<DOCUMENT>
<TYPE>10-Q
<SEQUENCE>1
<FILENAME>f2q0210q.txt
<DESCRIPTION>QUARTER ENDED 11/30/01
<TEXT>
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM 10-Q
FOR QUARTERLY REPORTS UNDER SECTION 13 OR 15 (d) OF
THE SECURITIES AND EXCHANGE ACT OF 1934
For the Quarter Ended November 30, 2001 Commission file number - 1-10635
NIKE, Inc.
(Exact name of registrant as specified in its charter)
OREGON 93-0584541
(State or other jurisdiction of (I.R.S. Employer
incorporation or organization) Identification No.)
One Bowerman Drive, Beaverton, Oregon 97005-6453
(Address of principal executive offices) (Zip Code)
Registrant's telephone number, including area code (503) 671-6453
Indicate by check mark whether the registrant (1) has filed all reports
required to be filed by Section 13 or 15 (d) of the Securities Exchange
Act of 1934 during the preceding 12 months (or for such shorter period
that the registrant was required to file such reports), and (2) has been
subject to such filing requirements for the past 90 days
Yes X No .
___ ___
Common Stock shares outstanding as of November 30, 2001 were:
_______________
Class A 98,621,904
Class B 169,404,495
___________
268,026,399
===========
PART 1 - FINANCIAL INFORMATION
Item 1. Financial Statements
NIKE, Inc.
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CONDENSED CONSOLIDATED BALANCE SHEET
November 30, May 31,
2001 2001
________ _______
(in millions)
ASSETS
Current assets:
Cash and equivalents $ 459.8 $ 304.0
Accounts receivable 1,659.9 1,621.4
Inventories (Note 5) 1,435.8 1,424.1
Deferred income taxes 100.9 113.3
Prepaid expenses and other current assets 242.5 162.5
________ ________
Total current assets 3,898.9 3,625.3
Property, plant and equipment 2,648.8 2,552.8
Less accumulated depreciation 1,021.8 934.0
________ ________
1,627.0 1,618.8
Identifiable intangible assets and goodwill 391.0 397.3
Deferred income taxes and other assets 275.8 178.2
________ ________
$6,192.7 $5,819.6
======== ========
LIABILITIES AND SHAREHOLDERS' EQUITY
Current liabilities:
Current portion of long-term debt $ 55.4 $ 5.4
Notes payable 543.6 855.3
Accounts payable 379.2 432.0
Accrued liabilities 625.5 472.1
Income taxes payable 73.6 21.9
________ ________
Total current liabilities 1,677.3 1,786.7
Long-term debt 624.0 435.9
Deferred income taxes and other liabilities 119.4 102.2
Commitments and contingencies (Note 7) -- --
Redeemable preferred stock 0.3 0.3
Shareholders' equity:
Common stock at stated value:
Class A convertible-98.6 and
99.1 shares outstanding 0.2 0.2
Class B-169.4 and 169.5 shares
outstanding 2.6 2.6
Capital in excess of stated value 472.2 459.4
Unearned stock compensation (8.2) (9.9)
Accumulated other comprehensive income (110.0) (152.1)
Retained earnings 3,414.9 3,194.3
________ ________
Total shareholders' equity 3,771.7 3,494.5
________ ________
$6,192.7 $5,819.6
======== ========
</TABLE>
The accompanying Notes to Condensed Consolidated Financial Statements are
an integral part of this statement.
NIKE, Inc.
CONDENSED CONSOLIDATED STATEMENT OF INCOME
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Three Months Ended Six Months Ended
November 30, November 30,
__________________ _________________
2001 2000 2001 2000
____ ____ ____ ____
(in millions, except per share data)
Revenues $2,336.8 $2,198.7 $4,950.5 $4,835.5
_________ _________ _________ _________
Costs and expenses:
Cost of sales 1,441.4 1,327.3 3,026.2 2,896.6
Selling and administrative 677.7 673.1 1,374.0 1,374.2
Interest 12.3 16.7 25.2 32.1
Other (income) expense, net 6.5 (6.4) 12.0 13.6
_________ _________ _________ _________
2,137.9 2,010.7 4,437.4 4,316.5
_________ _________ _________ _________
Income before income taxes and cumulative
effect of accounting change 198.9 188.0 513.1 519.0
Income taxes 69.6 68.6 179.6 189.4
_________ __________ _________ _________
Income before cumulative effect of
accounting change 129.3 119.4 333.5 329.6
Cumulative effect of accounting change,
net of income taxes - - 5.0 -
_________ __________ _________ _________
Net income $ 129.3 $ 119.4 $ 328.5 $ 329.6
========= ========== ======== =========
Basic earnings per common share (Note 4):
Before accounting change 0.48 0.44 1.24 1.22
Cumulative effect of accounting change - - (0.02) -
_________ __________ ________ _________
$ 0.48 $ 0.44 $ 1.22 $ 1.22
========= ========== ======== =========
Diluted earnings per common share (Note 4):
Before accounting change 0.48 0.44 1.23 1.21
Cumulative effect of accounting change - - (0.02) -
_________ __________ ________ _________
$ 0.48 $ 0.44 $ 1.21 $ 1.21
========= ========= ======== =========
Dividends declared per common share $ 0.12 $ 0.12 $ 0.24 $ 0.24
========= ========= ======== =========
</TABLE>
The accompanying Notes to Condensed Consolidated Financial Statements are
an integral part of this statement.
