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 November 30, 2006
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, or a non-accelerated filer.
Large accelerated filer X Accelerated filer Non-accelerated filer
___ ___ ___
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 November 30, 2006 were:
_______________
Class A 63,906,694
Class B 188,089,156
_______________
251,995,850
===============
PART 1 - FINANCIAL INFORMATION
Item 1. FINANCIAL STATEMENTS
NIKE, Inc.
UNAUDITED CONDENSED CONSOLIDATED BALANCE SHEETS
November 30, May 31,
2006 2006
________ ________
(in millions)
ASSETS
Current assets:
Cash and equivalents $1,102.9 $ 954.2
Short-term investments 804.4 1,348.8
Accounts receivable, net 2,387.6 2,395.9
Inventories (Note 2) 2,167.2 2,076.7
Deferred income taxes 186.2 203.3
Prepaid expenses and other current assets 561.3 380.1
________ ________
Total current assets 7,209.6 7,359.0
Property, plant and equipment 3,548.4 3,408.3
Less accumulated depreciation 1,875.4 1,750.6
________ ________
Property, plant and equipment, net 1,673.0 1,657.7
Identifiable intangible assets, net (Note 3) 406.7 405.5
Goodwill (Note 3) 130.8 130.8
Deferred income taxes and other assets 402.1 316.6
________ ________
Total assets $9,822.2 $9,869.6
======== ========
LIABILITIES AND SHAREHOLDERS' EQUITY
Current liabilities:
Current portion of long-term debt $ 30.6 $ 255.3
Notes payable 59.2 43.4
Accounts payable 880.3 952.2
Accrued liabilities (Note 4) 1,244.1 1,286.9
Income taxes payable 71.0 85.5
________ ________
Total current liabilities 2,285.2 2,623.3
Long-term debt 383.5 410.7
Deferred income taxes and other liabilities 615.1 550.1
Commitments and contingencies (Note 10) -- --
Redeemable preferred stock 0.3 0.3
Shareholders' equity:
Common stock at stated value:
Class A convertible-63.9 and
63.9 million shares outstanding 0.1 0.1
Class B-188.1 and 192.1 million shares
outstanding 2.7 2.7
Capital in excess of stated value 1,741.4 1,447.3
Accumulated other comprehensive income (Note 6) 142.7 121.7
Retained earnings 4,651.2 4,713.4
________ ________
Total shareholders' equity 6,538.1 6,285.2
________ ________
Total liabilities and shareholders' equity $9,822.2 $9,869.6
======== ========
The accompanying Notes to Unaudited Condensed Consolidated Financial
Statements are an integral part of this statement.
NIKE, Inc.
UNAUDITED CONDENSED CONSOLIDATED STATEMENTS OF INCOME
Three Months Ended Six Months Ended
November 30, November 30,
____________________ __________________
2006 2005 2006 2005
____ ____ ____ ____
(in millions, except per share data)
Revenues $3,821.7 $3,474.7 $8,015.8 $7,336.7
Cost of sales 2,164.6 1,963.3 4,509.5 4,077.2
_________ _________ _________ _________
Gross margin 1,657.1 1,511.4 3,506.3 3,259.5
Selling and administrative expense 1,223.7 1,054.7 2,513.4 2,159.1
Interest income, net (14.1) (5.7) (27.2) (12.1)
Other expense (income), net 0.2 (1.4) (3.0) (11.3)
_________ _________ _________ _________
Income before income taxes 447.3 463.8 1,023.1 1,123.8
Income taxes (Note 5) 121.7 162.7 320.3 390.4
_________ _________ _________ _________
Net income $ 325.6 $ 301.1 $ 702.8 $ 733.4
========= ========= ========= =========
Basic earnings per common share (Note 8) $ 1.30 $ 1.16 $ 2.79 $ 2.82
========= ========= ========= =========
Diluted earnings per common share (Note 8) $ 1.28 $ 1.14 $ 2.76 $ 2.77
========= ========= ========= =========
Dividends declared per common share $ 0.37 $ 0.31 $ 0.68 $ 0.56
========= ========= ========= =========
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
Six Months Ended
November 30,
_____________________
2006 2005
____ ____
(in millions)
Cash provided (used) by operations:
Net income $ 702.8 $ 733.4
Income charges (credits) not affecting cash:
Depreciation 135.4 136.2
Deferred income taxes 42.1 5.2
Stock-based compensation (Note 7) 91.7 --
Amortization and other 6.9 6.9
Tax benefit from exercise of stock options -- 37.0
Changes in certain working capital components and other
assets and liabilities:
Decrease in accounts receivable 38.1 68.3
Increase in inventories (98.4) (99.3)
Increase in prepaid expenses
and other assets (230.8) (31.0)
Decrease in accounts payable, accrued
liabilities and income taxes payable (146.2) (118.5)
_________ ________
Cash provided by operations 541.6 738.2
_________ ________
Cash provided (used) by investing activities:
Purchases of investments (913.0) (1,169.6)
Maturities of investments 1,468.0 690.2
Additions to property, plant and
equipment (155.1) (164.7)
Proceeds from the sale of property, plant and
equipment 0.4 0.6
Increase in other assets and liabilities, net (10.4) (8.6)
_________ ________
Cash provided (used) by investing activities 389.9 (652.1)
_________ ________
Cash provided (used) by financing activities:
Reductions in long-term debt,
including current portion (252.9) (3.1)
Increase in notes payable 13.5 18.1
Proceeds from exercise of options and
other stock issuances 180.5 145.8
Excess tax benefits from stock option exercises 31.6 --
Repurchase of common stock (619.4) (382.6)
Dividends on common stock (157.0) (130.4)
_________ ________
Cash used by financing activities (803.7) (352.2)
_________ ________
Effect of exchange rate changes on cash 20.9 12.5
_________ ________
Net increase (decrease) in cash and equivalents 148.7 (253.6)
Cash and equivalents, beginning of period 954.2 1,388.1
_________ ________
Cash and equivalents, end of period $ 1,102.9 $1,134.5
========= =========
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, 2006 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 six (6) months ended November 30, 2006 are not necessarily
indicative of results to be expected for the entire year.
Recently Issued 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 provisions of FIN 48
are effective for the fiscal year beginning June 1, 2007. The Company is
currently evaluating the impact of the provisions of FIN 48.
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 provisions of EITF 06-2 are effective for the fiscal year beginning June
1, 2007 and will be applied through a cumulative effect adjustment to retained
earnings. The Company has evaluated the provisions of EITF 06-2 and does not
expect that the adoption will have a material impact on the Company's
consolidated financial position or results of operations.
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 are
effective for the fiscal year beginning June 1, 2008. The Company is
currently evaluating the impact of the provisions of FAS 157.
In September 2006, the FASB issued SFAS No. 158, "Employers' Accounting
for Defined Benefit Pension and Other Postretirement Plans" ("FAS 158"). FAS
158 requires employers to fully recognize the obligations associated with
single-employer defined benefit pension, retiree healthcare and other
postretirement plans in their financial statements. The provisions of FAS 158
are effective as of the end of the fiscal year ending May 31, 2007. The
Company has evaluated the provisions of FAS 158 and does not expect that the
adoption will have a material impact on the Company's consolidated financial
position or results of operations.
