UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM 10-Q
FOR QUARTERLY REPORTS UNDER SECTION 13 OR 15(d) OF
THE SECURITIES AND EXCHANGE ACT OF 1934
For the Quarter Ended February 29, 2008
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 .
___ ___
Indicate by check mark whether the registrant is a large accelerated filer, an
accelerated filer, a non-accelerated filer, or a smaller reporting company.
See the definitions of "large accelerated filer," "accelerated filer" and
"smaller reporting company" in rule 12b-2 of the Exchange Act.
Large accelerated filer X Accelerated filer
___ ___
Non-accelerated filer Smaller Reporting Company
___ ___
Indicate by check mark whether the registrant is a shell company (as defined
in Rule 12b-2 of the Exchange Act). Yes No X .
___ ___
Common Stock shares outstanding as of February 29, 2008 were:
_______________
Class A 105,006,644
Class B 387,703,487
_______________
492,710,131
===============
PART 1 - FINANCIAL INFORMATION
Item 1. FINANCIAL STATEMENTS
NIKE, Inc.
UNAUDITED CONDENSED CONSOLIDATED BALANCE SHEETS
February 29, May 31,
2008 2007
________ ________
(in millions)
ASSETS
Current assets:
Cash and equivalents $2,242.4 $1,856.7
Short-term investments 684.2 990.3
Accounts receivable, net 2,775.5 2,494.7
Inventories (Note 2) 2,390.9 2,121.9
Deferred income taxes 245.0 219.7
Prepaid expenses and other current assets 566.7 393.2
_________ ________
Total current assets 8,904.7 8,076.5
Property, plant and equipment 4,009.7 3,619.1
Less accumulated depreciation 2,189.7 1,940.8
_________ ________
Property, plant and equipment, net 1,820.0 1,678.3
Identifiable intangible assets, net (Note 3) 384.4 409.9
Goodwill (Note 3) 130.8 130.8
Deferred income taxes and other assets 548.3 392.8
_________ ________
Total assets $11,788.2 $10,688.3
========= ========
LIABILITIES AND SHAREHOLDERS' EQUITY
Current liabilities:
Current portion of long-term debt $ 6.3 $ 30.5
Notes payable 205.6 100.8
Accounts payable 1,004.7 1,040.3
Accrued liabilities (Note 4) 1,630.2 1,303.4
Income taxes payable 96.4 109.0
_________ ________
Total current liabilities 2,943.2 2,584.0
Long-term debt 446.7 409.9
Deferred income taxes and other liabilities 784.8 668.7
Commitments and contingencies (Note 10) -- --
Redeemable preferred stock 0.3 0.3
Shareholders' equity:
Common stock at stated value:
Class A convertible-105.0 and
117.6 million shares outstanding 0.1 0.1
Class B-387.7 and 384.1 million shares
outstanding 2.7 2.7
Capital in excess of stated value 2,350.7 1,960.0
Accumulated other comprehensive income (Note 6) 277.0 177.4
Retained earnings 4,982.7 4,885.2
_________ ________
Total shareholders' equity 7,613.2 7,025.4
_________ ________
Total liabilities and shareholders' equity $11,788.2 $10,688.3
========= ========
The accompanying Notes to Unaudited Condensed Consolidated Financial
Statements are an integral part of this statement.
NIKE, Inc.
UNAUDITED CONDENSED CONSOLIDATED STATEMENTS OF INCOME
Three Months Ended Nine Months Ended
February 29 and 28, February 29 and 28,
____________________ ___________________
2008 2007 2008 2007
____ ____ ____ ____
(in millions, except per share data)
Revenues $4,544.4 $3,926.9 $13,539.0 $11,942.7
Cost of sales 2,496.5 2,191.7 7,483.0 6,701.2
_________ _________ __________ _________
Gross margin 2,047.9 1,735.2 6,056.0 5,241.5
Selling and administrative expense 1,403.2 1,243.3 4,267.4 3,756.7
Interest income, net 18.7 15.8 66.4 43.0
Other income (expense), net 5.3 10.3 (0.4) 13.3
_________ _________ _________ _________
Income before income taxes 668.7 518.0 1,854.6 1,541.1
Income taxes (Note 5) 204.9 167.2 461.7 487.5
_________ _________ _________ _________
Net income $ 463.8 $ 350.8 $1,392.9 $1,053.6
========= ========= ========= =========
Basic earnings per common share (Note 8) $ 0.94 $ 0.69 $ 2.80 $ 2.09
========= ========= ========= =========
Diluted earnings per common share (Note 8) $ 0.92 $ 0.68 $ 2.76 $ 2.07
========= ========= ========= =========
Dividends declared per common share $ 0.23 $ 0.185 $ 0.645 $ 0.525
========= ========= ========= =========
The accompanying Notes to Unaudited Condensed Consolidated Financial Statements
are an integral part of this statement.
NIKE, Inc.
UNAUDITED CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS
Nine Months Ended
February 29 and 28,
_____________________
2008 2007
____ ____
(in millions)
Cash provided (used) by operations:
Net income $1,392.9 $1,053.6
Income charges (credits) not affecting cash:
Depreciation 224.0 199.2
Deferred income taxes (104.1) 61.1
Stock-based compensation (Note 7) 115.6 119.1
Gain on divestiture (Note 11) (28.6) --
Amortization and other 24.9 (10.0)
Changes in certain working capital components and other
assets and liabilities:
Increase in accounts receivable (133.8) (102.7)
Increase in inventories (183.9) (108.8)
Increase in prepaid expenses
and other assets (30.1) (139.6)
Increase (decrease) in accounts payable, accrued
liabilities and income taxes payable 26.9 (157.1)
_________ ________
Cash provided by operations 1,303.8 914.8
_________ ________
Cash provided (used) by investing activities:
Purchases of investments (1,248.8) (1,193.7)
Maturities of investments 1,575.0 2,170.2
Additions to property, plant and
equipment (292.3) (217.1)
Proceeds from the sale of property, plant and
equipment 0.8 27.8
Increase in other assets and liabilities, net (10.1) (9.2)
Acquisition of shares of Umbro Plc (Note 11) (112.0) --
Proceeds from divestiture (Note 11) 60.0 --
_________ ________
Cash (used) provided by investing activities (27.4) 778.0
_________ ________
Cash provided (used) by financing activities:
Proceeds from issuance of long-term debt -- 41.8
Reductions in long-term debt,
including current portion (29.5) (254.2)
Increase in notes payable 90.6 49.0
Proceeds from exercise of stock options and
other stock issuances 246.3 275.2
Excess tax benefits from share-based payment
arrangements 37.0 48.3
Repurchase of common stock (951.5) (704.6)
Dividends on common stock (299.5) (250.2)
_________ ________
Cash used by financing activities (906.6) (794.7)
_________ ________
Effect of exchange rate changes on cash 15.9 26.9
_________ ________
Net increase in cash and equivalents 385.7 925.0
Cash and equivalents, beginning of period 1,856.7 954.2
_________ ________
Cash and equivalents, end of period $2,242.4 $1,879.2
========= =========
The accompanying Notes to Unaudited Condensed Consolidated Financial
Statements are an integral part of this statement.
NIKE, Inc.
NOTES TO UNAUDITED CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
NOTE 1 - Summary of Significant Accounting Policies:
__________________________________________
Basis of presentation:
The accompanying unaudited condensed consolidated financial statements
reflect all adjustments (consisting of normal recurring accruals) which
are, in the opinion of management, necessary for a fair statement of
the results of operations for the interim period. The year-end condensed
consolidated balance sheet data as of May 31, 2007 was derived from audited
financial statements, but does not include all disclosures required by
accounting principles generally accepted in the United States of America. 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 nine months ended February 29, 2008 are not necessarily
indicative of results to be expected for the entire year.
Recently Adopted Accounting Standards:
In June 2006, the Financial Accounting Standards Board ("FASB") issued
FASB Interpretation No. 48, "Accounting for Uncertainty in Income Taxes" ("FIN
48"). FIN 48 clarifies the accounting for uncertainty in income taxes
recognized in the Company's financial statements in accordance with FASB
Statement No. 109, "Accounting for Income Taxes." The Company adopted the
provisions of FIN 48 on June 1, 2007. See Note 5 for further discussion.
In June 2006, the FASB ratified the consensus reached on Emerging Issues
Task Force ("EITF") Issue No. 06-2, "Accounting for Sabbatical Leave and Other
Similar Benefits Pursuant to FASB Statement No. 43" ("EITF 06-2"). EITF 06-2
clarifies recognition guidance on the accrual of employees' rights to
compensated absences under a sabbatical or other similar benefit arrangement.
The adoption of EITF 06-2 on June 1, 2007 did not have a material impact on
the Company's consolidated financial position, results of operations or cash
flows.