NIKE, Inc.
CONDENSED CONSOLIDATED STATEMENT OF CASH FLOWS
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<S> <C> <C>
Six Months Ended
November 30,
_________________
2001 2000
____ ____
(in millions)
Cash provided (used) by operations:
Net income $ 328.5 $ 329.6
Income charges (credits) not
affecting cash:
Depreciation 107.0 92.5
Deferred income taxes (6.2) (2.0)
Amortization and other 32.7 14.8
Changes in other working capital
components (4.8) (128.9)
_______ _______
Cash provided by operations 457.2 306.0
_______ _______
Cash provided (used) by investing activities:
Additions to property, plant and
equipment (121.0) (151.3)
Disposals of property, plant and
equipment 7.4 6.0
Increase in other assets (6.1) (6.6)
Increase in other liabilities 3.6 6.4
_______ _______
Cash used by investing activities (116.1) (145.5)
_______ _______
Cash provided (used) by financing activities:
Proceeds from long-term debt issuance 249.3 0.1
Reductions in long-term debt
including current portion (3.4) (50.4)
Decrease in notes payable (311.7) -
Proceeds from exercise of options 10.9 14.9
Repurchase of stock (44.7) (39.0)
Dividends on common stock (64.4) (64.8)
_______ _______
Cash used by financing activities (164.0) (139.2)
_______ _______
Effect of exchange rate changes on cash (21.3) 49.9
Net increase in cash and equivalents 155.8 71.2
Cash and equivalents, May 31, 2001 and 2000 304.0 254.3
_______ _______
Cash and equivalents, November 30, 2001
and 2000 $ 459.8 $ 325.5
======= ========
</TABLE>
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 periods. 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 six (6) months ended November 30, 2001 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 2002 presentation. These changes had no impact on previously reported
results of operations or shareholders' equity.
NOTE 2 - Financial Risk Management and Derivatives:
_________________________________________
In addition to the financial risks discussed in Note 2 to our Condensed
Consolidated Financial Statements in our Form 10-Q for the period ended August
31, 2001, the Company is exposed to the risk of changes in the fair value of
certain fixed-rate debt attributable to changes in interest rates.
As discussed in the previous quarter, in August 2001 the Company issued a
$250 million corporate bond, maturing in August 2006, with a fixed interest
rate of 5.5%. In November 2001 the Company entered into interest rate swap
agreements totaling $250 million and maturing in August 2006, whereby the
Company receives fixed interest payments at 5.5% and pays variable interest
payments based on the London Inter Bank Offering Rate (LIBOR) plus a spread.
LIBOR for the swap agreements resets every three months, beginning in February
2002. At November 30, 2001, the interest rates on the swap agreements were
approximately 3.4%.
The interest rate swap agreements are designated as fair value hedges of
the $250 million corporate bond and meet the shortcut method requirements
under Statement of Financial Accounting Standard No. 133, "Accounting for
Derivative Instruments and Hedging Activities". Accordingly, interest expense
on the corporate bond is recorded based on the variable rates paid under the
interest rate swap agreements, and changes in the fair values of the interest
rate swap agreements exactly offset changes in the fair value of the corporate
bond. The critical terms of the interest rate swap agreements exactly match
the critical terms of the corporate bond. Therefore, the swaps are perfectly
effective.
The fair values of the interest rate swap agreements are classified in
the Company's balance sheet at November 30, 2001 as other long-term
liabilities and totaled a $7.4 million unrealized loss. As noted above, this
unrealized loss is exactly offset by an unrealized gain of $7.4 million on the
corporate bond, which is classified as long-term debt.