In September 2006, the SEC staff issued Staff Accounting Bulletin No.
108, "Considering the Effects of Prior Year Misstatements when Quantifying
Misstatements in Current Year Financial Statements" ("SAB 108"). SAB 108
requires public companies to quantify errors using both a balance sheet and
income statement approach and evaluate whether either approach results in
quantifying a misstatement as material, when all relevant quantitative and
qualitative factors are considered. The guidance in SAB 108 is effective for
the fiscal year ending May 31, 2007. The Company is currently evaluating the
impact of the provisions of SAB 108.
NOTE 2 - Inventories:
___________
Inventory balances of $2,167.2 million and $2,076.7 million at November
30, 2006 and May 31, 2006, 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 November 30, 2006 and May 31, 2006:
November 30, 2006 May 31, 2006
______________________ ______________________
Gross Net Gross Net
Carrying Accumulated Carrying Carrying Accumulated Carrying
Amount Amortization Amount Amount Amortization Amount
________ ____________ ________ ________ ____________ ________
(in millions)
Amortized intangible assets:
Patents $ 37.4 $ (10.9) $ 26.5 $ 34.1 $ (10.5) $ 23.6
Trademarks 48.4 (14.7) 33.7 46.4 (11.8) 34.6
Other 21.5 (16.5) 5.0 21.5 (15.7) 5.8
________ ________ ________ ________ ________ _________
Total $ 107.3 $ (42.1) $ 65.2 $ 102.0 $ (38.0) $ 64.0
======== ======== ======== ========
Unamortized intangible assets - Trademarks $ 341.5 $ 341.5
________ ________
Identifiable intangible assets, net $ 406.7 $ 405.5
======== ========
Goodwill $ 130.8 $ 130.8
======== ========
Amortization expense, which is included in selling and administrative
expense, was $2.4 million for both the three-month periods ended November 30,
2006 and 2005, and $4.9 million for both the six-month periods ended November
30, 2006 and 2005. The estimated amortization expense for intangible assets
subject to amortization for each of the years ending May 31, 2007 through May
31, 2011 are as follows: 2007: $9.6 million; 2008: $9.0 million; 2009: $8.0
million; 2010: $7.5 million; 2011: $7.0 million.
NOTE 4 - Accrued Liabilities:
___________________
Accrued liabilities include the following:
November 30, 2006 May 31, 2006
_______________ ____________
(in millions)
Compensation and benefits, excluding taxes $322.9 $427.2
Taxes other than income taxes 144.5 115.1
Endorser compensation 120.7 124.7
Advertising and marketing 117.5 75.4
Fair value of derivatives 108.7 111.2
Dividends payable 93.3 79.5
Import and logistics costs 65.0 63.3
Converse arbitration1 -- 51.9
Other2 271.5 238.6
_______ _______
$1,244.1 $1,286.9
========= =========
1 The Converse arbitration relates to a charge taken during the fourth
quarter ended May 31, 2006 as a result of a contract dispute between
NIKE, Inc.'s Converse subsidiary and a former South American licensee.
2 Other consists of various accrued expenses and no individual item accounted
for more than $50 million of the balance at November 30, 2006 and May 31, 2006.
NOTE 5 - Income Taxes:
____________
The effective tax rate for the three and six months ended November
30, 2006 of 27.2% and 31.3%, respectively, has decreased from the fiscal 2006
effective tax rate of 35.0%. The decrease is primarily due to a tax agreement
with the Dutch tax authorities entered into during the three months ended
November 30, 2006, which reduces the Company's income taxes for fiscal 2006
through fiscal 2015. A catch up adjustment for the retroactive tax benefit for
fiscal 2006 and the first quarter of fiscal 2007 is reflected in the effective
tax rate for the three months ended November 30, 2006.
NOTE 6 - Comprehensive Income:
____________________
Comprehensive income, net of taxes, is as follows:
Three Months Ended Six Months Ended
November 30, November 30,
_____________________ __________________
2006 2005 2006 2005
____ ____ ____ ____
(in millions)
Net income $325.6 $301.1 $702.8 $733.4
Other comprehensive income:
Change in cumulative translation
adjustment and other 41.0 (26.0) 39.0 (43.3)
Changes due to cash flow hedging
instruments:
Net gain (loss) on hedge derivatives (38.0) 55.4 (19.0) 97.4
Reclassification to net income of
previously deferred (gains) and losses
related to hedge derivative instruments 2.7 (8.4) 1.0 (0.7)
________ _______ _______ _______
Other comprehensive income 5.7 21.0 21.0 53.4
_______ _______ _______ _______
Total comprehensive income $331.3 $322.1 $723.8 $786.8
======= ======= ======= =======
NOTE 7 - Stock-Based Compensation
________________________
In 1990, the Board of Directors adopted, and the shareholders approved,
the NIKE, Inc. 1990 Stock Incentive Plan (the "1990 Plan"). The 1990 Plan
provides for the issuance of up to 66 million previously unissued shares of
Class B Common Stock in connection with stock options and other awards granted
under the plan. The 1990 Plan authorizes the grant of non-statutory stock
options, incentive stock options, stock appreciation rights, stock bonuses and
the issuance and sale of restricted stock. The exercise price for non-
statutory stock options, stock appreciation rights and the grant price of
restricted stock may not be less than 75% of the market price of the
underlying shares on the date of grant. The exercise price for incentive stock
options may not be less than the market price of the underlying shares on
the date of grant. A committee of the Board of Directors administers the 1990
Plan. The committee has the authority to determine the employees to whom
awards will be made, the amount of the awards, and the other terms and
conditions of the awards. The committee has granted substantially all stock
options and restricted stock at 100% of the market price on the date of grant.
Substantially all 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"). Employees are eligible to participate through
payroll deductions up to 10% of their compensation. At the end of each six-
month offering period, shares are purchased by the participants at 85% of the
lower of the fair market value at the beginning or the ending of the offering
period. In each of the six months ended November 30, 2006 and 2005, employees
purchased 0.2 million shares.
On June 1, 2006, the Company adopted SFAS No. 123R "Share-Based Payment"
("FAS 123R") which requires the Company to record expense for stock-based
compensation to employees using a fair value method. 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 in the Unaudited Condensed Consolidated Statements of
Income over the vesting period using the straight-line method.
The following table summarizes the effects of applying FAS 123R during
the six months ended November 30, 2006. The resulting stock-based compensation
expense primarily relates to stock options.
Three Months Ended Six Months Ended
November 30, 2006 November 30, 2006
___________________ ___________________
(in millions, except per share data)
Addition to selling and administrative
expense $ 27.6 $ 88.9
Reduction to income tax expense (8.8) (29.3)
_______ _______
Reduction to net income1 $ 18.8 $ 59.6
======= =======
Reduction to earnings per share:
Basic $ 0.07 $ 0.24
Diluted $ 0.08 $ 0.24
1 In accordance with FAS 123R, stock-based compensation expense reported
during the three and six months ended November 30, 2006, includes $1.0
million, net of tax, no effect per diluted share, and $23.3 million, net of
tax, or $0.09 per diluted share, respectively, of accelerated stock-based
compensation expense recorded for employees eligible for accelerated stock
option vesting upon retirement. 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 November 30, 2006, the Company had $181.1 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 2.5 years.