Recently Issued Accounting Standards:
In September 2006, the FASB issued Statement of Financial Accounting
Standard ("SFAS") No. 157, "Fair Value Measurements" ("FAS 157"). FAS 157
defines fair value, establishes a framework for measuring fair value in
accordance with generally accepted accounting principles, and expands
disclosures about fair value measurements. The provisions of FAS 157 for
financial assets and liabilities are effective for the fiscal year beginning
June 1, 2008 and the provisions of FAS 157 for non financial assets and
liabilities are effective for the fiscal year beginning June 1, 2009. The
Company is currently evaluating the impact of the provisions for non financial
assets and liabilities. The Company has evaluated the provisions of FAS 157
for financial assets and liabilities and does not expect that the adoption
will have a material impact on the Company's consolidated financial position
or results of operations.
In February 2007, the FASB issued SFAS No. 159, "The Fair Value Option
for Financial Assets and Financial Liabilities including an Amendment of FASB
Statement No. 115" ("FAS 159"). FAS 159 permits entities to choose to measure
many financial instruments and certain other items at fair value. The
provisions of FAS 159 are effective for the fiscal year beginning June 1,
2008. The Company has evaluated the impact of the provisions of FAS 159 and
does not expect that the adoption will have a material impact on the Company's
consolidated financial position or results of operations.
In December 2007, the FASB issued SFAS No. 141 (revised 2007), "Business
Combinations" ("FAS 141(R)") and SFAS No. 160, "Noncontrolling Interests in
Consolidated Financial Statements" ("FAS 160"). These standards aim to
improve, simplify, and converge internationally the accounting for business
combinations and the reporting of noncontrolling interests in consolidated
financial statements. The provisions of FAS 141(R) and FAS 160 are effective
for the fiscal year beginning June 1, 2009. The Company is currently
evaluating the impact of the provisions of FAS 141(R) and FAS 160.
In March 2008, the FASB issued SFAS No. 161, "Disclosures about
Derivative Instruments and Hedging Activities" ("FAS 161"). FAS 161 is
intended to improve financial reporting about derivative instruments and
hedging activities by requiring enhanced disclosures to enable investors to
better understand their effects on an entity's financial position, financial
performance, and cash flows. The provisions of FAS 161 are effective for the
quarter ending February 28, 2009. The Company is currently evaluating the
impact of the provisions of FAS 161.
NOTE 2 - Inventories:
___________
Inventory balances of $2,390.9 million and $2,121.9 million at February
29, 2008 and May 31, 2007, respectively, were substantially all finished
goods.
NOTE 3 - Identifiable Intangible Assets and Goodwill:
___________________________________________
The following table summarizes the Company's identifiable intangible
assets and goodwill balances as of February 29, 2008 and May 31, 2007:
February 29, 2008 May 31, 2007
______________________ ______________________
Gross Net Gross Net
Carrying Accumulated Carrying Carrying Accumulated Carrying
Amount Amortization Amount Amount Amortization Amount
________ ____________ ________ ________ ____________ ________
(in millions)
Amortized intangible assets:
Patents $ 48.9 $ (14.9) $ 34.0 $ 44.1 $ (12.3) $ 31.8
Trademarks 14.1 (8.3) 5.8 49.8 (17.5) 32.3
Other 21.7 (18.6) 3.1 21.6 (17.3) 4.3
________ ________ ________ ________ ________ ________
Total $ 84.7 $ (41.8) $ 42.9 $ 115.5 $ (47.1) $ 68.4
======== ======== ======== ========
Unamortized intangible assets - Trademarks $ 341.5 $ 341.5
________ ________
Identifiable intangible assets, net $ 384.4 $ 409.9
======== ========
Goodwill $ 130.8 $ 130.8
======== ========
Amortization expense, which is included in selling and administrative
expense, was $1.8 million and $2.5 million for the three-month periods ended
February 29, 2008 and February 28, 2007, respectively, and $6.8 million and
$7.4 million for the nine-month periods ended February 29, 2008 and February
28, 2007, respectively. The estimated amortization expense for intangible
assets subject to amortization for each of the years ending May 31, 2008
through May 31, 2012 are as follows: 2008: $8.3 million; 2009: $6.0 million;
2010: $5.6 million; 2011: $5.1 million; 2012: $4.4 million.
NOTE 4 ? Accrued Liabilities:
___________________
Accrued liabilities include the following:
February 29, 2008 May 31, 2007
_______________ ____________
(in millions)
Compensation and benefits, excluding taxes $443.0 $451.6
Fair value of derivatives 242.0 90.5
Taxes other than income taxes 177.2 133.4
Endorser compensation 163.5 139.9
Dividends payable 113.3 92.9
Advertising and marketing 110.1 70.6
Import and logistics costs 76.4 81.4
Other1 304.7 243.1
_________ _________
$1,630.2 $1,303.4
========= =========
1 Other consists of various accrued expenses and no individual item accounted
for more than $50 million of the balance at February 29, 2008 and May 31,
2007.
NOTE 5 ? Income Taxes:
____________
The effective tax rate for the nine months ended February 29, 2008 was
24.9%.? Over the last few years, several international entities generated
losses for which the Company did not recognize offsetting tax benefits because
the realization of those benefits was uncertain.? The necessary steps to
realize these benefits have now been taken resulting in a one-time reduction
of the effective tax rate for the nine months ended February 29, 2008 of 5.7
percentage points.? Also reflected in the effective tax rate for the nine
months ended February 29, 2008 is a reduction in our on-going effective tax
rate resulting from our operations outside of the United States; our tax rates
on these operations are generally lower than the U.S. statutory rate.
The Company adopted FIN 48 effective June 1, 2007. Upon adoption, the
Company recognized an additional long-term liability of $89.4 million for
unrecognized tax benefits, $15.6 million of which was recorded as a reduction
to the Company's beginning retained earnings, and the remaining $73.8 million
was recorded as a reduction to the Company's noncurrent deferred tax
liability. In addition, the Company reclassified $12.2 million of unrecognized
tax benefits from income taxes payable to other long term liabilities in
conjunction with the adoption of FIN 48.
At the adoption date of June 1, 2007, the Company had $122.5 million of
gross unrecognized tax benefits, excluding related interest and penalties,
$35.0 million of which would affect the Company's effective tax rate if
recognized in future periods. Including related interest and penalties and net
of federal benefit of interest and unrecognized state tax benefits, at June 1,
2007, the Company had $135.0 million of total unrecognized tax benefits, $52.0
million of which would affect the Company?s effective tax rate if recognized
in future periods. During the nine months ended February 29, 2008, the gross
unrecognized tax benefits increased $61.6 million, primarily related to tax
positions taken during the current and prior fiscal years.? As of February 29,
2008 the gross unrecognized tax benefits were $184.1 million. The Company
does not anticipate that total unrecognized tax benefits will change
significantly within the next 12 months.
The Company is subject to taxation primarily in the United States, China
and the Netherlands as well as various state and other foreign jurisdictions.
The Company has concluded substantially all U.S. federal income tax matters
through fiscal year 2004. The Company is currently under audit by the Internal
Revenue Service for the 2005 and 2006 tax years. The Company's major foreign
jurisdictions, China and the Netherlands, have concluded substantially all
income tax matters through calendar year 1996 and fiscal year 2001,
respectively.
The Company recognizes interest and penalties related to income tax
matters in income tax expense. Upon adoption at June 1, 2007, the Company had
$32.0 million (excluding federal benefit) accrued for interest and penalties
related to uncertain tax positions. The liability for payment of interest and
penalties increased $22.9 million during the nine months ended February 29,
2008. As of February 29, 2008, accrued interest and penalties related to
uncertain tax positions was $54.9 million (excluding federal benefit).
NOTE 6 - Comprehensive Income:
____________________
Comprehensive income, net of taxes, is as follows:
Three Months Ended Nine Months Ended
February 29 and 28, February 29 and 28,
_____________________ __________________
2008 2007 2008 2007
____ ____ ____ ____
(in millions)
Net income $463.8 $350.8 $1,392.9 $1,053.6
Other comprehensive income:
Change in cumulative translation
adjustment and other 26.9 3.0 164.6 42.0
Changes due to cash flow hedging
instruments:
Net gain (loss) on hedge derivatives 3.3 (8.1) (110.4) (27.1)
Reclassification to net income of
previously deferred losses
related to hedge derivative instruments 17.8 8.5 45.4 9.5
_______ _______ _________ _________
Other comprehensive income 48.0 3.4 99.6 24.4
_______ _______ _________ _________
Total comprehensive income $511.8 $354.2 $1,492.5 $1,078.0
======= ======= ========= =========
NOTE 7 - Stock-Based Compensation
________________________
A committee of the Board of Directors grants stock options and restricted
stock under the NIKE, Inc. 1990 Stock Incentive Plan (the "1990 Plan"). The
committee has granted substantially all stock options at 100% of the market
price on the date of grant. Substantially all stock option grants outstanding
under the 1990 Plan were granted in the first quarter of each fiscal year,
vest ratably over four years, and expire 10 years from the date of grant. In
addition to the 1990 Plan, the Company gives employees the right to purchase
shares at a discount to the market price under employee stock purchase plans
("ESPPs").
