295.8
====== ====== ====== ======
Basic earnings per
common share $ 0.44 $ 0.25 $ 1.26 $ 1.61
====== ====== ====== ======
Diluted earnings per
common share $ 0.44 $ 0.25 $ 1.24 $ 1.58
====== ====== ====== ======
NOTE 4 - Inventories:
___________
Inventories by major classification are as follows:
Feb. 28, May 31,
1999 1998
________ ________
(in millions)
Finished goods $1,071.8 $1,303.8
Work-in-progress 47.1 34.7
Raw materials 28.5 58.1
________ ________
$1,147.4 $1,396.6
======== ========
NOTE 5 - 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.
No increases to the 1998 restructuring charge were made during the first
nine months of fiscal 1999. A total of $6.7 million of the restructuring
accrual was not required due to changes in estimates related to severance
payments of $1.1 million, a $3.1 million change in estimated vendor software
costs related to Japan's software development, lease commitments of $1.5 million
due to earlier sub-leasing than originally anticipated and other changes of $1.0
million. This amount is included in other expense on the income statement.
1999 Charge
In the second quarter of fiscal 1999, an $18.7 million restructuring charge
was taken due to further cost realignment programs in the Company's Asia Pacific
region. An additional $0.8 million charge was added to this restructuring
accrual during the current quarter which relates to similar plans announced in
other countries in the region. The charge (detailed below in tabular format)
was for costs of severing employees, including severance packages, lease
abandonments and the write down of assets no longer in use. The charge is
included in other expense on the income statement.
As of February 28, 1999, there were a total of 1,208 employees terminated
in the original plan announced in the fourth quarter of fiscal 1998, with 1,180
having left the Company as of that date. An additional 287 employees were
terminated in the plan announced during the second and third quarters of fiscal
1999 with 241 having left the Company as of February 28, 1999.
Detail of the 1998 restructuring charge is as follows:
(in millions)
4th QTR FY98
DESCRIPTION CASH/NON- RESTRUCTURING ACTIVITY RESERVE ACTIVITY RESERVE
CASH CHARGE BALANCE AT BALANCE AT
5/31/98 2/28/99
___________________________________________________________________________________________________________
ELIMINATION OF JOB
RESPONSIBILITES COMPANY-
WIDE $(49.8) $18.8 $(31.0) $26.0 $(5.0)
Severance packages cash (29.1) 9.0 (20.1) 18.8 (1.3)
Lease cancellations &
commitments cash (10.8) 0.2 (10.6) 6.9 (3.7)
Write-down of assets non-cash (9.6) 9.6 - - -
Other cash (0.3) - (0.3) 0.3 -
___________________________________________________________________________________________________________
DOWNSIZING THE ASIA PACIFIC
HEADQUARTERS IN HONG KONG $(13.1) 5.4 $(7.7) $4.0 $(3.7)
Severance packages cash (4.6) 2.3 (2.3) 1.0 (1.3)
Lease cancellations &
commitments cash (5.5) 0.1 (5.4) 3.0 (2.4)
Write-down of assets non-cash (3.0) 3.0 - - -
____________________________________________________________________________________________________________
DOWNSIZING THE JAPAN
DISTRIBUTION CENTER $(31.6) $25.4 $(6.2) $4.7 $(1.5)
Write-off of assets non-cash (12.5) 12.5 - - -
Software development costs cash/non (19.1) 12.9 (6.2) 4.7 (1.5)
cash
____________________________________________________________________________________________________________
CANCELLATION OF ENDORSEMENT
CONTRACTS cash $(5.6) $0.6 $(5.0) $4.7 $(0.3)
____________________________________________________________________________________________________________
EXITING CERTAIN MANUFACTURING
OPERATIONS AT BAUER $(22.7) $19.9 $(2.8) $0.6 $(2.2)
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) - (1.6) 0.2 (1.4)
Severance packages cash (1.2) - (1.2) 0.4 (0.8)
____________________________________________________________________________________________________________
OTHER $(7.1) 2.4 $(4.7) $2.7 $(2.0)
Cash cash (0.6) - (0.6) 0.1 (0.5)
Non-cash non-cash (6.5) 2.4 (4.1) 2.6 (1.5)
____________________________________________________________________________________________________________
Effect of foreign currency