NOTE 3 - Comprehensive Income:
____________________
Comprehensive income, net of taxes, is as follows:
<TABLE>
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<S> <C> <C> <C> <C>
Three Months Ended Six Months Ended
November 30, November 30,
__________________ _________________
2001 2000 2001 2000
____ ____ ____ ____
(in millions)
Net Income $129.3 $119.4 $328.5 $329.6
Other Comprehensive Income:
Change in cumulative foreign currency
translation adjustment (24.8) (15.5) (6.7) (28.2)
Change in unrealized gain/loss
in securities - 0.2 - (3.6)
Recognition in net income of previously
deferred unrealized loss on securities,
due to accounting change - - 3.4 -
Changes due to cash flow hedging
instruments:
Initial recognition of net deferred
gain as of June 1, due to accounting
change - - 53.4 -
Net deferred gain 38.1 - 1.8 -
Reclassification to net income of
previously deferred net gains (3.2) - (9.8) -
_______ _______ _______ _______
Net change due to cash flow hedging
Instruments 34.9 - 45.4 -
_______ _______ _______ _______
Total Comprehensive Income $139.4 $104.1 $370.6 $297.8
======= ======= ======= =======
</TABLE>
NOTE 4 - Earnings Per Common Share:
_________________________
The following represents a reconciliation from basic earnings per share
to diluted earnings per share. Options to purchase 7.7 million and 9.7
million shares of common stock were outstanding at November 30, 2001 and
November 30, 2000, 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.
<TABLE>
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<S> <C> <C> <C> <C>
Three Months Ended Six Months Ended
November 30, November 30,
__________________ _________________
2001 2000 2001 2000
____ ____ ____ ____
(in millions, except per share data)
Determination of shares:
Average common shares
outstanding 268.1 269.8 268.3 269.8
Assumed conversion of
dilutive stock options
and awards 3.5 3.4 3.3 3.7
______ ______ ______ ______
Diluted average common
shares outstanding 271.6 273.2 271.6 273.5
====== ======= ====== ======
Basic earnings per common share:
Before cumulative effect of
accounting change 0.48 0.44 1.24 1.22
Cumulative effect of
accounting change - - (0.02) -
_______ _______ _______ _______
$ 0.48 $ 0.44 $ 1.22 $ 1.22
======= ======= ======= =======
Diluted earnings per common share:
Before cumulative effect of
accounting change 0.48 0.44 1.23 1.21
Cumulative effect of
accounting change - - (0.02) -
_______ _______ _______ _______
$ 0.48 $ 0.44 $ 1.21 $ 1.21
======= ======= ======= =======
</TABLE>
NOTE 5 - Inventories:
___________
Inventories by major classification are as follows:
Nov. 30, May 31,
2001 2001
________ ________
(in millions)
Finished goods $1,415.2 $1,399.4
Work-in-progress 12.6 15.1
Raw materials 8.0 9.6
________ ________
$1,435.8 $1,424.1
======== ========
NOTE 6 - Operating Segments:
__________________
The Company's major operating segments are defined by geographic regions
for subsidiaries participating in NIKE brand sales activity. "Other" as shown
below represents activity for Cole-Haan Holdings, Inc., Bauer NIKE
Hockey, Inc., and NIKE IHM, Inc., which are considered immaterial for
individual disclosure. Where applicable, "Corporate" represents items
necessary to reconcile to the consolidated financial statements, which
generally include corporate activity and corporate eliminations. The segments
are evidence of the structure of the Company's internal organization. Each
NIKE brand geographic segment operates predominantly in one industry: the
design, production, marketing and selling of sports and fitness footwear,
apparel, and equipment.
Net revenues as shown below represent sales to external customers for
each segment. Intercompany revenues have been eliminated and are immaterial
for separate disclosure. The Company evaluates performance of individual
operating segments based on management pre-tax income. On a consolidated
basis, this amount represents Income before income taxes and cumulative effect
of accounting change as shown in the Condensed Consolidated Statement of
Income. Reconciling items for management pre-tax income represent corporate
costs that are not allocated to the operating segments for management
reporting and intercompany eliminations for specific income statement items.