The Company accounts for stock-based compensation in accordance with SFAS
No. 123R "Share-Based Payment" ("FAS 123R"). Under FAS 123R, the Company
estimates the fair value of options granted under the 1990 Plan and employees'
purchase rights under the ESPPs using the Black-Scholes option pricing model.
The Company recognizes this fair value as selling and administrative expense
over the vesting period using the straight-line method.
The following table summarizes the Company's total stock-based
compensation expense:
Three Months Ended Nine Months Ended
February 29 and 28, February 29 and 28,
____________________ __________________
2008 2007 2008 2007
____ ____ ____ ____
(in millions)
Stock options1 $21.8 $24.5 $105.0 $109.9
ESPPs 1.8 1.5 5.6 5.0
Restricted stock 1.7 1.4 5.0 4.2
______ ______ _______ _______
Total stock-based compensation expense $25.3 $27.4 $115.6 $119.1
====== ====== ======= =======
1 In accordance with FAS 123R, accelerated stock option expense is recorded
for employees eligible for accelerated stock option vesting upon retirement.
Accelerated stock option expense was $0.7 million and $0.4 million for the
three months ended February 29, 2008 and February 28, 2007, respectively, and
$39.9 million and $35.9 million for the nine months ended February 29, 2008
and February 28, 2007, respectively. Because the Company usually grants the
majority of stock options in a single grant in the first three months of each
fiscal year, under FAS 123R, accelerated vesting will normally result in
higher expense in the first three months of the fiscal year.
As of February 29, 2008, the Company had $112.4 million of unrecognized
compensation costs from stock options, net of estimated forfeitures, to be
recognized as selling and administrative expense over a weighted average
period of 2.1 years.
The weighted average fair value per share of the options granted during
the nine months ended February 29, 2008 and February 28, 2007 as computed
using the Black-Scholes pricing model was $13.86 and $8.79, respectively. The
weighted average assumptions used to estimate these fair values are as
follows:
Nine Months Ended
February 29 and 28,
____________________
2008 2007
____ ____
Dividend yield 1.4% 1.6%
Expected volatility 20.5% 18.7%
Weighted-average expected life (in years) 5.0 5.0
Risk-free interest rate 4.8% 5.0%
Expected volatility is estimated based on the implied volatility in
market traded options on the Company's common stock with a term greater than
one year, along with other factors. The weighted average expected life of
options is based on an analysis of historical and expected future exercise
patterns. The interest rate is based on the U.S. Treasury (constant maturity)
risk-free rate in effect at the date of grant for periods corresponding with
the expected term of the options.
NOTE 8 - Earnings Per Common Share:
_________________________
The following represents a reconciliation from basic earnings per share
to diluted earnings per share. Options to purchase an additional 6.8 million
and 9.2 million shares of common stock were outstanding for the three months
ended February 29, 2008 and February 28, 2007, respectively, and 6.8 million
and 10.2 million shares of common stock were outstanding for the nine months
ended February 29, 2008 and February 28, 2007, respectively, but were not
included in the computation of diluted earnings per share because the options
were antidilutive.
Three Months Ended Nine Months Ended
February 29 and 28, February 29 and 28,
_____________________ ___________________
2008 2007 2008 2007
____ ____ ____ ____
(in millions, except per share data)
Determination of shares:
Weighted average common shares
outstanding 493.9 504.5 497.0 504.1
Assumed conversion of
dilutive stock options
and awards 8.6 6.3 8.4 5.5
_______ _______ _______ _______
Diluted weighted average common
shares outstanding 502.5 510.8 505.4 509.6
======= ======= ======= =======
Basic earnings per common share1 $ 0.94 $ 0.69 $ 2.80 $ 2.09
======= ======= ======= =======
Diluted earnings per common share1 $ 0.92 $ 0.68 $ 2.76 $ 2.07
======= ======= ======= =======
1 Basic and diluted earnings per common share for the three months ended February 28, 2007
do not recalculate due to rounding.
NOTE 9 - Operating Segments:
__________________
The Company's operating segments are evidence of the structure of the
Company's internal organization. The major segments are defined by geographic
regions for operations participating in NIKE brand sales activity excluding
NIKE Golf and NIKE Bauer Hockey. Each NIKE brand geographic segment operates
predominantly in one industry: the design, production, marketing and selling
of sports and fitness footwear, apparel, and equipment. The "Other" category
shown below represents activities of Cole Haan Holdings Incorporated, Converse
Inc., Exeter Brands Group LLC (whose primary business was the Starter Brand
business which was sold on December 17, 2007), Hurley International LLC, NIKE
Bauer Hockey Inc., and NIKE Golf, which are considered immaterial for
individual disclosure based on the aggregation criteria in SFAS No. 131
?Disclosures about Segments of an Enterprise and Related Information.?
Where applicable, "Corporate" represents items necessary to reconcile to
the consolidated financial statements, which generally include corporate
activity and corporate eliminations.
Net revenues as shown below represent sales to external customers for
each segment. Intercompany revenues have been eliminated and are immaterial
for separate disclosure. The Company evaluates performance of individual
operating segments based on pre-tax income. On a consolidated basis, this
amount represents income before income taxes as shown in the Unaudited
Condensed Consolidated Statements of Income. Reconciling items for pre-tax
income represent corporate costs that are not allocated to the operating
segments for management reporting including corporate activity, stock-based
compensation expense, certain currency exchange rate gains and losses on
transactions, the gain on the sale of the Starter brand business, which was
sold in December 2007, and intercompany eliminations for specific income
statement items in the Unaudited Condensed Consolidated Statements of Income.
Accounts receivable, net, inventories, and property, plant and equipment,
net for operating segments are regularly reviewed and therefore provided
below.
Three Months Ended Nine Months Ended
February 29 and 28, February 29 and 28,
__________________ _________________
2008 2007 2008 2007
_____ _____ _____ _____
(in millions)
Net Revenue
U.S. $1,556.5 $1,477.0 $ 4,708.3 $ 4,496.9
EUROPE, MIDDLE EAST, AFRICA 1,384.3 1,124.8 4,086.2 3,431.9
ASIA PACIFIC 748.3 589.9 2,053.7 1,686.5
AMERICAS 254.4 212.5 847.5 717.5
OTHER 600.9 522.7 1,843.3 1,609.9
_________ _________ __________ __________
$4,544.4 $3,926.9 $13,539.0 $11,942.7
========= ========= ========== ==========
Pre-tax Income
U.S. $ 347.3 $ 296.4 $ 1,001.2 $ 934.2
EUROPE, MIDDLE EAST, AFRICA 334.3 255.7 940.0 734.0
ASIA PACIFIC 193.0 132.1 526.6 382.8
AMERICAS 51.9 42.1 178.5 152.9
OTHER 77.5 67.0 243.5 208.5
CORPORATE (335.3) (275.3) (1,035.2) (871.3)
_________ _________ _________ _________
$ 668.7 $ 518.0 $ 1,854.6 $1,541.1
========= ========= ========= =========
Feb. 29, May 31,
2008 2007
_________ _________
(in millions)
Accounts receivable, net
U.S. $ 857.6 $ 806.8
EUROPE, MIDDLE EAST, AFRICA 852.8 739.1
ASIA PACIFIC 379.0 296.6
AMERICAS 223.3 184.1
OTHER 412.9 404.9
CORPORATE 49.9 63.2
_________ _________
$2,775.5 $2,494.7
========= =========
Inventories
U.S. $ 800.7 $ 796.0
EUROPE, MIDDLE EAST, AFRICA 632.3 554.5
ASIA PACIFIC 297.1 214.1
AMERICAS 160.7 132.0
OTHER 455.0 378.7
CORPORATE 45.1 46.6
_________ _________
$2,390.9 $2,121.9
========= =========
Property, plant and equipment, net
U.S. $ 302.4 $ 232.7
EUROPE, MIDDLE EAST, AFRICA 351.6 325.4
ASIA PACIFIC 368.7 326.1
AMERICAS 19.7 16.9
OTHER 114.6 103.6
CORPORATE 663.0 673.6
_________ _________
$1,820.0 $1,678.3
========= =========
NOTE 10 - Commitments and Contingencies:
_____________________________
At February 29, 2008, the Company had letters of credit outstanding
totaling $194.9 million. These letters of credit were issued primarily for
the purchase of inventory.
There have been no other significant subsequent developments relating to
the commitments and contingencies reported on our latest Annual Report on Form
10-K.