The Company has adopted the modified prospective transition method
prescribed by FAS 123R, which does not require the restatement of financial
results for previous periods. In accordance with this transition method,
the Company's Unaudited Condensed Consolidated Statement of Income for the
three and six months ended November 30, 2006 includes (1) amortization
of outstanding stock-based compensation granted prior to, but not vested, as
of June 1, 2006, based on the fair value estimated in accordance with the
original provisions of SFAS No. 123, "Accounting for Stock-Based Compensation"
("FAS 123") and (2) amortization of all stock-based awards granted subsequent
to June 1, 2006, based on the fair value estimated in accordance with the
provisions of FAS 123R.
Prior to the adoption of FAS 123R, the Company used the intrinsic value
method to account for stock options and ESPP shares in accordance with
Accounting Principles Board Opinion No. 25, "Accounting for Stock
Issued to Employees" as permitted by FAS 123. If the Company had instead
accounted for stock options and ESPP shares issued to employees using the fair
value method prescribed by FAS 123 during the three and six months
ended November 30, 2005, the Company's pro forma net income and pro forma
earnings per share would have been reported as follows:
Three Months Ended Six Months Ended
November 30, 2005 November 30, 2005
____________________ __________________
(in millions, except per share data)
Net income as reported $301.1 $733.4
Add: Stock option expense included
in reported net income, net of tax 0.0 0.1
Deduct: Total stock option and ESPP
expense under fair value based method for all
awards, net of tax1 (19.6) (38.5)
_______ _______
Pro forma net income $281.5 $695.0
======= =======
Earnings per share:
Basic - as reported $ 1.16 $2.82
Basic - pro forma 1.09 2.67
Diluted - as reported 1.14 2.77
Diluted - pro forma 1.07 2.64
1 Accelerated stock-based compensation expense for options subject to
accelerated vesting due to employee retirement is not included in the pro
forma figures shown above for the three and six months ended November
30, 2005. This disclosure reflects the expense of such options ratably over
the stated vesting period or upon actual employee retirement. Had the Company
recognized the fair value for such stock options on an accelerated basis in
this pro forma disclosure, the Company would have recognized less stock-based
compensation expense of $1.2 million, net of tax, no effect per diluted share,
for the three months ended November 30, 2005 and additional stock-based
compensation expense of $19.1 million, net of tax, or $0.07 per diluted share
for the six months ended November 30, 2005.
The weighted average fair value per share of the options granted during
the six months ended November 30, 2006 and 2005 as computed using the Black-
Scholes pricing model was $17.54 and $19.35, respectively. The weighted
average assumptions used to estimate these fair values are as follows:
Six Months Ended
November 30,
____________________
2006 2005
____ ____
Dividend yield 1.6% 1.0%
Expected volatility 18.7% 20.7%
Weighted-average expected life (in years) 5.0 4.5
Risk-free interest rate 5.0% 4.0%
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. 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.
The following summarizes the Company's stock option transactions during
the six months ended November 30, 2006:
Weighted
Weighted Average
Average Contractual Aggregate
Exercise Life Intrinsic
Shares Price Remaining Value
__________ __________ __________ _________
(in millions) (in years) (in millions)
Options outstanding May 31, 2006 20.2 $ 64.62
Exercised (3.2) 53.23
Forfeited (0.6) 73.16
Granted 5.8 78.89
__________
Options outstanding November 30, 2006 22.2 $ 69.71 7.5 $ 650.2
========== ========= ========== =========
Options exercisable November 30, 2006 9.5 $ 58.15 5.9 $ 389.4
========== ========= ========== =========
The aggregate intrinsic value in the table above was the amount by which
the market value of the underlying stock exceeded the exercise price of the
options. The total intrinsic value of the options exercised during the
six months ended November 30, 2006 and 2005 was $107.6 million and $95.5
million, respectively.
The following table summarizes the Company's total stock-based
compensation expense:
Three Months Ended Six Months Ended
November 30, 2006 November 30, 2006
____________________ __________________
(in millions)
Stock options $25.9 $85.4
ESPPs 1.7 3.5
Restricted stock1 1.6 2.8
_______ _______
Total stock-based compensation expense $29.2 $91.7
======= =======
1 The expense related to restricted stock awards was included in selling
and administrative expense in prior years and was not affected by the adoption
of FAS 123R.
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 10.8 million
and 5.6 million shares of common stock were outstanding for the three months
ended November 30, 2006 and 2005, respectively, and 9.2 million and 5.6
million shares of common stock were outstanding for the six months ended
November 30, 2006 and November 30, 2005, respectively, but were not included
in the computation of diluted earnings per share because the options were
antidilutive.
Three Months Ended Six Months Ended
November 30, November 30,
_____________________ ___________________
2006 2005 2006 2005
____ ____ ____ ____
(in millions, except per share data)
Determination of shares:
Weighted average common shares
outstanding 251.2 259.0 252.0 260.0
Assumed conversion of
dilutive stock options
and awards 2.5 4.7 2.4 5.0
_______ _______ _______ _______
Diluted weighted average common
shares outstanding 253.7 263.7 254.4 265.0
======= ======= ======= =======
Basic earnings per common share $ 1.30 $ 1.16 $ 2.79 $ 2.82
======= ======= ======= =======
Diluted earnings per common share $ 1.28 $ 1.14 $ 2.76 $ 2.77
======= ======= ======= =======
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, 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, 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 Six Months Ended
November 30, November 30,
__________________ _________________
2006 2005 2006 2005
_____ _____ _____ _____
(in millions)
Net Revenue
U.S. $1,418.0 $1,307.1 $3,019.9 $2,816.0
EUROPE, MIDDLE EAST, AFRICA 1,036.2 977.4 2,307.1 2,194.9
ASIA PACIFIC 578.2 503.3 1,096.6 962.9
AMERICAS 262.5 252.1 505.0 465.8
OTHER 526.8 434.8 1,087.2 897.1
_________ _________ _________ _________
$3,821.7 $3,474.7 $8,015.8 $7,336.7
========= ========= ========= =========
Pre-tax Income
U.S. $ 266.0 $ 265.7 $ 604.9 $ 610.9
EUROPE, MIDDLE EAST, AFRICA 158.8 194.2 461.3 524.4
ASIA PACIFIC 139.9 115.2 238.8 206.6
AMERICAS 59.8 57.4 108.2 102.0
OTHER 54.3 23.0 142.2 63.0
CORPORATE (231.5) (191.7) (532.3) (383.1)
_________ _________ _________ _________
$ 447.3 $ 463.8 $1,023.1 $1,123.8
========= ========= ========= =========
Nov. 30, May 31,
2006 2006
_________ _________
(in millions)
Accounts receivable, net
U.S. $ 773.8 $ 717.2
EUROPE, MIDDLE EAST, AFRICA 619.1 716.3
ASIA PACIFIC 325.7 319.7
AMERICAS 230.1 174.5
OTHER 356.1 410.0
CORPORATE 82.8 58.2
_________ _________
$2,387.6 $2,395.9
========= =========
Inventories
U.S. $ 803.1 $ 725.9
EUROPE, MIDDLE EAST, AFRICA 549.8 590.1
ASIA PACIFIC 245.5 238.3
AMERICAS 139.7 147.6
OTHER 369.2 330.5
CORPORATE 59.9 44.3
_________ _________
$2,167.2 $2,076.7
========= =========
Property, plant and equipment, net
U.S. $ 225.8 $ 219.3
EUROPE, MIDDLE EAST, AFRICA 294.2 266.6
ASIA PACIFIC 336.9 354.8
AMERICAS 16.3 17.0
OTHER 99.4 98.2
CORPORATE 700.4 701.8
_________ _________
$1,673.0 $1,657.7
========= =========
NOTE 10 - Commitments and Contingencies:
_____________________________
At November 30, 2006, the Company had letters of credit outstanding
totaling $149.3 million. These letters of credit were issued primarily for
the purchase of inventory.