Accounts receivable, inventory, and fixed assets for operating segments
are regularly reviewed and therefore provided:
<TABLE>
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<S> <C> <C> <C> <C>
Three Months Ended Six Months Ended
November 30, November 30,
__________________ _________________
2001 2000 2001 2000
____ ____ ____ ____
(in millions)
Net Revenue
USA $1,161.5 $1,131.1 $2,466.5 $2,483.0
EUROPE, MIDDLE EAST, AFRICA 582.9 512.1 1,341.9 1,287.6
ASIA PACIFIC 324.6 292.1 588.3 532.6
AMERICAS 154.3 147.6 314.4 297.7
OTHER 113.5 115.8 239.4 234.6
_________ _________ _________ ________
$2,336.8 $2,198.7 $4,950.5 $4,835.5
========= ========= ======== ========
Management Pre-Tax Income
USA $ 226.8 $ 206.1 $ 504.8 $ 491.9
EUROPE, MIDDLE EAST, AFRICA 55.0 60.6 190.9 201.6
ASIA PACIFIC 78.9 64.8 128.1 101.4
AMERICAS 27.9 30.0 54.8 54.8
OTHER (1.9) 13.7 6.2 30.7
CORPORATE (187.8) (187.2) (371.7) (361.4)
_________ _________ __________ ________
$ 198.9 $ 188.0 $ 513.1 $ 519.0
========= ========= ========== ========
Nov. 30, May 31,
2001 2001
_________ __________
Accounts Receivable, net
USA $ 663.5 $ 622.5
EUROPE, MIDDLE EAST, AFRICA 484.2 512.5
ASIA PACIFIC 177.7 194.8
AMERICAS 181.4 144.7
OTHER 128.2 118.6
CORPORATE 24.9 28.3
_________ _________
$1,659.9 $1,621.4
========= =========
Inventories, net
USA $ 731.2 $ 744.2
EUROPE, MIDDLE EAST, AFRICA 334.5 298.3
ASIA PACIFIC 140.4 125.8
AMERICAS 76.1 72.4
OTHER 133.8 156.4
CORPORATE 19.8 27.0
_________ _________
$1,435.8 $1,424.1
======== =========
Property, Plant and Equipment, net
USA $ 259.2 $ 263.5
EUROPE, MIDDLE EAST, AFRICA 203.7 208.2
ASIA PACIFIC 393.7 403.5
AMERICAS 14.7 15.4
OTHER 109.6 113.4
CORPORATE 646.1 614.8
_________ _________
$1,627.0 $1,618.8
========= =========
</TABLE>
NOTE 7 - Commitments and Contingencies:
_____________________________
At November 30, 2001, the Company had letters of credit outstanding
totaling $883.7 million. These letters of credit were issued for the
purchase of inventory.
There have been no other significant subsequent developments
relating to the commitments and contingencies reported on the
Company's most recent Form 10-K.
Item 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF RESULTS OF OPERATIONS AND
FINANCIAL CONDITION
Operating Results
_________________
Net income for the second quarter of fiscal 2002 was $129.3 million, an
8.3% increase compared to net income reported in the second quarter of fiscal
2001. The increase in net income for the quarter reflected a 5.8% increase in
pre-tax income. The increase in quarterly pre-tax income was driven by a 6.3%
increase in revenues, from $2,198.7 million to $2,336.8 million, as well as
lower selling and administrative expense as a percentage of revenues and lower
interest expense. A decrease in our gross margin percentage from 39.6% to
38.3% and higher other expense partially offset these improvements to pre-tax
income.
Quarterly net income improved at a higher rate than pre-tax income due to
a 1.5 point reduction in our effective tax rate. Quarterly earnings per share
improved 9.1%, from $0.44 to $0.48, a slightly higher rate than net income due
to share repurchases over the past year.
Year-to-date net income in fiscal 2002 (excluding a loss of $5.0 million
related to the cumulative effect of an accounting change) was $333.5 million,
an increase of 1.2% over the same period in fiscal 2001. Slower revenue
growth on a year-to-date basis drove year-to-date net income growth down as
compared to the growth in net income in the second quarter.
Consolidated revenues increased 6.3% for the quarter. Had foreign
exchange rates remained constant, the increase in revenues for the quarter
would have been 7.6%.
Most of our revenue growth occurred in our international regions, which
accounted for 45.4% of total company revenues in the second quarter of fiscal
2002, compared to 43.2% in the second quarter of fiscal 2001. Revenues from
our international regions reported in U.S. dollars increased 11.6%, a 14.6%
increase in constant dollars. In the Europe, Middle East, and Africa (EMEA)
region, quarterly reported revenues increased 13.8%, or 10.6% in constant
dollars. Strong growth in EMEA footwear revenues, which posted a 24.4%
increase in the quarter, drove the result. This increase was due to higher
prices and higher unit sales, as well as a higher-priced product mix as
compared to the second quarter of last year.
In the Asia Pacific region, quarterly reported revenues increased 11.2%
in the second quarter but 22.5% in constant dollars, reflecting significant
Asian currency weakness compared to the U.S. dollar year-over-year. We
achieved revenue growth in all business units in the region during the
quarter, reflecting increasingly strong demand for NIKE brand products.
In the Americas region, reported revenues were up 4.5% in the second
quarter, which represented 12.9% growth in constant dollars. Current
uncertain economic conditions in Argentina may negatively affect revenues in
this region during the remainder of the fiscal year, although we do not expect
that the negative effect will be significant to our consolidated operating
results.
Revenues in the U.S. region were up 2.5% in the second quarter of fiscal
2002. Growth in the U.S. apparel and equipment businesses drove the revenue
increase for the region. U.S. apparel revenues increased 9.9% in the second
quarter, as increased demand for NIKE brand apparel more than offset declines
in licensed apparel sales due to the expiration of our agreement with the
National Football League. Close-out sales of apparel increased during the
quarter due to our decision to manage apparel inventory levels more
aggressively, improving storage efficiency in our warehouses and minimizing
the amount of inventory converted into the new supply chain systems
implemented in December. U.S. equipment revenues grew 14.3% in the second
quarter, driven by growth in sales of golf products as well as bags, socks,
and sports accessories. In addition, a portion of the U.S. revenue increase
reflected early shipments of footwear, apparel, and equipment products prior
to our warehouse shutdown in November, due to the implementation of new U.S.
supply chain systems at the beginning of December.