translation - $1.8 $1.8 $(2.3) $(0.5)
____________________________________________________________________________________________________________
____________________________________________________________________________________________________________
TOTAL $(129.9) $74.3 $(55.6) $40.4 $(15.2)
____________________________________________________________________________________________________________
Detail of the 1999 restructuring charge is as follows:
(in millions)
2nd QTR FY99 ADDITIONAL
DESCRIPTION CASH/NON- RESTRUCTURING 3RD QTR ACTIVITY RESERVE
CASH CHARGE CHARGE BALANCE AT
2/28/99
__________________________________________________________________________________________
ELIMINATION OF JOB
RESPONSIBILITES $(18.7) $(0.8) $12.5 $(7.0)
Severance packages cash (8.7) (0.4) 6.2 (2.9)
Lease cancellations &
commitments cash (2.3) (0.1) 0.4 (2.0)
Write-down of assets non-cash (5.5) (0.3) 5.5 (0.3)
Other cash/non- (2.2) - 0.4 (1.8)
cash
__________________________________________________________________________________________
<Table/>
NOTE 6 - Commitments and contingencies:
_____________________________
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 1999 was $124.2 million, a
70% increase compared to the $73.1 million in the prior year's third quarter.
Year-to-date net income decreased 24% to $357.0 million. The increase in net
income for the quarter was the result of both a higher gross margin percentage
and lower selling and administrative spending. For the year, revenues and gross
margin trail last year, however the affect is somewhat offset by decreased
levels of selling and administrative expenses.
Consolidated revenues decreased 2%, or $47.2 million for the quarter, and
9%, or $650.7 million year-to-date. U.S. brand revenues in the quarter were
fairly equal to last year's, increasing 1% to $1.159 million. Year-to-date U.S.
revenues decreased 8%, with a 9% drop in both footwear and apparel. This
quarter was the first in five where U.S. revenues have exceeded the comparable
period. The positive trend came from footwear, where revenues were up 4% in the
quarter. The increase came from a 3% increase in pairs sold and a 1% increase
in average selling price. Two of the largest categories, Running and Brand
Jordan, were up 28% and 27%, respectively. U.S. Apparel was down 8% in the
quarter. The largest categories, Men's Branded Athletic and Team Sports, were
down 18% and 5%, respectively. For the year the same categories were down 24%
and 9%, respectively. Categories that experienced increases in the quarter
included basketball, up 17%, running, up 15%, and Brand Jordan, up 5%.
Total revenues in Europe were up 5%, or $28.5 million for the quarter. For
the year, revenues have increased 8%. Had the dollar remained constant,
revenues would have decreased 3% and increased 2% for the quarter and year-to-
date, respectively. The revenue increase continues to be driven by growth in
apparel, which increased 15% in the quarter (33% year-to-date), while footwear
revenues were down.
Revenues in the Asia Pacific region remain affected by the general economic
crisis in the area. Revenues decreased 19% for the quarter and 39% year-to-
date. Had the dollar remained constant, revenues would have decreased 24% and
34%, respectively. Revenues in Japan, the Company's second largest subsidiary,
declined 26% (33% on a constant dollar basis) for the quarter and 47% for the
year (43% on a constant dollar basis).
Revenues in the Americas region decreased 22% for the quarter and 16% year-
to-date, compared to last year. Results have been driven primarily by Canada,
the largest country in the region, which has been experiencing a sluggish retail
environment similar to the United States. The strengthening of the dollar,
mostly in Canada and Mexico, has also affected results, with revenue down 18%
for the quarter and 10% year-to-date, on a constant dollar basis in the region.
Other Brands, which includes Bauer NIKE Hockey, Cole Haan, Nike Team Sports
(formally Sports Specialties), and NIKE IHM (which includes what was formally
Tetra Plastics), decreased 5% for the quarter and less than 1% year-to-date.