NOTE 11 ? Acquisitions, Divestitures and Subsequent Events:
________________________________________________
On October 23, 2007, the Company entered into an Implementation Agreement
with Umbro Plc, a United Kingdom company, pursuant to which the Company
agreed to acquire all of the outstanding shares of Umbro Plc for 1.9306
British pounds sterling per share in cash (the "Umbro Acquisition").
On December 21, 2007, the Company purchased 19.9% of the outstanding
shares of Umbro Plc from Sports Direct International Plc ("Sports Direct") in
a privately negotiated transaction. The Company paid Sports Direct 1.9306
British pounds sterling for each of the 29.1 million shares, for a total
purchase price of 56.4 million pounds sterling (approximately $112.0 million),
inclusive of transaction fees.
In March 2008 the Company completed the Umbro Acquisition by purchasing
all remaining outstanding shares of Umbro Plc for 1.9306 British pounds
sterling each, for a total of 226.8 million pounds sterling (approximately
$449.5 million), inclusive of transaction fees.
On December 17, 2007, the Company completed the sale of the Starter brand
business to Iconix Brand Group, Inc. for $60 million in cash. This
transaction resulted in a gain of $28.6 million, which is reflected in Other
income (expense), net and in the corporate line in the segment presentation of
pre-tax income in Note 9.
On February 21, 2008, the Company entered into a definitive agreement to
sell NIKE Bauer Hockey Corp. for $200 million in cash. The transaction is
expected to be completed before the end of the fiscal year ending May 31,
2008.
Item 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND
RESULTS OF OPERATIONS
Overview
In the third quarter of fiscal 2008, our revenues grew 16% to $4.5
billion, net income grew 32% to $463.8 million and we delivered diluted
earnings per share of $0.92, a 35% increase versus the third quarter of fiscal
2007.
Income before income taxes grew 29% for the third quarter, driven by
revenue growth, a higher gross margin percentage, and selling and
administrative expense leverage primarily due to the timing of our demand
creation spend. Net income and diluted earnings per share grew at a faster rate
than pretax income due to a year-over-year decrease in our effective tax rate
and a reduction in outstanding shares due to repurchases made under our share
repurchase program.
As part of our long term growth strategy, we continually evaluate our
existing portfolio of businesses as well as new business opportunities to
ensure the Company is investing in those businesses with the largest growth
potential and highest returns. In December 2008 we completed our sale of the
Starter brand business. In March 2008 we completed our acquisition of Umbro
Plc., a leading United Kingdom-based global soccer brand. In addition, during
the third quarter we entered into a definitive agreement to sell NIKE Bauer
Hockey; we expect this transaction will be completed in the fourth quarter of
fiscal 2008.
Results of Operations
Three Months Ended Nine Months Ended
February 29 and 28, February 29 and 28,
___________________ __________________
% %
2008 2007 change 2008 2007 change
______ ______ ________ ______ ______ ________
(dollars in millions, except per share data)
Revenues $4,544.4 $3,926.9 16% $13,539.0 $11,942.7 13%
Cost of sales 2,496.5 2,191.7 14% 7,483.0 6,701.2 12%
Gross margin 2,047.9 1,735.2 18% 6,056.0 5,241.5 16%
Gross margin % 45.1% 44.2% 44.7% 43.9%
Selling and administrative 1,403.2 1,243.3 13% 4,267.4 3,756.7 14%
% of revenue 30.9% 31.7% 31.5% 31.5%
Income before income taxes 668.7 518.0 29% 1,854.6 1,541.1 20%
Net income 463.8 350.8 32% 1,392.9 1,053.6 32%
Diluted earnings per share 0.92 0.68 35% 2.76 2.07 33%
Consolidated Operating Results
Revenues
Three Months Ended Nine Months Ended
February 29 and 28, February 29 and 28,
___________________ __________________
% %
2008 2007 change 2008 2007 change
______ ______ ________ ______ ______ _______
(dollars in millions)
Revenues $4,544.4 $3,926.9 16% $13,539.0 $11,942.7 13%
On a consolidated basis, changes in foreign currency exchange rates
increased revenues by 6 percentage points for the third quarter, and 4
percentage points for the first nine months of fiscal 2008 compared to the
same periods in the prior year. Strong demand for NIKE brand products
continued to drive revenue growth for the quarter and year-to-date period, as
all four of our geographic regions and all three of our product business units
continued to deliver revenue growth. Excluding the effects of changes in
currency exchange rates, our international regions contributed 6 percentage
points to the consolidated revenue growth for both the quarter and year-to-
date periods. Our Other businesses, comprised primarily of results from Cole
Haan Holdings Incorporated, Converse Inc., Exeter Brands Group LLC (whose
primary business was the Starter brand business which was sold on December 17,
2007), Hurley International LLC, NIKE Bauer Hockey Corp., and NIKE Golf
contributed 2 percentage points of the consolidated constant-currency revenue
growth for both the quarter and year-to-date period. The U.S. Region
contributed the balance of revenue growth.
By product group, our worldwide footwear business reported revenue growth
of 15% for the third quarter of fiscal 2008 and contributed $324 million of
incremental revenue. Our worldwide apparel and equipment businesses grew 18%
and 11%, respectively, and combined added $215 million of incremental revenue
for the quarter. For the first nine months of fiscal 2008, our worldwide
footwear business contributed $864 million of incremental revenue, while our
worldwide apparel and equipment businesses together contributed $499 million of
incremental revenue.
Gross Margin
Three Months Ended Nine Months Ended
February 29 and 28, February 29 and 28,
___________________ __________________
% %
2008 2007 change 2008 2007 change
______ ______ _______ ______ ______ _______
(dollars in millions)
Gross margin $2,047.9 $1,735.2 18% $6,056.0 $5,241.5 16%
Gross margin % 45.1% 44.2% 90 bps 44.7% 43.9% 80 bps
For the third quarter and year-to-date period of fiscal 2008, the primary
factors contributing to the increase in gross margins versus the prior year
periods were higher footwear in-line gross pricing margins, most notably in the
U.S. and Asia Pacific regions, and an increase in retail sales as a percentage
of total sales, partially offset by lower apparel in-line gross pricing margins,
most notably in the U.S. region.
Selling and Administrative Expense
Three Months Ended Nine Months Ended
February 29 and 28, February 29 and 28,
___________________ __________________
% %
2008 2007 change 2008 2007 change
______ ______ ________ ______ ______ _______
(dollars in millions)
Demand creation expense $ 508.3 $ 467.8 9% $1,618.6 $1,449.3 12%
Operating overhead expense 894.9 775.5 15% 2,648.8 2,307.4 15%
________ _________ _________ _________
Selling and administrative
expense $1,403.2 $1,243.3 13% $4,267.4 $3,756.7 14%
% of revenues 30.9% 31.7% (80)bps 31.5% 31.5% -
Changes in foreign currency exchange rates increased selling and
administrative expense by 4 percentage points for both the third quarter and
the first nine months of fiscal 2008 as compared to the same periods in the
prior year.
Excluding changes in exchange rates, operating overhead increased 12% for
both the third quarter and year-to-date period versus the prior year periods.
This increase was attributable to increased investments in growth drivers such
as NIKE-owned retail, emerging markets, non-Nike brand businesses, and normal
wage inflation and performance based compensation.
Excluding changes in exchange rates, demand creation expense increased 3%
and 7% for the third quarter and year-to-date periods of fiscal 2008,
respectively, versus the same periods in the prior year. The increase in
demand creation was primarily attributable to higher spending on sports
marketing, most notably to support our soccer business, partially offset by a
reduction in advertising spending due primarily to the timing of our spending.
For the remainder of the fiscal year we expect selling and administrative
expenses to grow faster than revenue as we accelerate demand creation spending,
driven by investments around the 2008 Olympics in Beijing, the European
Football Championships occurring in June 2008 and the USA training product
campaign.
Other Income (Expense), net
Three Months Ended Nine Months Ended
February 29 and 28, February 29 and 28,
___________________ __________________
% %
2008 2007 change 2008 2007 change
______ ______ ________ ______ ______ _______
(dollars in millions)
Other income (expense), net $ 5.3 $ 10.3 (49)% $ (0.4) $ 13.3 (103)%
Other income (expense), net is comprised substantially of gains and
losses associated with the conversion of non-functional currency receivables
and payables, the re-measurement of derivative instruments, disposals of fixed
assets, as well as other unusual or non-recurring transactions that are
outside the normal course of business. Foreign currency hedge gains and
losses reported in Other income (expense), net are reflected in the Corporate
line in our segment presentation of pre-tax income in the Notes to Unaudited
Condensed Consolidated Financial Statements (Note 9 ? Operating Segments).
The foreign currency hedge losses recognized in Other income (expense),
net in the third quarter of fiscal 2008 were more than offset by the $28.6
million gain on the sale of the Starter brand business. Other income
(expense), net in the third quarter of fiscal 2007 is primarily comprised of
the $14.7 million gain on the sale of the Oregon footwear distribution center,
partially offset by foreign currency hedge losses.