U.S. NIKE brand footwear revenues decreased 2.2%, reflecting a slight
increase in in-line sales, offset by a drop in close-out sales. These results
represent an improvement over the last quarter, when U.S. footwear sales
decreased 7.0% as compared to the previous year.
Consolidated revenues increased 2.4% for the year-to-date period. Had
foreign exchange rates remained constant, the increase in revenues for the
year-to-date period would have been 5.1%. Year-to-date revenue growth was not
as strong as the second quarter revenue growth primarily due to the drop in
sales of U.S. footwear in the first quarter of this year compared to the first
quarter of last year.
The uncertain economic conditions following the terrorist attacks of
September 11, 2001 negatively affected U.S. NIKE brand revenues in the second
quarter, particularly at NIKE-owned retail stores and wholesale sales of
equipment. (Our apparel and footwear wholesale businesses were not affected
as severely because a large portion of their second quarter revenues derived
from orders placed several months in advance, prior to the September 11
attacks.) In addition, revenues from our Cole Haan business were also
negatively affected, most significantly at company-owned retail stores.
Although significant uncertainty continues to exist with respect to the future
prospects for the U.S. and world economies, we continue to expect earnings
growth for the full fiscal year.
The breakdown of revenues follows. "Other" as shown below includes
revenues from our subsidiaries Bauer NIKE Hockey, Inc. and Cole-Haan Holdings,
Inc.
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<S> <C> <C> <C> <C> <C> <C>
Three Months Ended Six Months Ended
November 30, November 30,
___________________ _________________
% %
2001 2000 change 2001 2000 change
______ ______ _______ ______ ______ _______
(in millions)
U.S.A. REGION
FOOTWEAR $689.6 $705.0 -2% $1,559.3 $1,640.0 -5%
APPAREL 381.0 346.6 10% 705.2 672.5 5%
EQUIPMENT AND OTHER 90.9 79.5 14% 202.0 170.5 18%
_______ _______ ________ ________
TOTAL U.S.A. 1,161.5 1,131.1 3% 2,466.5 2,483.0 -1%
EMEA REGION
FOOTWEAR 315.2 253.3 24% 741.8 677.2 10%
APPAREL 228.9 218.0 5% 504.7 514.7 -2%
EQUIPMENT AND OTHER 38.8 40.8 -5% 95.4 95.7 0%
_______ _______ ________ ________
TOTAL EMEA 582.9 512.1 14% 1,341.9 1,287.6 4%
ASIA PACIFIC REGION
FOOTWEAR 164.4 153.3 7% 331.5 305.3 9%
APPAREL 131.0 115.9 13% 201.0 180.6 11%
EQUIPMENT AND OTHER 29.2 22.9 28% 55.8 46.7 19%
_______ _______ ________ ________
TOTAL ASIA PACIFIC 324.6 292.1 11% 588.3 532.6 10%
AMERICAS REGION
FOOTWEAR 100.1 100.8 -1% 199.2 202.3 -2%
APPAREL 45.6 40.0 14% 95.3 82.2 16%
EQUIPMENT AND OTHER 8.6 6.8 26% 19.9 13.2 51%
_______ _______ ________ ________
TOTAL AMERICAS 154.3 147.6 5% 314.4 297.7 6%
_______ _______ ________ ________
TOTAL NIKE BRAND 2,223.3 2,082.9 7% 4,711.1 4,600.9 2%
OTHER 113.5 115.8 -2% 239.4 234.6 2%
_______ _______ ________ ________
TOTAL REVENUES $2,336.8 $2,198.7 6% $4,950.5 $4,835.5 2%
======== ======== ======== ========
</TABLE
Our quarterly gross margin percentage declined 1.2 points, from 39.6% to
38.3%. The primary drivers of the decrease are discussed following:
1) Weaker foreign currencies compared to the same period last year
negatively affected margins internationally, particularly in our EMEA
region.
2) The weaker economy following the September 11 attacks had a
significant impact on Cole Haan margins, which decreased due to
additional discounting, inventory obsolescence, and returns.
3) U.S. apparel close-out sales increased versus the prior year, and
pricing margins on these close-outs were lower. These results
were due to our decision to manage inventory levels more aggressively
in advance of our December supply chain system implementation.
4) The start-up of new NIKE-owned distribution facilities in Japan
lowered margins in Asia Pacific.
These negative impacts to our gross margin percentage were partially offset by
higher prices and a more favorable product mix attained on EMEA footwear and
apparel sales, as well as lower product costs on apparel in the U.S. and EMEA
regions due to improved factory sourcing.