The breakdown of revenues follows:
Three Months Ended Nine Months Ended
February 28, February 28,
___________________ ________________
% %
1999 1998 change 1999 1998 change
______ ______ _______ ______ ______ ________
(in millions)
U.S.A. REGION
FOOTWEAR $828.5 $800.4 4% $2,411.9 $2,644.1 -9%
APPAREL 304.3 331.0 -8% 1,074.6 1,174.5 -9%
EQUIPMENT AND OTHER 26.6 16.3 63% 69.2 53.0 31%
_______ _______ _______ _______
TOTAL U.S.A. 1,159.4 1,147.7 1% 3,555.7 3,871.6 -8%
EUROPE REGION
FOOTWEAR 311.4 329.0 -5% 863.2 958.6 -10%
APPAREL 273.7 239.0 15% 800.2 600.3 33%
EQUIPMENT AND OTHER 14.7 3.3 345% 47.4 18.6 155%
_______ _______ _______ _______
TOTAL EUROPE 599.8 571.3 5% 1,710.8 1,577.5 8%
ASIA PACIFIC REGION
FOOTWEAR 124.4 175.0 -29% 321.4 647.5 -50%
APPAREL 92.3 98.2 -6% 273.0 353.0 -23%
EQUIPMENT AND OTHER 5.8 2.8 101% 16.4 5.8 183%
_______ _______ _______ _______
TOTAL ASIA PACIFIC 222.5 276.0 -19% 610.8 1,006.3 -39%
AMERICAS REGION
FOOTWEAR 72.6 91.4 -21% 248.9 304.1 -18%
APPAREL 29.8 41.7 -29% 119.3 138.0 -14%
EQUIPMENT AND OTHER 2.3 1.1 109% 8.8 5.7 54%
_______ _______ _______ _______
TOTAL AMERICAS 104.7 134.2 -22% 377.0 447.8 -16%
_______ _______ _______ _______
TOTAL NIKE BRAND 2,086.4 2,129.2 -2% 6,254.3 6,903.2 -9%
OTHER & OTHER BRANDS 90.4 94.8 -5% 340.3 342.2 -1%
_______ _______ _______ _______
TOTAL REVENUES $2,176.8 $2,224.0 -2% $6,594.6 $7,245.4 -9%
======== ======== ======== =========
The Company's gross margin percentage for the third quarter was 37.3%, up
from 35.8% in the prior year. On a year-to-date basis, margins were down
slightly to 37.0% from 37.8% in the prior year. The improvement in margins for
the quarter was mainly attributable to the focus on inventory clean up efforts
achieved in previous quarters. In the USA and Asia Pacific regions, closeout
product has been reduced dramatically, thereby minimizing the impact of
discounted sales in those regions during the quarter.
Selling and administrative expenses have decreased 13% from last year's
third quarter and 8% year-to-date. Expenses for the quarter are also down as a
percentage of revenues, and are only up slightly on a year-to-date basis.
Reductions in spending came from virtually every area of the Company's
operations in the Company's continued efforts to better align its cost structure
with overall revenue levels. The reductions include wage and wage-related
costs, despite the effects of continued retail outlet store growth around the
world.
Interest expense has decreased for both the quarter and year-to-date
periods, compared to last year, as the Company needed less short term debt to
finance lower levels of inventories and accounts receivable. Other expense has
increased over the prior year, mainly due to the $19.5 million restructuring
charge (discussed further below). In addition, $18 million was charged to
expense in the current fiscal year, $10.7 million during the third quarter,
relating to capital projects that have been discontinued. Offsetting these
charges was a $6.7 million reversal of fiscal 1998's restructuring charge.
Worldwide futures and advance orders for NIKE brand athletic footwear and
apparel scheduled for delivery between March and July 1999 totaled $3.8 billion,
4% lower 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 the Company will experience for subsequent periods. This is
due to potential shifts in the mix of advance orders in relation to at once
orders and varying cancellation rates. Finally exchange rate fluctuations will
also cause differences in the comparisons.
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 overall cost structure and organization with planned
revenue levels. 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.