There have been no other significant subsequent developments
relating to the commitments and contingencies reported on the
Company's latest Annual Report on Form 10-K.
Item 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND
RESULTS OF OPERATIONS
Overview
In the second quarter of fiscal 2007, revenues grew 10% to $3.8 billion,
net income grew 8% to $325.6 million and we delivered diluted earnings per
share of $1.28, a 12% increase versus the second quarter of fiscal 2006.
During the quarter, the Company finalized a new ten-year tax agreement with
the Dutch tax authorities, which will improve our cash flows and reduce our
effective tax rate in fiscal 2007 and future years. The agreement provided a
retroactive tax benefit for fiscal 2006 and the first quarter of fiscal 2007,
which was recognized during the three months ended November 30, 2006. The
Dutch tax agreement contributed $0.13 per diluted share to our results for the
second quarter.
Also included in our second quarter results is an after-tax charge of
$18.8 million, or approximately $0.08 per diluted share, related to stock-
based compensation expense now recognized in accordance with Statement of
Financial Accounting Standard ("SFAS") No. 123R "Share-Based Payment" ("FAS
123R"), which we adopted during the first quarter of fiscal 2007. Our net
income for the quarter was negatively affected by higher demand creation
spending compared with low spending levels last year, when our spending was
heavily weighted to the fourth quarter of fiscal 2006 in support of the World
Cup. Our earnings per share for the quarter grew at a higher rate than net
income given lower outstanding shares due to our share repurchase program.
Results of Operations
Three Months Ended Six Months Ended
November 30, November 30,
___________________ __________________
% %
2006 2005 change 2006 2005 change
______ ______ ________ ______ ______ ________
(in millions, except per share data)
Revenues $3,821.7 $3,474.7 10% $8,015.8 $7,336.7 9%
Cost of sales 2,164.6 1,963.3 10% 4,509.5 4,077.2 11%
Gross margin 1,657.1 1,511.4 10% 3,506.3 3,259.5 8%
Gross margin % 43.4% 43.5% 43.7% 44.4%
Selling and administrative 1,223.7 1,054.7 16% 2,513.4 2,159.1 16%
% of revenue 32.0% 30.4% 31.4% 29.4%
Income before income taxes 447.3 463.8 -4% 1,023.1 1,123.8 -9%
Net income 325.6 301.1 8% 702.8 733.4 -4%
Diluted earnings per share 1.28 1.14 12% 2.76 2.77 0%
Reconciliation of Net Income and Diluted Earnings Per Share ("EPS")
Excluding Stock-Based Compensation Expense
Three Months Ended Six Months Ended
November 30, November 30,
___________________ __________________
% %
2006 2005 change 2006 2005 change
______ ______ ________ ______ ______ _______
(dollars in millions, except per share data)
Net income, as reported $325.6 $301.1 8% $702.8 $733.4 -4%
Stock-based compensation expense1,
net of tax of $8.8 and $29.3 18.8 -- - 59.6 -- -
_______ ________ _______ _______
Net income, excluding stock-
based compensation expense2 $344.4 $301.1 14% $762.4 $733.4 4%
Diluted EPS, as reported $ 1.28 $ 1.14 12% $ 2.76 $ 2.77 0%
Diluted EPS, excluding stock-
based compensation expense $ 1.36 $ 1.14 19% $ 3.00 $ 2.77 8%
1 This charge relates to stock-based compensation associated with stock
options and Employee Stock Purchase Plan ("ESPP") shares issued to
employees and expensed in accordance with FAS 123R. We adopted FAS
123R on June 1, 2006 using the modified prospective transition method.
While this expense was not reflected in our results of operations for
the second quarter and first six months of fiscal 2006, it will
continue to be reflected in future accounting periods.
2 This schedule is intended to satisfy the quantitative reconciliation
for non-GAAP financial measures in accordance with Regulation G of the
Securities and Exchange Commission. In addition, this schedule is
provided to enhance the visibility of the underlying business trends
by presenting our results for the second quarter and year-to-date
period of fiscal 2007 using the same accounting policy for stock-based
compensation expense applied during the comparable prior year periods.
Consolidated Operating Results
Revenues
Three Months Ended Six Months Ended
November 30, November 30,
___________________ __________________
% %
2006 2005 change 2006 2005 change
______ ______ ________ ______ ______ _______
(dollars in millions)
Revenues $3,821.7 $3,474.7 10% $8,015.8 $7,336.7 9%
On a consolidated basis, changes in foreign currency exchange rates
increased revenues by 1 percentage point for both the second quarter and first
six months of fiscal 2007. 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 delivered
revenue growth. Excluding the impact of changes in foreign currency, both the
U.S. region and our international regions each contributed 3 percentage points
to the consolidated revenue growth for the quarter and year-to-date periods.
Our Other businesses, comprised of results from Cole Haan Holdings
Incorporated, Converse Inc., Exeter Brands Group LLC, Hurley International
LLC, NIKE Bauer Hockey, Inc., and NIKE Golf contributed the remaining 3
percentage points of the consolidated constant-currency revenue growth for
both the quarter and year-to-date period, as each business within the group
posted higher revenues.
By product group, our worldwide apparel and equipment businesses were
particularly strong, each posting 11% growth for the second quarter; and
combined, added $140 million of incremental revenue. Footwear grew 7%, and
contributed $115 million of incremental revenue for the quarter. For the first
six months of fiscal 2007, our worldwide apparel and equipment businesses
contributed $278 million of incremental revenue, while footwear contributed
$212 million of incremental revenue.
Gross Margin
Three Months Ended Six Months Ended
November 30, November 30,
___________________ __________________
% %
2006 2005 change 2006 2005 change
______ ______ ________ ______ ______ _______
(dollars in millions)
Gross margin $1,657.1 $1,511.4 10% $3,506.3 $3,259.5 8%
Gross margin % 43.4% 43.5% -10 bps 43.7% 44.4% -70bps
For the second quarter of fiscal 2007, gross margins remained relatively
consistent with the prior year period, reflecting a slight decrease in our
overall geographical region margins, partially offset by margin improvement in
our Other businesses. The primary factors contributing to the year-to-date
change in gross margin percentage were as follows:
(1) Lower footwear in-line net pricing margins due to:
- higher sales incentives, primarily in the Europe, Middle East and
Africa ("EMEA") region;
- additional logistics costs incurred to meet strong footwear
demand in the U.S. region; and
- overall higher product costs, primarily the result of higher
labor costs;
- partially offset by cost reduction such as lean manufacturing and
price increases on selected products.