Our year-to-date gross margin percentage also declined 1.2 points, from
40.1% to 38.9%. In addition to the second quarter factors discussed above,
margins on U.S. team apparel sales were lower in the first quarter of fiscal
2002 as compared to the same period last year.
Selling and administrative expense was $677.7 million in the second
quarter of fiscal 2002 versus $673.1 million in the second quarter of fiscal
2001. Year-to-date, selling and administrative expense was $1,374.0 million
in the current fiscal year versus $1,374.2 million in the prior fiscal year.
As a percentage of revenues, selling and administrative expense decreased 1.6
points and 0.6 points for the quarter and year-to-date period, respectively.
Lower demand creation spending drove the decrease in selling and
administrative expense as a percentage of revenues for both the quarter and
year-to-date period. Demand creation spending in the quarter was $235.3
million versus $248.4 million in the prior year, and year-to-date demand
creation spending was $492.6 million versus $532.7 million during the same
period last year. The most significant driver of the decrease between years
is the significant expense we incurred in the prior year related to the 2000
Summer Olympics and the 2000 European Football Championships. Partially
offsetting the decrease to demand creation expense was spending on brand
marketing initiatives in EMEA focused on soccer and on apparel. We expect
demand creation spending will increase for the full fiscal year 2002 versus
fiscal year 2001, with the spending focused in the second half of the year.
Lower demand creation spending during the second quarter and year-to-date
period was also offset by increased operational overhead. Of the various
factors driving operational overhead higher, the most significant was
increased headcount in EMEA as compared to the same period last year. The
increased headcount supports the on-going growth of our business in this
region and also reflects the conversion of certain Eastern European markets
from independent distributorships to direct NIKE ownership over the past year.
Second quarter interest expense decreased from $16.7 million to $12.3
million, a decline of 26.3%. Year-to-date interest expense decreased from
$32.1 million to $25.2 million, a decline of 21.5%. The decrease reflected
lower interest rates in the current year and lower average debt levels as we
have used operating free cash flow to reduce debt.
Other income/expense was net expense of $6.5 million compared to net
income for the same quarter of last year of $6.4 million. Year-to-date, other
income/expense was a net expense of $12.0 million compared to a net expense
$13.6 million in the prior year. Significant amounts included in other
income/expense were interest income, profit sharing expense, goodwill
amortization, and certain foreign currency gains and losses.
Our effective tax rate for the quarter and year-to-date period was 35.0%,
compared to 36.5% for the quarter and year-to-date period in the prior year.
The drop in the rate was primarily due to lower taxes on a portion of foreign
earnings that have been permanently reinvested offshore.
Futures Orders
Worldwide futures and advance orders for NIKE brand athletic footwear and
apparel scheduled for delivery from December 2001 through April 2002 were 8%
higher than such orders booked in the comparable period of fiscal 2001. The
percentage growth in these orders is not necessarily indicative of our
expectation of revenue growth in subsequent periods. 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
can cause differences in the comparisons between future orders and actual
revenues. Finally, a significant portion of our revenue is not derived from
futures orders, including wholesale sales of equipment, U.S. licensed team
apparel, Bauer NIKE Hockey, and Cole Haan, and retail sales across all brands.
For the period from December 2001 through April 2002, we expect several
factors may reduce actual revenue growth below the level of futures order
growth:
- We shut down our U.S. distribution facilities at the end of November
to prepare for implementation of our new supply chain systems in early
December. To ensure December orders would be delivered to our
customers on time, we shipped some December futures orders in
November.
- In the uncertain economic environment following September 11, 2001, we
reduced our factory orders for product to be delivered during this
period in order to minimize the risk of excess inventory.
- As in the second quarter, we expect lower footwear close-out sales and
other at-once order sales in the U.S. as compared to the prior year,
reflecting our recent efforts to limit the availability of these
footwear products in the marketplace.
Euro Conversion
On January 1, 1999, eleven of the fifteen member countries of the
European Union established permanent, fixed conversion rates between their
existing currencies and the European Union's new common currency, the euro. In
January 2001, an additional country, Greece, also established a fixed
conversion rate to the euro. During the transition period that ended December
31, 2001, public and private parties were able to pay for goods and services
using either the euro or the participating country's legacy currency. On
January 1, 2002, euro denominated bills and coins were issued and began
circulating. Most participating countries plan to withdraw legacy currencies
from circulation by February 28, 2002.
We have made modifications to information technology systems supporting
marketing, order management, purchasing, invoicing, payroll, financial
reporting, and cash management functions, in order to make them euro
compliant. In addition, our sales and retail systems have been modified where
appropriate. All major systems have been converted and are euro compliant.