No increases to the 1998 restructuring charge were made during the first
nine months of fiscal 1999. A total of $6.7 million of the restructuring
accrual was not required due to changes in estimates related to severance
payments of $1.1 million, a $3.1 million change in estimated vendor software
costs related to Japan's software development, lease commitments of $1.5 million
due to earlier sub-leasing than originally anticipated and other changes of $1.0
million. This amount is included in other expense on the income statement. The
remaining liability balance is expected to be paid by the end of the fiscal
year, except for certain lease payments that will fall into the first quarter of
fiscal 2000. The only remaining non-cash item, relating to the disposal of
sales exhibits, will be finalized by May 31, 1999.
In the second quarter of fiscal 1999, an $18.7 million restructuring charge
was taken due to further cost realignment programs in the Company's Asia Pacific
region. An additional $0.8 million charge was added to this restructuring
accrual during the current quarter which related to similar plans announced in
other countries in the region. The charge (detailed below in tabular format)
was for costs of severing employees, including severance packages, lease
abandonments and the write down of assets no longer in use. The charge is
included in other expense on the income statement. The majority of the
liability balance will be paid by May 31, 1999, excluding certain lease
arrangements which will continue to be paid during the first quarter of fiscal
2000.
As of February 28, 1999, there were a total of 1,208 employees terminated
in the original plan announced in the fourth quarter of fiscal 1998, with 1,180
having left the Company as of that date. An additional 287 employees were
terminated in the plans announced during the second and third quarters of fiscal
1999, with 241 having left the Company as of February 28, 1999.
Detail of the 1998 restructuring charge is as follows:
(in millions)
4th QTR FY98
DESCRIPTION CASH/NON- RESTRUCTURING ACTIVITY RESERVE ACTIVITY RESERVE
CASH CHARGE BALANCE AT BALANCE AT
5/31/98 2/28/99
___________________________________________________________________________________________________________
ELIMINATION OF JOB
RESPONSIBILITES COMPANY-
WIDE $(49.8) $18.8 $(31.0) $26.0 $(5.0)
Severance packages cash (29.1) 9.0 (20.1) 18.8 (1.3)
Lease cancellations &
commitments cash (10.8) 0.2 (10.6) 6.9 (3.7)
Write-down of assets non-cash (9.6) 9.6 - - -
Other cash (0.3) - (0.3) 0.3 -
___________________________________________________________________________________________________________
DOWNSIZING THE ASIA PACIFIC
HEADQUARTERS IN HONG KONG $(13.1) 5.4 $(7.7) $4.0 $(3.7)
Severance packages cash (4.6) 2.3 (2.3) 1.0 (1.3)
Lease cancellations &
commitments cash (5.5) 0.1 (5.4) 3.0 (2.4)
Write-down of assets non-cash (3.0) 3.0 - - -
____________________________________________________________________________________________________________
DOWNSIZING THE JAPAN
DISTRIBUTION CENTER $(31.6) $25.4 $(6.2) $4.7 $(1.5)
Write-off of assets non-cash (12.5) 12.5 - - -
Software development costs cash/non (19.1) 12.9 (6.2) 4.7 (1.5)
cash
____________________________________________________________________________________________________________
CANCELLATION OF ENDORSEMENT
CONTRACTS cash $(5.6) $0.6 $(5.0) $4.7 $(0.3)
____________________________________________________________________________________________________________
EXITING CERTAIN MANUFACTURING
OPERATIONS AT BAUER $(22.7) $19.9 $(2.8) $0.6 $(2.2)
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) - (1.6) 0.2 (1.4)
Severance packages cash (1.2) - (1.2) 0.4 (0.8)
____________________________________________________________________________________________________________
OTHER $(7.1) 2.4 $(4.7) $2.7 $(2.0)
Cash cash (0.6) - (0.6) 0.1 (0.5)
Non-cash non-cash (6.5) 2.4 (4.1) 2.6 (1.5)
____________________________________________________________________________________________________________
Effect of foreign currency
translation - $1.8 $1.8 $(2.3) $(0.5)
____________________________________________________________________________________________________________
____________________________________________________________________________________________________________
TOTAL $(129.9) $74.3 $(55.6) $40.4 $(15.2)
____________________________________________________________________________________________________________
Detail of the 1999 restructuring charge is as follows:
(in millions)
2nd QTR FY99 ADDITIONAL
DESCRIPTION CASH/NON- RESTRUCTURING 3RD QTR ACTIVITY RESERVE
CASH CHARGE CHARGE BALANCE AT
2/28/99
__________________________________________________________________________________________
ELIMINATION OF JOB
RESPONSIBILITES $(18.7) $(0.8) $12.5 $(7.0)
Severance packages cash (8.7) (0.4) 6.2 (2.9)
Lease cancellations &
commitments cash (2.3) (0.1) 0.4 (2.0)
Write-down of assets non-cash (5.5) (0.3) 5.5 (0.3)
Other cash/non- (2.2) - 0.4 (1.8)
cash
__________________________________________________________________________________________
<Table/>
In June 1998, the Financial Accounting Standards Board issued Statement of
Financial Accounting Standards No. 133, "Accounting for Derivative Instruments
and Hedging Activities" (FAS 133). FAS 133 is effective for all fiscal quarters
of all fiscal years beginning after June 15, 1999 (June 1, 2000 for the
Company). This statement will require the Company to recognize all derivatives
on the balance sheet at fair value. Changes in the fair value of derivatives
will be recorded in current earnings or other comprehensive income, depending on
the intended use of the derivative and the resulting designation. The
ineffective portion of all hedges will be recognized in current-period earnings.
Management of the Company has not yet determined the impact that the adoption of
FAS 133 will have on the Company's results from operations or its financial
position.
Year 2000 Readiness Disclosure
The Year 2000 issue is the result of computer programs using two digits
rather than four to define the applicable year. Such software may recognize a
date using "00" as the year 1900 or some other year, rather than the year 2000.
This could result in system failures or miscalculations leading to disruptions
in NIKE's activities and operations (the "Year 2000" or "Y2K" issue). If we or
our significant suppliers or customers fail to make necessary modifications,
conversions and contingency plans on a timely basis, the Year 2000 issue could
have a material adverse effect on our financial condition, results of operations
or liquidity.
STATE OF READINESS
Project Categories
In May 1997, NIKE established a corporate-wide project team to oversee,
monitor and coordinate the Company-wide Year 2000 effort. Our Year 2000 project
focuses on three areas: (1) information technology ("IT") systems, such as
application software, mainframes, PCs, networks and production control systems;
(2) non-IT systems, such as equipment, machinery, climate control and security
systems, which may contain microcontrollers with embedded technology; and (3)
suppliers and customers.
NIKE uses a four-phase approach to fix or replace non-compliant IT systems:
(1) inventory, assessment of risks and impact and prioritization of
projects:
- Tier 1-critical (vital to business operations)
- Tier 2-high priority (important to business operations)
- Tier 3-moderate priority (minor disruption to operations
expected if non-compliant)
- Tier 4-low priority (will not disrupt operations even if non-
compliant);
(2) remediation (fix, replace or develop contingency plans for non-
compliant systems);
(3) testing (validation) and implementation; and
(4) completion and auditing results where appropriate.
When appropriate, we have engaged the services of independent consultants to
analyze and develop testing standards, quality assurance and contingency plans.
We use our internal auditing department to review Year 2000 compliance and have
consulted with external independent consultants to evaluate and review those
results.
IT Projects
By early 1999, we had identified 148 major internal IT remediation projects
worldwide. We have completed our assessment and prioritization of all of our IT
systems. Of the 148 projects, we have completed and tested 71 as Year 2000
compliant as of March 31, 1998. Of the remaining 77 projects, we have
consolidated 37 small projects into nine global projects to accelerate their
completion. Of the remaining 40 projects, we have classified five as Tier 1 and
nine as Tier 2. NIKE expects that half of these 14 Tier 1 and Tier 2 projects
will be completed as Year 2000 compliant by May 31, 1999. For the other half,
we expect to finish remediation and be in final testing by August 31, 1999, and
to be completed as Year 2000 compliant by November 30, 1999. We have classified
the remaining 26 projects as Tier 3 or Tier 4. NIKE expects that all of these
projects will be completed as Year 2000 compliant by July 31, 1999.