(2) Higher gross margins for apparel, primarily during the second
quarter, due to a shift in mix from lower margin apparel to higher
margin apparel, combined with improved inventory management.
(3) Improved gross margins in our Other businesses driven primarily by
NIKE Bauer Hockey and Converse, partially offset by the expected
effects of the transition in Exeter's business model from licensing
to wholesale.
Selling and Administrative Expense
Three Months Ended Six Months Ended
November 30, November 30,
___________________ __________________
% %
2006 2005 change 2006 2005 change
______ ______ ________ ______ ______ _______
(dollars in millions)
Operating overhead expense, excluding
stock-based compensation expense1 $ 716.6 $ 677.7 6% $1,443.0 $1,360.5 6%
Stock-based compensation expense2 27.6 -- - 88.9 -- -
_______ ________ _________ ________
Operating overhead expense, as
reported 744.2 677.7 10% 1,531.9 1,360.5 13%
Demand creation expense3 479.5 377.0 27% 981.5 798.6 23%
_________ _________ _________ _________
Selling and administrative
expense $1,223.7 $1,054.7 16% $2,513.4 $2,159.1 16%
% of revenues 32.0% 30.4% 160 bps 31.4% 29.4% 200bps
1 This schedule is intended to satisfy the quantitative reconciliation
for non-GAAP financial measures in accordance with Regulation G of the
Securities and Exchange Commission. In addition, this schedule is
provided to enhance the visibility of the underlying business trends
excluding this identifiable expense by presenting our results for the
second quarter and first six months of fiscal 2007 using the same
accounting policy for stock-based compensation expense applied during the
comparable prior year periods.
2 This charge relates to stock-based compensation associated with stock
options and ESPP shares issued to employees and expensed in accordance
with FAS 123R. We adopted FAS 123R on June 1, 2006 using the modified
prospective transition method. While this expense was not reflected in
our results of operations for the second quarter and first six months of
fiscal 2006, it will continue to be reflected in future accounting
periods.
3 Demand creation consists of advertising and promotion expenses, including
costs of endorsement contracts.
Changes in foreign currency exchange rates increased selling and
administrative expense by 1 percentage point for the second quarter and year-
to-date period versus the same periods in the prior year. During the second
quarter and first six months of fiscal 2007, excluding stock-based
compensation, the increase in selling and administrative expenses, comprised of
demand creation (advertising and promotion) and operating overhead, was
primarily attributable to the timing of major advertising campaigns during
fiscal 2007 versus fiscal 2006.
In the second quarter and year-to-date period, demand creation expense
increased 27% and 23%, respectively, versus the same periods in the prior year.
The growth in demand creation was driven by increased spending on advertising
and sports marketing events related to the NIKE Pro, LeBron, American Football
and NIKE+ campaigns during the second quarter, and increased spending around
the global World Cup and NIKE Air (registered) campaigns over the six-month
period. Additionally, the timing of demand creation spending in fiscal 2006,
with a higher percentage of our spending occurring in the latter half of the
year around the World Cup, also contributed to the increases versus the
comparable prior year periods. For all of fiscal 2007, growth in demand
creation expense is expected to be more in line with our revenue growth.
Excluding stock-based compensation expense, operating overhead increased
6% for both the second quarter and first six months of fiscal 2007, a lower
rate of growth than revenue. The increase in operating overhead was mainly
attributable to higher wages and benefits and increased spending to support
the growth of NIKE-owned retail, primarily related to the addition of new
factory outlet stores.
Other Expense (Income), net
Three Months Ended Six Months Ended
November 30, November 30,
___________________ __________________
% %
2006 2005 change 2006 2005 change
______ ______ ________ ______ ______ _______
(dollars in millions)
Other expense (income), net $ 0.2 ($ 1.4) -114% ($ 3.0) ($ 11.3) -73%
Other expense (income), 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. Such items did not have a significant
effect on Other expense (income), net for the second quarter of fiscal 2007.
As disclosed in the first quarter, the decrease in Other expense
(income), net for the first six months of fiscal 2007 compared to the prior
year was primarily the result of foreign currency hedge losses in fiscal
2007, compared to foreign currency hedge gains in fiscal 2006. The foreign
currency hedge losses recognized in the first six months of fiscal 2007 were
more than offset by the $14.2 million benefit from the final settlement of the
Converse arbitration during the first quarter. For our segment reporting,
foreign currency hedge gains and losses are reflected in the Corporate line of
pre-tax income and the Converse arbitration settlement is reflected in the
Other line in our segment presentation of pre-tax income in the Notes to
Unaudited Condensed Consolidated Financial Statements (Note 9 - Operating
Segments).
Income Taxes
Three Months Ended Six Months Ended
November 30, November 30,
___________________ __________________
% %
2006 2005 change 2006 2005 change
______ ______ ________ ______ ______ _______
Effective tax rate 27.2% 35.1% -790 bps 31.3% 34.7% -340 bps
The effective tax rate for the second quarter was 27.2%, an improvement
of nearly 8 percentage points versus the comparable period in the prior year.
During the second quarter, we finalized a tax agreement with the Dutch
government that is effective for fiscal years 2006 through 2015. This
agreement resulted in a retroactive tax benefit related to fiscal 2006 and the
first quarter of fiscal 2007, which we recognized in our second quarter
results. For the balance of fiscal 2007, we expect an effective tax rate of
approximately 33.5%, bringing our estimated full year rate to 32.5%.
Futures Orders
Worldwide futures and advance orders for our footwear and apparel,
scheduled for delivery from December 2006 through April 2007, were 7% higher
than such orders reported for the comparable period of fiscal 2006. 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 from changes in foreign
currency exchange rates contributed 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, U.S. licensed team
apparel, Cole Haan, Converse, Exeter Brands Group, Hurley, NIKE Bauer Hockey,
NIKE Golf and retail sales across all brands.