We believe the introduction of the euro may create a move towards a
greater level of wholesale price harmonization, although differing country
costs and value added tax rates will continue to result in price differences
at the retail level. Over the past four years, we have been actively working
to assess and, where necessary, adjust pricing practices to operate
effectively in this new environment.
The costs of adapting our systems and practices to the implementation of
the euro were generally related to the modification of existing systems and
totaled approximately $8 million. These costs were expensed as incurred,
primarily in fiscal 2000. We believe that the conversion to the euro will not
have a material impact on our financial condition or results of operations.
Recently Issued Accounting Standards
In July 2001, the Financial Accounting Standards Board issued Statement
of Financial Accounting Standard No. 141, "Business Combinations" (FAS 141)
and Statement of Financial Accounting Standard No. 142, "Goodwill and Other
Intangible Assets" (FAS 142). FAS 141 requires the purchase method of
accounting to be used for all business combinations initiated after June 30,
2001. FAS 141 also specifies criteria that intangible assets acquired must
meet to be recognized and reported separately from goodwill. The adoption of
FAS 141 will not have any material effect on our results of operations or
financial position.
FAS 142 requires that goodwill and intangible assets with indefinite
lives no longer be amortized but instead be measured for impairment at least
annually, or when events indicate that an impairment exists. Our adoption date
will be June 1, 2002. As of that date, amortization of goodwill and other
indefinite-lived intangible assets, including those recorded in past business
combinations, will cease. As a result of the elimination of this
amortization, other expense will decrease by approximately $13 million
annually.
As required by FAS 142, we will perform impairment tests on goodwill and
other indefinite-lived intangible assets as of the adoption date. Thereafter,
we will perform impairment tests annually and whenever events or circumstances
indicate that the value of goodwill or other indefinite-lived intangible
assets might be impaired. In connection with the FAS 142 transitional
goodwill impairment test, we will utilize the required two-step method for
determining goodwill impairment as of the adoption date. To accomplish this,
we will identify our reporting units and determine the carrying value of each
reporting unit by assigning the assets and liabilities, including the existing
goodwill and intangible assets, to those reporting units as of the adoption
date. We will then have up to six months from the adoption date to determine
the fair value of each reporting unit and compare it to the carrying amount of
the reporting unit. To the extent the carrying amount of a reporting unit
exceeds the fair value of the reporting unit, we then will perform the second
step of the transitional impairment test. If necessary, in the second step,
we will compare the implied fair value of the reporting unit goodwill with the
carrying amount of the reporting unit goodwill, both of which would be
measured as of the adoption date. The implied fair value of goodwill will be
determined by allocating the fair value of the reporting unit to all of the
assets (recognized and unrecognized) and liabilities of the reporting unit in
a manner similar to a purchase price allocation, in accordance with FAS 141.
The residual fair value after this allocation will be the implied fair value
of the reporting unit goodwill. We will record a transitional impairment loss
for the excess of the carrying value of goodwill allocated to the reporting
unit over the implied fair value. FAS 142 requires that this second step be
completed as soon as possible, but no later than the end of the year of
adoption.
In connection with the FAS 142 indefinite-lived intangible asset
impairment test, we will utilize the required one-step method to determine
whether an impairment exists as of the adoption date. The test will consist
of a comparison of the fair values of indefinite-lived intangible assets with
the carrying amounts. If the carrying amount of an indefinite-lived
intangible asset exceeds its fair value, we will recognize an impairment loss
in an amount equal to that excess.
We have not yet determined the impact of FAS 142's impairment test
provisions on our results of operations and financial position; however, the
possibility exists that we will incur a significant transitional impairment
loss. Any transitional impairment loss will be recognized as the cumulative
effect of a change in accounting principle in our income statement during the
quarter ending August 31, 2002.
Liquidity and Capital Resources
Cash provided by operations was $457.2 million in the first six months of
fiscal 2002, which compared to $306.0 million in the first six months of
fiscal 2001. Our primary source of operating cash flow was net income of
$328.5 million. Operating cash flow in the current period exceeded that from
the same period last year as a smaller increase in working capital used less
cash.
Total cash used by investing activities during the first half of fiscal
2002 was $116.1 million, compared to $145.5 million invested during the first
half of fiscal 2001. The decrease reflected lower capital spending on our
campus expansion, which we have completed, and on our new distribution
facilities in Japan, which began operating in April 2001. The most significant
capital expenditures during the six-month period of fiscal 2002 were related to
computer equipment and software, driven by our supply chain initiative. In
addition, we continued to invest in new NIKE-owned retail stores.
Net cash used by financing activities in the first half of fiscal 2002
was $164.0 million, up from $139.2 million in the first quarter of the prior
year. This amount included uses of cash for dividends to shareholders, a net
reduction of short-term debt, and share repurchases. These uses of cash were
partially offset by proceeds from the exercise of employee stock options.