Non-IT Projects
By early 1999, we had identified 27 major internal non-IT remediation
projects worldwide. We have completed our assessment and prioritization of all
of our major non-IT projects. We have designated all 27 of these projects as
high priority. These include facilities that are critical to NIKE's business
operations, which may involve equipment, machinery, climate control and security
systems. We are currently remediating these priority non-IT projects and expect
to complete all priority non-IT projects as Year 2000 compliant by August 31,
1999. We have classified the remaining non-IT projects as non-priority non-IT
projects, which include climate control, security and mechanical systems in
buildings that are not critical to our business operations. To the extent that
these non-priority non-IT projects may not be completed by December 31, 1999, we
do not expect that any non-compliance or failure of any non-priority non-IT
systems, individually or in the aggregate, will have a material adverse effect
on NIKEs manufacturing, distribution, inventory control or the management and
collection of our accounts receivable. For this reason, we have not set a
completion date for remediation of the remaining non-priority non-IT systems.
Suppliers and Customers
We have focused our Year 2000 compliance efforts on our significant
suppliers and customers-those that are material to our business-and are
assessing the Year 2000 readiness of these significant suppliers and customers.
We have assessed the Year 2000 readiness of 460 of our suppliers, 168 of which
we consider to be significant suppliers. We have also assessed the Year 2000
readiness of 151 customers, 80 of which we consider to be significant customers.
We have relationships with significant suppliers and customers in most of the
locations in which we operate. See "Manufacturing" above. The level of
preparedness of our significant suppliers and customers can vary greatly from
operation to operation and country to country. NIKE relies on suppliers to
timely deliver a broad range of goods and services worldwide, including raw
materials, footwear, apparel, accessories, equipment, advertising,
transportation services, banking services, telecommunications and utilities.
Moreover, our suppliers rely on countless other suppliers, over which we may
have little or no influence regarding Year 2000 compliance.
We have sent surveys to all of our significant suppliers and customers to
determine the extent to which we may be affected by those third parties' Y2K
preparedness plans. A substantial majority of our significant suppliers and
customers have not responded to our surveys, or have not provided assurance of
their Year 2000 readiness, or have not responded with sufficient detail for us
to determine their Year 2000 readiness. In the absence of adequate responses,
we are making independent assessments of our significant suppliers and customers
and the countries in which they operate, which include direct contact and
discussions with persons coordinating Y2K compliance efforts for our significant
suppliers and customers. We also research regulatory filings and other public
information available to NIKE provided by our significant suppliers and
customers and, in general, countries in which they operate.
CONTINGENCY PLANS
Having completed our identification and assessment of major projects, our
"worst-case scenario" would be a failure of multiple significant suppliers to
supply merchandise or services for a prolonged period of time that would
materially impair our ability to ship product in a timely and reliable manner to
our customers. Although the occurrence of this scenario could have a material
adverse effect on NIKE, we do not have a basis to determine at this time whether
such a scenario is reasonably likely to occur. We believe that suppliers
present the area of greatest risk to disruption of our operations because of our
limited ability to influence actions of third parties or to estimate the level
and impact of noncompliance of third parties throughout the extended supply
chain.
We are currently developing contingency plans for our significant suppliers
and customers, which we expect to finalize by August 31, 1999. In addition, we
are developing contingency plans that assume some estimated level of
noncompliance by, or business disruption to, certain other suppliers and
customers on a case-by-case basis, which we will continue to develop on an as-
needed basis throughout 1999. We are also developing contingency plans for our
Tier 1 IT systems, which plans we expect to finalize by August 31, 1999.
The contingency plans for our suppliers and customers include, where
appropriate, (a) booking orders and manufacturing and shipping products before
anticipated business disruptions, (b) shifting production capacity from
facilities that NIKE determines to be at high risk of noncompliance or business
disruption, (c) consolidating finance vendors and (d) temporarily discontinuing
business with suppliers determined to be high risk of noncompliance or business
disruption and finding alternative suppliers.