Operating Segments
The breakdown of revenues follows:
Three Months Ended Six Months Ended
November 30, November 30,
___________________ ____________________
% %
2006 2005 change 2006 2005 change
______ ______ _______ ______ ______ ______
(dollars in millions)
U.S. REGION
FOOTWEAR $ 879.4 $ 811.5 8% $1,958.5 $1,832.6 7%
APPAREL 475.4 433.8 10% 906.9 829.3 9%
EQUIPMENT 63.2 61.8 2% 154.5 154.1 0%
________ ________ ________ ________
TOTAL U.S. 1,418.0 1,307.1 8% 3,019.9 2,816.0 7%
EMEA REGION
FOOTWEAR 541.4 533.2 2% 1,220.9 1,218.3 0%
APPAREL 421.0 379.6 11% 908.0 814.8 11%
EQUIPMENT 73.8 64.6 14% 178.2 161.8 10%
________ ________ ________ ________
TOTAL EMEA 1,036.2 977.4 6% 2,307.1 2,194.9 5%
ASIA PACIFIC REGION
FOOTWEAR 277.4 245.4 13% 543.4 482.8 13%
APPAREL 250.6 214.6 17% 451.5 391.1 15%
EQUIPMENT 50.2 43.3 16% 101.7 89.0 14%
________ ________ ________ ________
TOTAL ASIA PACIFIC 578.2 503.3 15% 1,096.6 962.9 14%
AMERICAS REGION
FOOTWEAR 185.1 178.1 4% 357.4 335.0 7%
APPAREL 55.7 55.4 1% 106.9 96.1 11%
EQUIPMENT 21.7 18.6 17% 40.7 34.7 17%
________ ________ ________ ________
TOTAL AMERICAS 262.5 252.1 4% 505.0 465.8 8%
________ ________ ________ ________
3,294.9 3,039.9 8% 6,928.6 6,439.6 8%
OTHER 526.8 434.8 21% 1,087.2 897.1 21%
________ ________ ________ ________
TOTAL REVENUES $3,821.7 $3,474.7 10% $8,015.8 $7,336.7 9%
======== ======== ======== ========
The breakdown of income before income taxes ("pre-tax income") follows:
Three Months Ended Six Months Ended
November 30, November 30,
___________________ __________________
% %
2006 2005 change 2006 2005 change
______ ______ ________ ______ ______ _______
(dollars in millions)
U.S. Region $ 266.0 $ 265.7 0% $ 604.9 $ 610.9 -1%
EMEA Region 158.8 194.2 -18% 461.3 524.4 -12%
Asia Pacific Region 139.9 115.2 21% 238.8 206.6 16%
Americas Region 59.8 57.4 4% 108.2 102.0 6%
Other 54.3 23.0 136% 142.2 63.0 126%
Corporate (231.5) (191.7) -21% (532.3) (383.1) -39%
________ ________ ________ ________
Total pre-tax income $ 447.3 $ 463.8 -4% $1,023.1 $1,123.8 -9%
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 Six Months Ended
November 30, November 30,
___________________ __________________
% %
2006 2005 change 2006 2005 change
______ ______ ________ ______ ______ _______
(dollars in millions)
Revenues
Footwear $ 879.4 $ 811.5 8% $1,958.5 $1,832.6 7%
Apparel 475.4 433.8 10% 906.9 829.3 9%
Equipment 63.2 61.8 2% 154.5 154.1 0%
________ ________ _________ _________
Total revenues $1,418.0 $1,307.1 8% $3,019.9 $2,816.0 7%
Pre-tax income $ 266.0 $ 265.7 0% $ 604.9 $ 610.9 -1%
For the second quarter and first six months of fiscal 2007, the growth
in U.S. footwear revenue was the result of increases in both unit sales and
average selling price per pair. For both the quarter and year-to-date
period, unit sales growth and increases in average selling price per pair
were driven by higher demand for our NIKE brand sport culture, men's sports
performance, most notably running, and Brand Jordan products.
The growth in U.S. apparel revenues for the second quarter and first
six months of fiscal 2007 was attributable to higher unit sales, primarily
NIKE brand sport performance apparel, as well as an improvement in average
selling prices, driven by team and licensed apparel and Brand Jordan
products.
Second quarter pre-tax income for the U.S. region was consistent with the
comparable period in the prior year, and down slightly for the year-to-date
period, as higher selling and administrative expenses and lower gross margins
(resulting from additional logistics costs incurred to meet strong footwear
unit demand, higher footwear product costs and lower retail margins)
neutralized the growth in revenues. Selling and administrative expenses
increased for the quarter and first six months of the fiscal year as a result
of higher demand creation spending around the Lebron, American Football and
Nike+ campaigns, most notably during the second quarter, combined with
increased spend around the World Cup and Nike Air (registered) campaigns in
the first quarter. The growth in demand creation spend versus the comparable
prior year periods is also a function of the difference in timing of major
advertising campaigns during fiscal 2007 versus fiscal 2006.
EMEA Region
Three Months Ended Six Months Ended
November 30, November 30,
___________________ __________________
% %
2006 2005 change 2006 2005 change
______ ______ ________ ______ ______ _______
(dollars in millions)
Revenues
Footwear $ 541.4 $ 533.2 2% $1,220.9 $1,218.3 0%
Apparel 421.0 379.6 11% 908.0 814.8 11%
Equipment 73.8 64.6 14% 178.2 161.8 10%
________ ________ _______ _________
Total revenues $1,036.2 $ 977.4 6% $2,307.1 $2,194.9 5%
Pre-tax income $ 158.8 $ 194.2 -18% $ 461.3 $ 524.4 -12%
For the EMEA region, which includes Europe, Middle East and Africa,
3 percentage points of the revenue growth for both the second quarter and the
first six months of fiscal 2007 was due to changes in currency exchange rates.
Excluding changes in currency exchange rates, all markets within the region,
with the exception of the U.K. and France, increased revenues during the
quarter and year-to-date period. The emerging markets in the region grew
approximately 30% for the quarter and year-to-date period driven by strong
results in Russia, South Africa and Turkey. Increases in Italy and Spain also
contributed significantly to the revenue growth in both the second quarter and
year-to-date period. While the majority of markets in the region continued to
experience growth, the challenging retail environment in the U.K. and France
partially offset this growth.
Excluding changes in exchange rates, footwear revenues decreased during
the second quarter and year-to-date periods of fiscal 2007 compared to the
same periods in the prior year, as a result of decreased unit sales,
partially offset by a slight increase in the average selling price per pair.
The unit sales decrease was due primarily to lower sales to certain
retailers and a challenging retail environment in the U.K. and France,
offset by increased demand for sport culture products across the rest of the
region. The increase in the average selling price per pair was due in part
to changes in the mix of in-line products sold towards products with a
higher average selling price.
The increase in EMEA apparel revenue during the second quarter and
first six months of 2007 was driven by increased unit sales and an increase
in average selling prices of NIKE brand apparel, primarily sport performance
products, including Nike Pro.
The decline in EMEA pre-tax income for the second quarter and first six
months of fiscal 2007 reflected a lower gross margin percentage and higher
selling and administrative expenses, primarily demand creation, which more
than offset the increase in revenues and favorable foreign currency
translation compared to prior year periods. The lower gross margin
percentage for the quarter and year-to-date period was attributable to lower
in-line net pricing margins in footwear combined with an increase in
warehousing costs. The lower in-line net pricing margins in footwear were
attributable to higher product costs, which were primarily the result of
increased labor costs and higher sales incentives.
Excluding changes in foreign currency exchange rates, selling and
administrative expenses for the second quarter and first six months of 2007
were higher than the corresponding periods in the prior year, driven
primarily by higher demand creation spending around the Nike Pro and Nike+
campaigns, most notably during the second quarter, combined with increased
spend around the World Cup and Nike Air (registered) campaigns over the six-
month period. Operating overhead expense increased in both the second
quarter and first six months of fiscal 2007 due primarily to expected annual
increases in wages and benefits.