For the third quarter and year-to-date periods of fiscal 2008, we
estimate that the combination of foreign currency hedge losses in Other income
(expense), net and the favorable translation of foreign currency-denominated
profits from international businesses, resulted in a year-over-year increase
in consolidated income before income taxes of approximately $29 million and
$87 million, respectively.
Income Taxes
Three Months Ended Nine Months Ended
February 29 and 28, February 29 and 28,
___________________ __________________
% %
2008 2007 change 2008 2007 change
______ ______ ________ ______ ______ _______
Effective tax rate 30.6% 32.3% (170) bps 24.9% 31.6% (670) bps
Over the last few years, several of our international entities generated
losses for which we did not recognize the corresponding tax benefits, as the
realization of those benefits was uncertain. In the first quarter of fiscal
2008, we took steps necessary to realize these benefits, resulting in a one-
time tax benefit. Also reflected in the year-over-year effective tax rate
improvement was a reduction in our on-going effective tax rate resulting from
our profits earned outside of the United States; our effective tax rates for
these operations are generally lower than the U.S. statutory rate. We
estimate that our effective tax rate for the fourth quarter of fiscal 2008
will be slightly lower than our rate for the third quarter of fiscal 2008, and
our full year fiscal 2008 rate will be approximately 26%.
Futures Orders
Worldwide futures and advance orders for our footwear and apparel,
scheduled for delivery from March through July 2008, were 11% higher
than such orders reported for the comparable period of fiscal 2007. This
futures growth rate is calculated based upon our forecasts of the actual
exchange rates under which our revenues will be translated during this period,
which approximate current spot rates. The net effect of changes in foreign
currency exchange rates contributed approximately 2 percentage points to
futures growth versus the same period in the prior year. Excluding this
currency impact, unit sales volume increases for both footwear and apparel
drove the growth in overall futures and advance orders. The reported futures
and advance orders growth is not necessarily indicative of our expectation of
revenue growth during this period. This is because the mix of orders can shift
between advance/futures and at-once orders. In addition, exchange rate
fluctuations as well as differing levels of order cancellations and discounts
can cause differences in the comparisons between futures and advance orders,
and actual revenues. Moreover, a significant portion of our revenue is not
derived from futures and advance orders, including at-once and closeout sales
of NIKE footwear and apparel, wholesale sales of equipment, Cole Haan,
Converse, Hurley, NIKE Bauer Hockey, NIKE Golf, Umbro and retail sales across
all brands.
Operating Segments
The breakdown of revenues is as follows:
Three Months Ended Nine Months Ended
February 29 and 28, February 29 and 28,
___________________ ____________________
% %
2008 2007 change 2008 2007 change
______ ______ _______ ______ ______ ______
(dollars in millions)
U.S. REGION
FOOTWEAR $1,080.0 $1,027.9 5% $3,183.2 $2,986.4 7%
APPAREL 407.8 371.3 10% 1,297.2 1,278.2 1%
EQUIPMENT 68.7 77.8 (12)% 227.9 232.3 (2)%
________ ________ ________ ________
TOTAL U.S. 1,556.5 1,477.0 5% 4,708.3 4,496.9 5%
EMEA REGION
FOOTWEAR 784.8 630.0 25% 2,223.4 1,850.9 20%
APPAREL 499.5 413.2 21% 1,552.4 1,321.2 17%
EQUIPMENT 100.0 81.6 23% 310.4 259.8 19%
________ ________ ________ ________
TOTAL EMEA 1,384.3 1,124.8 23% 4,086.2 3,431.9 19%
ASIA PACIFIC REGION
FOOTWEAR 411.3 319.4 29% 1,077.5 862.8 25%
APPAREL 272.6 217.4 25% 802.3 668.9 20%
EQUIPMENT 64.4 53.1 21% 173.9 154.8 12%
________ ________ ________ ________
TOTAL ASIA PACIFIC 748.3 589.9 27% 2,053.7 1,686.5 22%
AMERICAS REGION
FOOTWEAR 177.9 152.8 16% 590.6 510.2 16%
APPAREL 55.0 42.3 30% 186.5 149.2 25%
EQUIPMENT 21.5 17.4 24% 70.4 58.1 21%
________ ________ ________ ________
TOTAL AMERICAS 254.4 212.5 20% 847.5 717.5 18%
________ ________ ________ ________
3,943.5 3,404.2 16% 11,695.7 10,332.8 13%
OTHER 600.9 522.7 15% 1,843.3 1,609.9 14%
________ ________ _________ _________
TOTAL REVENUES $4,544.4 $3,926.9 16% $13,539.0 $11,942.7 13%
======== ======== ========= =========
The breakdown of income before income taxes (?pre-tax income?) is as
follows:
Three Months Ended Nine Months Ended
February 29 and 28, February 29 and 28,
___________________ __________________
% %
2008 2007 change 2008 2007 change
______ ______ ________ ______ ______ _______
(dollars in millions)
U.S. Region $ 347.3 $ 296.4 17% $1,001.2 $ 934.2 7%
EMEA Region 334.3 255.7 31% 940.0 734.0 28%
Asia Pacific Region 193.0 132.1 46% 526.6 382.8 38%
Americas Region 51.9 42.1 23% 178.5 152.9 17%
Other 77.5 67.0 16% 243.5 208.5 17%
Corporate (335.3) (275.3) (22)% (1,035.2) (871.3) (19)%
________ ________ _________ _________
Total pre-tax income $ 668.7 $ 518.0 29% $1,854.6 $1,541.1 20%
The following discussion includes disclosure of pre-tax income for
our operating segments. We have reported pre-tax income for each of our
operating segments in accordance with SFAS No. 131, "Disclosures about
Segments of an Enterprise and Related Information." As discussed in Note 9 ?
Operating Segments in the accompanying Notes to Unaudited Condensed
Consolidated Financial Statements, certain corporate costs are not included
in pre-tax income of our operating segments.
U.S. Region
Three Months Ended Nine Months Ended
February 29 and 28, February 29 and 28,
___________________ __________________
% %
2008 2007 change 2008 2007 change
______ ______ ________ ______ ______ _______
(dollars in millions)
Revenues
Footwear $1,080.0 $1,027.9 5% $3,183.2 $2,986.4 7%
Apparel 407.8 371.3 10% 1,297.2 1,278.2 1%
Equipment 68.7 77.8 (12)% 227.9 232.3 (2)%
_________ _________ _________ _________
Total revenues $1,556.5 $1,477.0 5% $4,708.3 $4,496.9 5%
Pre-tax income $ 347.3 $ 296.4 17% $1,001.2 $ 934.2 7%
For the third quarter, the increase in U.S. footwear revenue was the
result of relatively flat unit sales and mid-single digit growth in average
price per pair, most notably in running, Brand Jordan and sports culture
products, partially offset by a reduction in unit sales of lower priced kids
products. For the year-to-date period, U.S. footwear revenue growth was
attributable to high-single digit growth in unit sales, driven by increased
demand for our NIKE brand sports culture and Brand Jordan products.
The growth in U.S. apparel revenues for the third quarter reflected
an increase in unit sales, driven by higher closeout unit sales and growth
in unit sales of sports performance products, partially offset by lower
average selling prices due primarily to the higher mix of closeout sales.
For the year-to-date period, the slight increase in U.S. apparel revenue is
attributable to higher unit sales, mostly offset by lower average selling
prices. The increase in unit sales has primarily been driven by increased
demand for NIKE brand sport performance products, partially offset by lower
unit sales of sports culture and Brand Jordan products. Average selling
prices have decreased primarily as a result of a higher mix of closeout
sales.
The increase in pre-tax income for the third quarter and first nine
months of fiscal 2008 exceeded revenue growth over the same period primarily
as the result of selling and administrative expense leverage and improved
footwear gross pricing margins, partially offset by reductions in apparel
gross pricing margins. Selling and administrative expenses decreased in the
third quarter versus the comparable period in the prior year, and grew at a
slower rate than revenue for the first nine months of fiscal 2008,
driven by a decrease in demand creation spending, partially offset by an
increase in operating overhead. The decrease in demand creation spending
was primarily due to the timing of advertising spend. Demand creation
spending is expected to accelerate over the remainder of the fiscal year,
driven by spending around the USA training product campaign. The increase
in operating overhead was attributable to investments in NIKE-owned retail
and normal wage inflation.