The contingency plans for our Tier 1 IT systems include, where appropriate,
(a) manual work processes, (b) storing additional sets of backup data before
critical process dates, (c) off-site system recovery and (d) temporarily
shifting production software from one hardware system to another.
We continually update our assessments and revise our contingency plans for
our significant suppliers and customers as we receive additional information
from them concerning their Y2K preparedness. However, judgments regarding
contingency plans-such as how to develop them and to what extent-are subject to
many variables and uncertainties. There can be no assurance that NIKE will
correctly anticipate the level, impact or duration of noncompliance by its
suppliers and customers. As a result, there is no certainty that our
contingency plans will be sufficient to mitigate the impact of noncompliance by
suppliers and customers and some material adverse effect to NIKE may result from
one or more third parties regardless of our contingency plans. The failure of
any such contingency plan could have a material adverse effect on NIKE's
financial condition, results of operations or liquidity.
COSTS
As of February 28, 1999, NIKE estimates that total costs related to the
Year 2000 issue will be approximately $105 to $120 million, of which
approximately $78 million have been incurred. Of the $78 million, approximately
$20 million are external expenses, $17 million internal costs and $41 million
replacement projects. Approximately $10 million of these expenses will be
capitalized; the remainder has been expensed as incurred. We presently believe
that the total cost of achieving Year 2000 compliant systems will not be
material to our financial condition, liquidity or results of operations. NIKE
funds Year 2000 costs through operating cash flows.
Estimates of time, cost and risk estimates are based on currently available
information. Developments that could affect estimates include, but are not
limited to: the availability and cost of trained personnel; the ability to
locate and correct all relevant computer code and systems; cooperation and Year
2000 readiness of our suppliers and customers (and their suppliers and
customers); and the ability to correctly anticipate risks and implement suitable
contingency plans in the event of system failures at NIKE or with our suppliers
and customers (and their suppliers and customers).
The above section, even if incorporated by reference into other documents
or disclosures, is a Year 2000 Readiness Disclosure as defined under the Year
2000 Information and Readiness Disclosure Act of 1998.
Liquidity and Capital Resources
The Company's financial position remained strong at February 28, 1999.
Compared to May 31, 1998 shareholder's equity remained fairly consistent at $3.3
billion. Working capital decreased 4% to $1.8 billion and the current ratio was
2.10:1 at February 28, 1999 compared to 2.07:1 at May 31, 1998.
Cash provided by operations increased $453 million compared to the first
nine months of last year. Working capital changes were the main reason for the
increase, primarily the decrease in inventory levels. Consolidated inventory
levels at February 28, 1999 were 27% lower than last February and 18% lower than
May 31, 1998. In the current year the decrease in inventories was offset by a
decrease in current payables and liabilities due to the slow down in spending
and lower inventory levels.
Additions to property, plant and equipment for the first nine months of
fiscal 1999 were $265.4 million, the largest single component being expenditures
related to the expansion of the Company's U.S. headquarters. In addition,
approx. $47 million has been expended for expansion of retail stores around the
world.
Management believes that significant funds generated by operations,
together with access to sufficient sources of funds, will adequately meet its
anticipated operating, global infrastructure expansion and capital needs.
Significant short and long-term lines of credit are maintained with banks,
which, along with cash on hand, provide adequate operating liquidity. Liquidity
is also provided by the Company's commercial paper program, under which there
was $255.3 million outstanding at February 28, 1999.
Dividends per share of common stock for the third quarter of fiscal 1999
remained at $.12 per share, the same level as the previous year.
As of February 28, 1999, the Company purchased a total of 8.0 million
shares of NIKE's Class B common stock for $318 million in the open market since
the $1 billion share repurchase program was approved in December 1997. During
the first nine months of fiscal 1999, the Company purchased a total of 6.8
million shares for $264 million. Funding has, and is expected to continue to,
come from operating cash flow in conjunction with short-term borrowings. The
timing and the amount of shares purchased will be dictated by working capital
needs and stock market conditions.