Asia Pacific Region
Three Months Ended Six Months Ended
November 30, November 30,
___________________ __________________
% %
2006 2005 change 2006 2005 change
______ ______ ________ ______ ______ _______
(dollars in millions)
Revenues
Footwear $ 277.4 $ 245.4 13% $ 543.4 $ 482.8 13%
Apparel 250.6 214.6 17% 451.5 391.1 15%
Equipment 50.2 43.3 16% 101.7 89.0 14%
________ ________ ________ _________
Total revenues $ 578.2 $ 503.3 15% $ 1,096.6 $ 962.9 14%
Pre-tax income $ 139.9 $ 115.2 21% $ 238.8 $ 206.6 16%
In the Asia Pacific region, changes in currency exchange rates did not
have a significant effect on year-over-year revenue growth for the second
quarter or the first six months of fiscal 2007. While the majority of
countries within the region reported double-digit sales increases for both the
quarter and year-to-date period, China and Korea were the primary drivers of
revenue growth, as revenues for each country grew more than 30% and 20%,
respectively, for both the quarter and year-to-date period. While revenue
growth in the Asia Pacific region was strong, revenue growth in Japan was up
just over 1% for the quarter and approximately 2% year-to-date, due to weak
market conditions.
Footwear revenue growth for both the quarter and first six months of
fiscal 2007 reflected increased unit sales, most notably in China and Korea,
partially offset by lower average selling prices, which primarily resulted
from strategies to improve consumer value in Japan. The increase in apparel
revenue for both the quarter and year-to-date period was also primarily driven
by increased demand in China and Korea.
The increase in pre-tax income in the second quarter and first six
months of fiscal 2007 was driven by higher revenues, improved gross
margins and favorable foreign currency translation, which more than offset
higher selling and administrative expenses. The increase in selling and
administrative expenses during the second quarter was primarily attributable
to demand creation investments in the LeBron campaign, the Just Do It
campaign in China, the launch of Nike+ in Japan, and sports marketing across
the region, as well as increased spend around the World Cup during the first
quarter. Overall business growth across the region, combined with retail
expansion in China also contributed to an increase in operating overhead
expenses. The gross margin improvement for the quarter and first six months
of the fiscal year was primarily driven by improved year-over-year hedge
rates, better inventory management and reduced warehousing costs. The year-
to-date improvement in margins was partially offset by higher sales
incentives combined with efforts to improve consumer value, most notably in
Japan.
Americas Region
Three Months Ended Six Months Ended
November 30, November 30,
___________________ __________________
% %
2006 2005 change 2006 2005 change
______ ______ ________ ______ ______ _______
(dollars in millions)
Revenues
Footwear $ 185.1 $ 178.1 4% $ 357.4 $ 335.0 7%
Apparel 55.7 55.4 1% 106.9 96.1 11%
Equipment 21.7 18.6 17% 40.7 34.7 17%
________ ________ _________ _________
Total revenues $ 262.5 $ 252.1 4% $ 505.0 $ 465.8 8%
Pre-tax income $ 59.8 $ 57.4 4% $ 108.2 $ 102.0 6%
In the Americas region, changes in currency exchange rates contributed
1 and 2 percentage points of revenue growth for the second quarter and first
six months of fiscal 2007, respectively. Excluding the changes in foreign
currency exchange rates, sales increases in Argentina, Mexico and Chile
contributed to the revenue growth in both the second quarter and year-to-
date period. Growth in these markets was partially offset by sales declines
in Brazil and Canada for both the second quarter and year-to-date period.
The increase in pre-tax income for both the second quarter and first
six months was attributable to higher revenues and improved gross margins,
combined with favorable foreign currency translation. These factors were
partially offset by higher selling and administrative expenses for both the
quarter and year-to-date period. The increase in selling and administrative
expenses was primarily the result of higher demand creation spending around
the Run Americas II campaign during the second quarter and the global World
Cup in the year-to-date period. Operating overhead expense also increased
for the quarter and first six months of fiscal 2007, driven by increases in
wages and benefit costs.
Other Businesses
Three Months Ended Six Months Ended
November 30, November 30,
___________________ __________________
% %
2006 2005 change 2006 2005 change
______ ______ ________ ______ ______ _______
(dollars in millions)
Revenues $ 526.8 $ 434.8 21% $1,087.2 $ 897.1 21%
Pre-tax income 54.3 23.0 136% 142.2 63.0 126%
The increase in Other business revenues for the second quarter and
first six months of fiscal 2007 was driven by higher revenues across all
businesses, most notably Converse and NIKE Bauer Hockey.
During the second quarter and year-to-date period, improved
profitability at Converse, driven by increased revenues in the U.S. and
internationally, and growth at NIKE Bauer Hockey contributed to the increase
in pre-tax income versus the same periods in the prior year. As previously
discussed, the year-to-date results include the benefit from the favorable
settlement of the arbitration ruling involving Converse and a former South
American licensee.
Liquidity and Capital Resources
Cash Flow Activity
Cash provided by operations was $541.6 million for the first six months
of fiscal 2007, compared to $738.2 million for the first six months of
fiscal 2006. Our primary source of operating cash flow for the first six
months of 2007 was net income of $702.8 million offset by an increased
investment in working capital to support growth in the business. The
increased investment in working capital over the first six months of fiscal
2007 was largely due to an increase in taxes receivable resulting from the
Dutch Tax agreement and an increase in tax prepayments versus the same
period in the prior year.
Cash provided by investing activities was $389.9 million for the first
six months of fiscal 2007, compared to cash used in investing activities of
$652.1 million for the first six months of fiscal 2006. The increase over
fiscal 2006 was primarily due to higher net maturities of short-term
investments (maturities net of purchases) as we liquidated short-term
investments for share repurchases.
Cash used in financing activities was $803.7 million for the first six
months of fiscal 2007, compared to $352.2 million used in the first six
months of fiscal 2006. The increase over fiscal 2006 was primarily due to
the $250 million repayment of corporate bonds, combined with an increase in
share repurchases, as discussed below.
In the current quarter, we purchased 1.5 million shares of NIKE's Class
B common stock for $126.0 million, bringing total purchases for the first
six months of fiscal 2007 to 7.5 million shares at a cost of $602.7 million.
In the first quarter of fiscal 2007, we repurchased 6 million shares, of
which 2 million shares completed the previous four-year, $1.5 billion share
repurchase program approved by the Board of Directors in June 2004. As of
the end the second quarter of fiscal 2007, we have now repurchased 5.5
million shares for $440.1 million under the new $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.
During the second quarter of fiscal 2007, we increased our dividend per
common share 19% to $0.37, as compared to $0.31 in the second quarter of
fiscal 2006.
Contractual Obligations
As a result of renewals of and additions to outstanding endorsement
contracts, the cash payments due under our endorsement contracts have
changed from what was previously reported in our Annual Report on Form 10-K
as of May 31, 2006.
Endorsement contract obligations as of November 30, 2006 are as follows:
Cash Payments Due During the Fiscal Year Ending
May 31,
_______________________________________________
Remaining
Description of Commitment 2007 2008 2009 2010 2011 Thereafter Total
__________________________ ______ ______ ______ ______ ______ __________ _______
(in millions)
Endorsement Contracts $ 270.5 422.6 376.4 295.0 235.9 651.9 $2,252.3
The amounts listed for endorsement contracts represent approximate
amounts of base compensation and minimum guaranteed royalty fees we are
obligated to pay athlete and sport 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.
Capital Resources
On December 1, 2006, the Company entered into a new $1 billion multi-year
credit facility that replaces the Company's previous $750 million facility.