EMEA Region
Three Months Ended Nine Months Ended
February 29 and 28, February 29 and 28,
___________________ __________________
% %
2008 2007 change 2008 2007 change
______ ______ ________ ______ ______ _______
(dollars in millions)
Revenues
Footwear $ 784.8 $ 630.0 25% $2,223.4 $1,850.9 20%
Apparel 499.5 413.2 21% 1,552.4 1,321.2 17%
Equipment 100.0 81.6 23% 310.4 259.8 19%
_________ _________ _________ _________
Total revenues $1,384.3 $1,124.8 23% $4,086.2 $3,431.9 19%
Pre-tax income $ 334.3 $ 255.7 31% $ 940.0 $ 734.0 28%
In the EMEA region, changes in currency exchange rates contributed 13 and
10 percentage points of the revenue growth for the third quarter and first
nine months of fiscal 2008, respectively. Excluding changes in currency
exchange rates, nearly every market within the region increased revenues for
the quarter and year-to-date periods. The emerging markets in the region grew
over 34% and 27% on a currency neutral basis for the quarter and year-to-date
period, respectively, driven by strong results in Russia and South Africa. The
UK grew approximately 10% for both the quarter and year-to-date period.
Excluding changes in exchange rates, footwear revenues increased 11 and
10 percentage points during the third quarter and first nine months of
fiscal 2008, respectively, compared to the same periods in the prior year as
a result of double-digit percentage growth in unit sales, partially offset
by a decrease in average selling price per pair. The increase in unit sales
for both the third quarter and year-to-date periods was primarily driven by
higher demand for our NIKE brand sports culture and soccer products. The
decrease in the average selling price per pair resulted from a shift in
product mix from higher priced to lower priced models, most notably within
our sports culture product lines.
On a currency neutral basis, EMEA apparel revenue increased 8 percentage
points during both the third quarter and year-to-date periods, primarily as a
result of increased unit sales of NIKE brand apparel combined with a slight
increase in average selling prices. The increase in unit sales of NIKE brand
apparel was driven primarily by increased demand for sport performance
products, most notably soccer.
The increase in pre-tax income in the third quarter and first nine
months of fiscal 2008 was primarily driven by higher revenues, improved
gross margins, primarily as a result of improved in-line gross pricing
margins, stronger European currencies and selling and administrative
expense leverage. Demand creation spending is expected to accelerate over
the remainder of the fiscal year, driven by spending around the European
Football Championships in June 2008.
Asia Pacific Region
Three Months Ended Nine Months Ended
February 29 and 28, February 29 and 28,
___________________ __________________
% %
2008 2007 change 2008 2007 change
______ ______ ________ ______ ______ _______
(dollars in millions)
Revenues
Footwear $ 411.3 $ 319.4 29% $1,077.5 $ 862.8 25%
Apparel 272.6 217.4 25% 802.3 668.9 20%
Equipment 64.4 53.1 21% 173.9 154.8 12%
_________ _________ _________ _________
Total revenues $ 748.3 $ 589.9 27% $2,053.7 $1,686.5 22%
Pre-tax income $ 193.0 $ 132.1 46% $ 526.6 $ 382.8 38%
In the Asia Pacific region, changes in currency exchange rates
contributed 7 and 5 percentage points of revenue growth for the third quarter
and year-to-date period, respectively. While the majority of countries within
the region reported sales increases for both the quarter and year-to-date
period, China continues to be the primary driver of growth within the region,
as revenues grew 51% for the quarter and 46% for the year-to-date period on a
constant currency basis. The revenue growth in China was primarily due to
expansion in both the number of stores selling NIKE product and the sales
through existing retail doors. Constant currency revenues in Japan increased
4% for the quarter and were flat year-to-date.
Footwear revenue growth for both the quarter and first nine months of
fiscal 2008 reflected increased unit sales, most notably in China, partially
offset by lower average selling prices driven primarily by a shift in mix from
higher priced to lower priced models. The increase in apparel revenue for both
the quarter and year-to-date period was primarily driven by increased unit
demand in China.
The increase in pre-tax income in the third quarter and first nine
months of fiscal 2008 was driven by higher revenues, improved gross
margins, favorable foreign currency translation, and selling and
administrative expenses that grew at a slower rate than revenue during the
comparable periods. The gross margin improvement for the quarter and first
nine months of the fiscal year was driven by higher in-line gross pricing
margins, most notably in footwear, and improved margins on closeout product.
Selling and administrative expenses grew at a slower rate than revenue
during both the third quarter and first nine months of fiscal 2008 due
primarily to the timing of demand creation spending. Demand creation
spending is expected to accelerate over the remainder of the fiscal year,
driven by spending around the 2008 Olympics in Beijing.
Americas Region
Three Months Ended Nine Months Ended
February 29 and 28, February 29 and 28,
___________________ __________________
% %
2008 2007 change 2008 2007 change
______ ______ ________ ______ ______ _______
(dollars in millions)
Revenues
Footwear $ 177.9 $ 152.8 16% $ 590.6 $ 510.2 16%
Apparel 55.0 42.3 30% 186.5 149.2 25%
Equipment 21.5 17.4 24% 70.4 58.1 21%
_________ _________ _________ _________
Total revenues $ 254.4 $ 212.5 20% $ 847.5 $ 717.5 18%
Pre-tax income $ 51.9 $ 42.1 23% $ 178.5 $ 152.9 17%
In the Americas region, changes in currency exchange rates contributed
10 and 6 percentage points of revenue growth for the third quarter and first
nine months of fiscal 2008, respectively. Excluding the changes in foreign
currency exchange rates, double-digit revenue growth in most markets within
the region during the third quarter and year-to-date period, led by
Argentina and Mexico, more than offset slight sales declines in Canada.
The increase in pre-tax income for both the third quarter and first
nine months of fiscal 2008 versus the comparable prior year periods was
primarily attributable to higher revenues and improved gross margins,
combined with favorable foreign currency translation. For the year-to-date
period, these factors were partially offset by higher selling and
administrative expenses, primarily as the result of higher demand creation
spending around the Run Americas III campaign and higher spending on sports
marketing, most notably in soccer.
Other Businesses
Three Months Ended Nine Months Ended
February 29 and 28, February 29 and 28,
___________________ __________________
% %
2008 2007 change 2008 2007 change
______ ______ ________ ______ ______ _______
(dollars in millions)
Revenues $ 600.9 $ 522.7 15% $1,843.3 $1,609.9 14%
Pre-tax income 77.5 67.0 16% 243.5 208.5 17%
The increase in Other business revenues for the third quarter and first
nine months of fiscal 2008 was driven by higher revenues across all
businesses, most notably Converse, NIKE Bauer Hockey and NIKE Golf.
During the third quarter and year-to-date period, growth at Converse,
NIKE Bauer Hockey and NIKE Golf, combined with margin improvement across
most businesses drove the year-over-year increase in pre-tax income. Pre-
tax income for the first nine months of fiscal 2007 included a $14.2 million
benefit relating to the settlement of an arbitration ruling involving
Converse and a former South American licensee. Fiscal 2008 year-to-date
pre-tax income for our Other businesses would have increased approximately
25% versus the comparable prior year period, excluding this favorable
settlement.
As part of our long term growth strategy, we continually evaluate our
existing portfolio of businesses as well as new business opportunities to
ensure the Company is investing in those businesses with the largest growth
potential and highest returns. In March, 2008 we completed our acquisition
of the remaining outstanding shares of Umbro Plc, a leading United Kingdom-
based global soccer brand, in an all-cash deal valued at approximately 283
million pounds sterling, inclusive of transaction fees.
Following a strategic review of the Company's existing business
portfolio, we concluded that the Starter and NIKE Bauer Hockey businesses
did not align with our long-term growth priorities. In December 2007,
we completed the sale of the Starter brand business for $60 million in cash.
This transaction resulted in a gain of approximately $28.6 million, which is
reflected in the Corporate line in our segment presentation of pre-tax
income in the Notes to Unaudited Condensed Consolidated Financial Statements
(Note 9 ? Operating Segments). In the third quarter we also entered into a
definitive agreement to sell NIKE Bauer Hockey. We expect to complete this
sale in the fourth quarter of fiscal 2008.
Liquidity and Capital Resources
Cash Flow Activity
Cash provided by operations was $1,303.8 million for the first nine
months of fiscal 2008, compared to $914.8 million for the first nine months of
fiscal 2007. Our primary source of operating cash flow for the first nine
months of 2008 was net income of $1,392.9 million offset by investments in
working capital to support growth in the business. Our investments in
working capital increased during the first nine months of fiscal 2008 as
compared to the same period in the prior year primarily due to an increase
in accounts receivable as a result of higher sales revenue in the third
quarter of fiscal 2008 and an increase in inventory receipts to support the
continued growth of the business.
Cash used by investing activities was $27.4 million for the first
nine months of fiscal 2008, compared to cash provided by investing
activities of $778.0 million for the first nine months of fiscal 2007. The
decrease over fiscal 2007 was primarily due to lower net maturities of
short-term investments (maturities net of purchases) as we liquidated less
short-term investments for share repurchases during the first nine months of
fiscal 2008 compared to fiscal 2007.
Cash used in financing activities was $906.6 million for the first nine
months of fiscal 2008, compared to $794.7 million used in the first nine
months of fiscal 2007. The increase over fiscal 2007 was primarily due to
an increase in share repurchases, as discussed below, and dividends paid.