Special Note Regarding Forward-Looking Statements
and Reports Analyst Reports
Certain written and oral statements made or incorporated by reference
from time to time by NIKE or its representatives in this report, other
reports, filings with the Securities and Exchange Commission, press releases,
conferences, or otherwise, are "forward-looking statements" within the meaning
of the Private Securities Litigation Reform Act of 1995 ("the Act"). Forward-
looking statements include, without limitation, any statement that may predict,
forecast, indicate, or imply future results, performance, or achievements, and
may contain the words "believe," "anticipate," "expect," "estimate," "project,"
"will be," "will continue," "will result," or words or phrases of similar
meaning. Forward-looking statements involve risks and uncertainties which may
cause actual results to differ materially from the forward-looking statements.
The risks and uncertainties are detailed from time to time in reports filed by
NIKE with the S.E.C., including Forms 8-K, 10-Q, and 10-K, and include, among
others, the following: international, national and local general economic and
market conditions (including the current Asian economic problems); the size and
growth of the overall athletic footwear, apparel, and equipment markets; intense
competition among designers, marketers, distributors and sellers of athletic
footwear, apparel, and equipment for consumers and endorsers; demographic
changes; changes in consumer preferences; popularity of particular designs,
categories of products, and sports; seasonal and geographic demand for NIKE
products; the size, timing and mix of purchases of NIKE's products; fluctuations
and difficulty in forecasting operating results, including, without limitation,
the fact that advance "futures" orders may not be indicative of future revenues
due to the changing mix of futures and at-once orders; the ability of NIKE to
sustain, manage or forecast its growth and inventories; new product development
and introduction; the ability to secure and protect trademarks, patents, and
other intellectual property; performance and reliability of products; customer
service; adverse publicity; the loss of significant customers or suppliers;
dependence on distributors; business disruptions; disruptions due to Year 2000
noncompliance by NIKE, its suppliers or customers (or their suppliers or
customers); increased costs of freight and transportation to meet delivery
deadlines; changes in business strategy or development plans; general risks
associated with doing business outside the United States, including, without
limitation, import duties, tariffs, quotas and political and economic
instability; changes in government regulations; liability and other claims
asserted against NIKE; the ability to attract and retain qualified personnel;
and other factors referenced or incorporated by reference in this report and
other reports.
The risks included here are not exhaustive. Other sections of this
report may include additional factors which could adversely impact NIKE's
business and financial performance. Moreover, NIKE operates in a very
competitive and rapidly changing environment. New risk factors emerge from
time to time and it is not possible for management to predict all such risk
factors, nor can it assess the impact of all such risk factors on NIKE's
business or the extent to which any factor, or combination of factors, may
cause actual results to differ materially from those contained in any forward-
looking statements. Given these risks and uncertainties, investors should not
place undue reliance on forward-looking statements as a prediction of actual
results.
Investors should also be aware that while NIKE does, from time to time,
communicate with securities analysts, it is against NIKE's policy to disclose
to them any material non-public information or other confidential commercial
information. Accordingly, shareholders should not assume that NIKE agrees with
any statement or report issued by any analyst irrespective of the content of
the statement or report. Furthermore, NIKE has a policy against issuing or
confirming financial forecasts or projections issued by others. Thus, to the
extent that reports issued by securities analysts contain any projections,
forecasts or opinions, such reports are not the responsibility of NIKE.
Part II - Other Information
Item 1. Legal Proceedings:
There have been no material changes from the information previously
reported under Item 3 of the Company's Annual Report on Form 10-K for the
fiscal year ended May 31, 1998.
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 28, 1999.
SIGNATURES
Pursuant to the requirements of the Securities Exchange Act of 1934,
the registrant has duly caused this report to be signed on its behalf by
the undersigned thereunto duly authorized.
NIKE, Inc.
An Oregon Corporation
BY:/s/Robert E. Harold
________________________
Robert E. Harold
Interim Chief Financial Officer
DATED: April 14, 1999