The share repurchases were part of a $1 billion share repurchase program
that began in fiscal 2001, after completion of a four-year, $1 billion program
in fiscal 2000. In the second quarter of fiscal 2002, we purchased a total of
525,000 shares of NIKE's Class B common stock for $24.7 million. We expect to
fund the current program from operating free cash flow. The timing and the
amount of shares purchased will be dictated by our capital needs and stock
market conditions.
On October 10, 2001, we filed a debt registration statement with the
Securities and Exchange Commission for $1 billion. We had $250 million
remaining under our shelf registration statement filed in April 1999, which
was incorporated into the new $1 billion registration. This registration
statement is not yet effective, and we have not issued any debt under the
registration statement.
As discussed in the previous quarter, in August 2001 we issued a $250
million corporate bond, maturing in August 2006, with a fixed interest rate of
5.5%. In November 2001 we entered into interest rate swap agreements totaling
$250 million and maturing in August 2006, whereby we receive fixed interest
payments at 5.5% and pay variable interest payments based on the London Inter
Bank Offering Rate (LIBOR) plus a spread. LIBOR for the swap agreements
resets every three months, beginning in February 2002. At November 30, 2001,
the interest rates on these swap agreements were approximately 3.4%.
On November 16, 2001, we renewed our 364-day committed credit facility
with a group of 20 banks. The facility is a revolver due 364 days from the
renewal date. We reduced the amount of the facility from $750.0 million to
$600.0 million upon renewal. We currently do not have any outstanding
borrowings under this facility or under our four-year $500.0 million revolver.
Under the renewed facility, the interest rate, facility fees, and minimum
specified financial ratios with which we must be in compliance have not
changed from those disclosed in our Form 10-K for the year ended May 31, 2001.
We currently believe that cash generated by operations, together with
access to external sources of funds, will be sufficient to meet our operating
and capital needs. Significant short and long-term lines of credit are
maintained with banks, which, along with cash on hand, provide adequate
operating liquidity. Liquidity is also provided by our commercial paper
program, under which there was $432.6 million and $710.0 million outstanding
at November 30, 2001 and May 31, 2001, respectively.
At November 30, 2001, letters of credit of $883.7 million were
outstanding for the purchase of inventories.
Dividends per share of common stock for the second quarter of fiscal 2002
remained at $.12 per share, the same level as the previous year.
Item 3. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK
Please see Note 2 to the Condensed Consolidated Financial Statements for
a discussion of a change to our disclosure about market risk made in the
Annual Report on Form 10-K for the fiscal year ended May 31, 2001. There were
no other material changes to this matter.
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 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, 2001.
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 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 November 17, 2000 among NIKE, Inc., Bank
of America, N.A., individually and as Agent, and the other banks party
thereto (incorporated by reference from Exhibit 10.1 to the Company's
Quarterly Report on Form 10-Q for the fiscal quarter ended November
30, 2000).
10.2 First Amendment to Credit Agreement dated as of November 16, 2001
(see Exhibit 10.1).
10.3 Form of non-employee director Stock Option Agreement (incorporated
by reference from Exhibit 10.2 to the Company's Quarterly Report on
Form 10-Q for the fiscal quarter ended November 30, 2000).*
10.4 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).
10.5 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 18, 2000).*
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, 2000).*
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 the
fiscal year ended May 31, 1994).*
10.9 Covenant Not To Compete And Non-Disclosure Agreement between NIKE,
Inc. and Thomas E. Clarke dated August 31, 1994 (incorporated
by reference from Exhibit 10.8 to the Company's Quarterly Report on
Form 10-Q for the fiscal quarter ended August 31, 2001).*
10.10 Covenant Not To Compete And Non-Disclosure Agreement between NIKE,
Inc. and Mark G. Parker dated October 6, 1994 (incorporated
by reference from Exhibit 10.9 to the Company's Quarterly Report on
Form 10-Q for the fiscal quarter ended August 31, 2001).*
10.11 NIKE, Inc. Deferred Compensation Plan dated January 1, 2000
(incorporated by reference from Exhibit 10.10 to the Company's
Quarterly Report on Form 10-Q for the fiscal quarter ended August 31,
2001).*
12.1 Computation of Ratio of Earnings to Fixed Charges.
* Management contract or compensatory plan or arrangement.
(b) Reports on Form 8-K:
Reports on Form 8-K filed during the second quarter ended November 30, 2001:
September 13, 2001: Item 5. Other Events. Rescheduling of First Quarter
Earnings Release and Annual Meeting of Shareholders.
SIGNATURES
Pursuant to the requirements of the Securities Exchange Act of 1934,
the registrant has duly caused this report to be signed on its behalf by
the undersigned thereunto duly authorized.
NIKE, Inc.
An Oregon Corporation
BY:/s/ Donald W. Blair
________________________
Donald W. Blair
Chief Financial Officer
DATED: January 14, 2002
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