This was partially offset by the $250 million repayment of corporate bonds
during the first nine months of fiscal 2007.
In the third quarter of fiscal 2008, we purchased 5.6 million shares of
NIKE's Class B common stock for $343.9 million, bringing total purchases for
the first nine months of fiscal 2008 to 16.1 million shares at a cost of
$958.1 million. As of the end of the third quarter of fiscal 2008, we have
now repurchased 34.2 million shares for $1.8 billion under the $3 billion
program approved by our Board of Directors in June 2006. We expect to fund
share repurchases from operating cash flow, excess cash, and/or debt. The
timing and the amount of shares purchased will be dictated by our capital
needs and stock market conditions.
Dividends declared per share of common stock for the third quarter of
fiscal 2008 were $0.23, compared to $0.185 in the third quarter of fiscal
2007.
Contractual Obligations
As a result of renewals of and additions to outstanding operating
leases and endorsement contracts, the cash payments due under our operating
leases and endorsement contracts have changed from what was previously
reported in our Annual Report on Form 10-K as of May 31, 2007.
Obligations under operating leases and endorsement contracts as of February
29, 2008 are as follows:
Cash Payments Due During the Fiscal Year Ending
May 31,
_______________________________________________
Remainder of
Description of Commitment 2008 2009 2010 2011 2012 Thereafter Total
__________________________ ______ ______ ______ ______ ______ __________ _______
(in millions)
Operating Leases $ 84.6 $278.4 $231.5 $200.5 $167.0 $732.6 $1,694.6
Endorsement Contracts1 145.0 629.4 518.9 441.7 403.6 1,233.6 3,372.2
1 The amounts listed for endorsement contracts represent approximate
amounts of base compensation and minimum guaranteed royalty fees we are
obligated to pay athlete and sports team endorsers of our products. Actual
payments under some contracts may be higher than the amounts listed as these
contracts provide for bonuses to be paid to the endorsers based upon
athletic achievements and/or royalties on product sales in future periods.
Actual payments under some contracts may also be lower as these contracts
include provisions for reduced payments if athletic performance declines in
future periods.
In addition to the cash payments, we are obligated to furnish the
endorsers with NIKE products for their use. It is not possible to determine
how much we will spend on this product on an annual basis, as the contracts
do not stipulate a specific amount of cash to be spent on the product, and
as a result, such amounts are not included in the table above. The amount of
product provided to the endorsers will depend on many factors including
general playing conditions, the number of sporting events in which they
participate, and our own decisions regarding product and marketing
initiatives. In addition, the costs to design, develop, source, and purchase
the products furnished to the endorsers are incurred over a period of time
and are not necessarily tracked separately from similar costs incurred for
products sold to customers.
Upon adoption of Financial Accounting Standards Board ("FASB")
Interpretation No. 48 "Accounting for Uncertainty in Income Taxes" ("FIN 48")
on June 1, 2007, the total long term liability for uncertain tax positions was
$135.0 million, including interest and penalties and net of the federal
benefit of interest and unrecognized state tax benefits. During the nine
months ended February 29, 2008, the total long term liability for uncertain
tax positions increased $87.0 million, primarily related to tax positions
taken during the current and prior fiscal years, including the accrual of the
related interest and penalties. As of February 29, 2008, the total long term
liability for uncertain tax positions was $222.0 million. We are not able to
reasonably estimate when, or if cash payments of the long-term liability for
uncertain tax positions will occur.
There have been no other significant changes to the contractual
obligations reported in our Annual Report on Form 10-K as of May 31, 2007.
Capital Resources
We have a shelf registration statement with the Securities and Exchange
Commission for $1.0 billion.? We have a medium term note program under this
shelf registration statement that allows us to issue $500 million in medium
term notes. We have $240.0 million in medium-term notes outstanding at
February 29, 2008.
We also have a $1.0 billion revolving credit facility in place with a
group of banks, and we currently have no amounts outstanding under the
facility. The facility is scheduled to mature in December 2012.
Our long-term senior unsecured debt ratings remain at A+ and A2 from
Standard and Poor?s Corporation and Moody?s Investor Services, respectively.
Liquidity is also provided by our $1.0 billion commercial paper
program. In February 2008, we borrowed $50 million under our commercial
paper program at an interest rate of 2.95%. In March 2008, we repaid the $50
million and subsequently borrowed $150 million at an interest rate of
2.35%.? No amount was outstanding under our commercial paper program at May
31, 2007. ?We currently have short-term debt ratings of A1 and P1 from
Standard and Poor's Corporation and Moody's Investor Services, respectively.
During the third quarter, one of the Company?s Japanese subsidiaries
entered into a 2 billion yen (approximately $19 million) short term bank
loan to meet general operating needs. The interest rate on the bank loan is
based on the Japanese Yen London Interbank Offer Rate (JPY LIBOR) plus a
spread, with an all-in rate at inception of 0.9%.
We currently believe that cash generated by operations, together with
access to external sources of funds as described above and in our Annual
Report on Form 10-K for the fiscal year ended May 31, 2007, will be
sufficient to meet our operating and capital needs in the foreseeable
future.
Recently Adopted Accounting Standards
In June 2006, the FASB issued FIN 48, which clarifies the accounting
for uncertainty in income taxes recognized in our financial statements in
accordance with FASB Statement No. 109, "Accounting for Income Taxes." We
adopted the provisions of FIN 48 on June 1, 2007. See Note 5 in the
accompanying Notes to Unaudited Condensed Consolidated Financial Statements
for further discussion.
In June 2006, the FASB ratified the consensus reached in Emerging Issues
Task Force ("EITF") Issue No. 06-2, "Accounting for Sabbatical Leave and Other
Similar Benefits Pursuant to FASB Statement No. 43" ("EITF 06-2"). EITF 06-2
clarifies recognition guidance on the accrual of employees' rights to
compensated absences under a sabbatical or other similar benefit arrangement.
The adoption of EITF 06-2 on June 1, 2007 did not have a material impact on
our consolidated financial position, results of operations or cash flows.
Recently Issued Accounting Standards
In September 2006, the FASB issued SFAS No. 157, "Fair Value
Measurements" ("FAS 157"). FAS 157 defines fair value, establishes a
framework for measuring fair value in accordance with generally accepted
accounting principles, and expands disclosures about fair value
measurements. The provisions of FAS 157 for financial assets and
liabilities are effective for our fiscal year beginning June 1,2008 and the
provisions of FAS 157 for non financial assets and liabilities are effective
for the fiscal year beginning June 1, 2009. We are currently evaluating the
impact of the provisions for non financial assets and liabilities. We have
evaluated the provisions of FAS 157 for financial assets and liabilities and
do not expect that the adoption will have a material impact on our
consolidated financial position or results of operations.
In February 2007, the FASB issued SFAS No. 159, "The Fair Value Option
for Financial Assets and Financial Liabilities including an Amendment of
FASB Statement No. 115" ("FAS 159"). FAS 159 permits entities to choose to
measure many financial instruments and certain other items at fair value.
The provisions of FAS 159 are effective for the fiscal year beginning June
1, 2008. We have evaluated the provisions of FAS 159 and do not expect that
the adoption will have a material impact on our consolidated financial
position or results of operations.
In December 2007, FASB issued SFAS No. 141 (revised 2007), "Business
Combinations" ("FAS 141(R)") and SFAS No. 160, "Noncontrolling Interests in
Consolidated Financial Statements" ("FAS 160"). These standards aim to
improve, simplify, and converge internationally the accounting for business
combinations and the reporting of noncontrolling interests in consolidated
financial statements. The provisions of FAS 141(R) and FAS 160 are effective
for the fiscal year beginning June 1, 2009. We are currently evaluating the
impact of the provisions of FAS 141(R) and FAS 160.
In March 2008, the FASB issued SFAS No. 161, "Disclosures about
Derivative Instruments and Hedging Activities" ("FAS 161"). FAS 161 is
intended to improve financial reporting about derivative instruments and
hedging activities by requiring enhanced disclosures to enable investors to
better understand their effects on an entity's financial position, financial
performance, and cash flows. The provisions of FAS 161 are effective for the
quarter ending February 28, 2009. We are currently evaluating the impact of
the provisions of FAS 161.
Critical Accounting Policies
Our discussion and analysis of our financial condition and results of
operations are based upon our consolidated financial statements, which have
been prepared in accordance with accounting principles generally accepted in
the United States of America. The preparation of these financial statements
requires us to make estimates and judgments that affect the reported amounts
of assets, liabilities, revenues and expenses, and related disclosure of
contingent assets and liabilities.
We believe that the estimates, assumptions and judgments involved in
the accounting policies described in the "Management's Discussion and
Analysis of Financial Condition and Results of Operations" section of our
most recent Annual Report on Form 10-K have the greatest potential impact on
our financial statements, so we consider these to be our critical accounting
policies. With the adoption of FIN 48 at the beginning of the first quarter
of fiscal 2008, we have added additional information to our "Taxes" Critical
Accounting Policy as described below. Actual results could differ from the
estimates we use in applying our critical accounting policies. We are not
currently aware of any reasonably likely events or circumstances that would
result in materially different amounts being reported.
Taxes
We account for uncertain tax positions in accordance with FIN 48. On a
quarterly basis, we reevaluate the probability that a tax position will be
effectively sustained and the appropriateness of the amount recognized
for uncertain tax positions based on factors including changes in facts or
circumstances, changes in tax law, settled audit issues and new audit
activity. Changes in our assessment may result in the recognition of a tax
benefit or an additional charge to the tax provision in the period our
assessment changes. We recognize interest and penalties related to income tax
matters in income tax expense.
Item 3. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK
There have been no material changes from the information previously
reported under Item 7A of our Annual Report on Form 10-K for the fiscal year
ended May 31, 2007.
Item 4. CONTROLS AND PROCEDURES
We maintain disclosure controls and procedures that are designed to
ensure that information required to be disclosed in our Exchange Act reports
is recorded, processed, summarized and reported within the time periods
specified in the Securities and Exchange Commission's rules and forms and that
such information is accumulated and communicated to our management, including
our Chief Executive Officer and Chief Financial Officer, as appropriate, to
allow for timely decisions regarding required disclosure. In designing and
evaluating the disclosure controls and procedures, management recognizes that
any controls and procedures, no matter how well designed and operated, can
provide only reasonable assurance of achieving the desired control objectives,
and management is required to apply its judgment in evaluating the cost-
benefit relationship of possible controls and procedures.
We carry out a variety of on-going procedures under the supervision and
with the participation of our management, including our Chief Executive
Officer and Chief Financial Officer, to evaluate the effectiveness of the
design and operation of our disclosure controls and procedures. Based on the
foregoing, our Chief Executive Officer and Chief Financial Officer concluded
that our disclosure controls and procedures were effective at the reasonable
assurance level as of February 29, 2008.
There has been no change in our internal controls over financial
reporting during our most recent fiscal quarter that has materially affected,
or is reasonably likely to materially affect, our internal controls over
financial reporting.
Special Note Regarding Forward-Looking Statements
and Analyst Reports
Certain written and oral statements, other than purely historical
information including estimates, projections, statements relating to NIKE's
business plans, objectives and expected operating results, and the assumptions
upon which those statements are based, made or incorporated by reference from
time to time by NIKE or its representatives in this report, other reports,
filings with the Securities and Exchange Commission, press releases,
conferences, or otherwise, are "forward-looking statements" within the meaning
of the Private Securities Litigation Reform Act of 1995 and Section 21E of the
Securities Exchange Act of 1934, as amended. 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 Securities and Exchange Commission, including
Forms 8-K, 10-Q, and 10-K, and include, among others, the following:
international, national and local general economic and market conditions; the
size and growth of the overall athletic footwear, apparel, and equipment
markets; intense competition among designers, marketers, distributors and
sellers of athletic footwear, apparel, and equipment for consumers and
endorsers; demographic changes; changes in consumer preferences; popularity of
particular designs, categories of products, and sports; seasonal and
geographic demand for NIKE products; difficulties in anticipating or
forecasting changes in consumer preferences, consumer demand for NIKE
products, and the various market factors described above; difficulties in
implementing, operating, and maintaining NIKE's increasingly complex
information systems and controls, including, without limitation, the systems
related to demand and supply planning, and inventory control; fluctuations and
difficulty in forecasting operating results, including, without limitation,
the fact that advance "futures" orders may not be indicative of future
revenues due to the changing mix of futures and at-once orders; the ability of
NIKE to sustain, manage or forecast its growth and inventories; the size,
timing and mix of purchases of NIKE's products; new product development and
introduction; the ability to secure and protect trademarks, patents, and other
intellectual property performance and reliability of products; customer
service; adverse publicity; the loss of significant customers or suppliers;
dependence on distributors; business disruptions; increased costs of freight
and transportation to meet delivery deadlines; changes in business strategy or
development plans; general risks associated with doing business outside the
United States, including, without limitation, exchange rate fluctuations,
import duties, tariffs, quotas and political and economic instability; changes
in government regulations; liability and other claims asserted against NIKE;
the ability to attract and retain qualified personnel; and other factors
referenced or incorporated by reference in this report and other reports.
The risks included here are not exhaustive. Other sections of this report
may include additional factors which could adversely affect NIKE's business
and financial performance. Moreover, NIKE operates in a very competitive and
rapidly changing environment. New risk factors emerge from time to time and it
is not possible for management to predict all such risk factors, nor can it
assess the impact of all such risk factors on NIKE's business or the extent to
which any factor, or combination of factors, may cause actual results to
differ materially from those contained in any forward-looking statements.
Given these risks and uncertainties, investors should not place undue reliance
on forward-looking statements as a prediction of actual results.
Investors should also be aware that while NIKE does, from time to time,
communicate with securities analysts, it is against NIKE's policy to disclose
to them any material non-public information or other confidential commercial
information. Accordingly, shareholders should not assume that NIKE agrees with
any statement or report issued by any analyst irrespective of the content of
the statement or report. Furthermore, NIKE has a policy against issuing or
confirming financial forecasts or projections issued by others. Thus, to the
extent that reports issued by securities analysts contain any projections,
forecasts or opinions, such reports are not the responsibility of NIKE.
Part II - Other Information
Item 1. Legal Proceedings
There have been no significant developments with respect to the
information previously reported under Item 3 of the Company?s Annual Report on
Form 10-K for the fiscal year ended May 31, 2007.
Item 1A. Risk Factors
There have been no material changes in our risk factors from those
disclosed in Part I, Item 1A, of our Annual Report on Form 10-K for the fiscal
year ended May 31, 2007.
Item 2. Unregistered Sales of Equity Securities and Use of Proceeds
The following table presents a summary of share repurchases made by NIKE
during the quarter ended February 29, 2008.
Total Number of Maximum Dollar Value
Shares Purchased as of Shares that May
Total Number Average Part of Publicly Yet Be Purchased
Of Shares Price Paid Announced Plans Under the Plans
Period Purchased Per Share or Programs or Programs
______ ____________ __________ ___________________ ____________________
(in thousands) (in thousands) (in millions)
December 1 ? 31, 2007 1,717.3 $ 65.19 1,717.3 $1,461.1
January 1 ? 31, 2008 2,053.0 $ 59.20 2,053.0 $1,339.6
February 1 ? 29, 2008 1,800.0 $ 61.31 1,800.0 $1,229.2
_________ _______ _________
Total 5,570.3 $ 61.73 5,570.3
========= =========
Item 6. Exhibits
(a) EXHIBITS:
3.1 Restated Articles of Incorporation, as amended (incorporated
by reference to Exhibit 3.1 to the Company?s Quarterly Report
on Form 10-Q for the fiscal quarter ended August 31, 2005).
3.2 Third Restated Bylaws, as amended (incorporated by reference
from Exhibit 3.2 to the Company?s Current Report on Form 8-K
filed February 16, 2007).
4.1 Restated Articles of Incorporation, as amended (see Exhibit
3.1).
4.2 Third Restated Bylaws, as amended (see Exhibit 3.2).
10.1 First Amendment to the Credit Agreement, dated August 24, 2007, among
NIKE, Inc., Bank of America, N.A., as Administrative Agent, Citicorp
USA, Inc., as Syndication Agent, and HSBC Bank USA, N.A., The Bank of
Tokyo Mitsubishi UFG, Ltd. and Deutsche Bank Securities Inc.,
as Co-Documentation Agents, and the other Banks named therein.
10.2 Extension and Second Amendment to the Credit Agreement, dated
November 1, 2007, among NIKE, Inc., Bank of America, N.A., as
Administrative Agent, Citicorp USA, Inc., as Syndication
Agent, and HSBC Bank USA, N.A., The Bank of Tokyo Mitsubishi
UFG, Ltd. and Deutsche Bank Securities Inc., as Co-
Documentation Agents, and the other Banks named therein.
31.1 Rule 13(a)-14(a) Certification of Chief Executive Officer.
31.2 Rule 13(a)-14(a) Certification of Chief Financial Officer.
32.1 Section 1350 Certificate of Chief Executive Officer.
32.2 Section 1350 Certificate of Chief Financial Officer.
SIGNATURES
Pursuant to the requirements of the Securities Exchange Act of 1934,
the registrant has duly caused this report to be signed on its behalf by
the undersigned thereunto duly authorized.
NIKE, Inc.
an Oregon Corporation
/s/Donald W. Blair
________________________
Donald W. Blair
Chief Financial Officer
DATED: April 3, 2008