The new revolving credit facility has similar terms as the previous facility
and matures in December 2011, with a one year extension option prior to each
of the first anniversary and second anniversary of the closing date, for a
total extension of two years. No amounts were outstanding under these
facilities at May 31, 2006 or November 30, 2006.
Our long-term senior unsecured debt ratings remain at A+ and A2 from
Standard and Poor's Corporation and Moody's Investor Services, respectively.
Liquidity is also provided by our commercial paper program, under which
there was no amount outstanding at November 30, 2006 or May 31, 2006. We
currently have short-term debt ratings of A1 and P1 from Standard and Poor's
Corporation and Moody's Investor Services, respectively.
We currently believe that cash generated by operations, together with
access to external sources of funds as described above and in our Annual
Report on Form 10-K for the fiscal year ended May 31, 2006, will be
sufficient to meet our operating and capital needs in the foreseeable
future.
Recently Issued 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 our financial statements in accordance with FASB Statement No.
109, "Accounting for Income Taxes". The provisions of FIN 48 are effective
for our fiscal year beginning June 1, 2007. We are currently evaluating the
impact of the provisions of FIN 48.
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 provisions of EITF 06-2 are effective for the fiscal year beginning June
1, 2007 and will be applied through a cumulative effect adjustment to retained
earnings. We have evaluated the provisions of EITF 06-2 and do not expect
that the adoption will have a material impact on the Company's consolidated
financial position or results of operations.
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 generally accepted accounting
principles, and expands disclosures about fair value measurements. The
provisions of FAS 157 are effective for our fiscal year beginning June 1,
2008. We are currently evaluating the impact of the provisions of FAS 157.
In September 2006, the FASB issued SFAS No. 158. "Employers' Accounting
for Defined Benefit Pension and Other Postretirement Plans" ("FAS 158").
FAS 158 requires employers to fully recognize the obligations associated
with single-employer defined benefit pension, retiree healthcare and other
postretirement plans in their financial statements. The provisions of FAS
158 are effective as of the end of the fiscal year ending May 31, 2007. We
have evaluated the provisions of FAS 158 and do not expect that the adoption
will have a material impact on the Company's consolidated financial position
or results of operations.
In September 2006, the SEC staff issued Staff Accounting Bulletin No.
108, "Considering the Effects of Prior Year Misstatements when Quantifying
Misstatements in Current Year Financial Statements" ("SAB 108"). SAB 108
requires public companies to quantify errors using both a balance sheet and
income statement approach and evaluate whether either approach results in
quantifying a misstatement as material, when all relevant quantitative and
qualitative factors are considered. The guidance in SAB 108 is effective for
the fiscal year ending May 31, 2007. We are currently evaluating the
impact of SAB 108.
Critical Accounting Policies
Our discussion and analysis of our financial condition and results of
operations are based upon our consolidated financial statements, which have
been prepared in accordance with accounting principles generally accepted in
the United States. The preparation of these financial statements requires us
to make estimates and judgments that affect the reported amounts of assets,
liabilities, revenues and expenses, and related disclosure of contingent
assets and liabilities.
We believe that the estimates, assumptions and judgments involved in
the accounting policies described in the "Management's Discussion and
Analysis of Financial Condition and Results of Operations" section of our
most recent Annual Report on Form 10-K have the greatest potential impact on
our financial statements, so we consider these to be our critical accounting
policies. With the adoption of FAS 123R at the beginning of the first
quarter of fiscal 2007, we have added "Stock-based Compensation" as a
critical accounting policy as described below. Actual results could differ
from the estimates we use in applying the critical accounting policies.
Certain of these critical accounting policies affect working capital account
balances, including the policies for revenue recognition, the reserve for
uncollectible accounts receivable, inventory reserves, and contingent
payments under endorsement contracts. These policies require that we make
estimates in the preparation of our financial statements as of a given date.
However, since our business cycle is relatively short, actual results
related to these estimates are generally known within the six-month period
following the financial statement date. Thus, these policies generally
affect only the timing of reported amounts across two to three quarters.
Within the context of these critical accounting policies, we are not
currently aware of any reasonably likely events or circumstances that would
result in materially different amounts being reported.
Stock-based Compensation
As of the first quarter of fiscal 2007, we account for stock-based
compensation in accordance with FAS 123R. Under the provisions of FAS 123R,
the fair value of stock-based compensation is estimated on the date of grant
using the Black-Scholes fair value model. The Black-Scholes option pricing
model requires the input of highly subjective assumptions including
volatility. Expected volatility is estimated based on implied volatility in
market traded options on the Company's common stock, with a term greater than
one year. Our decision to use implied volatility was based on the
availability of actively traded options on our common stock and our assessment
that implied volatility is more representative of future stock price trends
than historical volatility. If factors change and we use different
assumptions for estimating stock-based compensation expense in future periods,
stock-based compensation expense may differ materially in the future from that
recorded in the current period.
Item 3. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK
There have been no material changes from the information previously
reported under Item 7A of the Company's Annual Report on Form 10-K for the
fiscal year ended May 31, 2006.
Item 4. CONTROLS AND PROCEDURES
The Company maintains disclosure controls and procedures that are
designed to ensure that information required to be disclosed in the Company's
Exchange Act reports is recorded, processed, summarized and reported within
the time periods specified in the Securities and Exchange Commission's rules
and forms and that such information is accumulated and communicated to the
Company's management, including its Chief Executive Officer and Chief
Financial Officer, as appropriate, to allow for timely decisions regarding
required disclosure. In designing and evaluating the disclosure controls and
procedures, management recognizes that any controls and procedures, no matter
how well designed and operated, can provide only reasonable assurance of
achieving the desired control objectives, and management is required to apply
its judgment in evaluating the cost-benefit relationship of possible controls
and procedures.
The Company carries out a variety of on-going procedures, under the
supervision and with the participation of the Company's management, including
the Company's Chief Executive Officer and the Company's Chief Financial
Officer, to evaluate the effectiveness of the design and operation of the
Company's disclosure controls and procedures. Based on the foregoing, the
Company's Chief Executive Officer and Chief Financial Officer concluded that
the Company's disclosure controls and procedures were effective at the
reasonable assurance level as of November 30, 2006.
There has been no change in the Company's internal controls over
financial reporting during the Company's most recent fiscal quarter that has
materially affected, or is reasonably likely to materially affect, the
Company's internal controls over financial reporting.
Special Note Regarding Forward-Looking Statements
and Analyst Reports
Certain written and oral statements, other than purely historical
information including estimates, projections, statements relating to NIKE's
business plans, objectives and expected operating results, and the assumptions
upon which those statements are based, made or incorporated by reference from
time to time by NIKE or its representatives in this report, other reports,
filings with the Securities and Exchange Commission, press releases,
conferences, or otherwise, are "forward-looking statements" within the meaning
of the Private Securities Litigation Reform Act of 1995 and Section 21E of the
Securities Exchange Act of 1934. Forward-looking statements include, without
limitation, any statement that may predict, forecast, indicate, or imply
future results, performance, or achievements, and may contain the words
"believe," "anticipate," "expect," "estimate," "project," "will be," "will
continue," "will likely result," or words or phrases of similar meaning.
Forward-looking statements involve risks and uncertainties which may cause
actual results to differ materially from the forward-looking statements. The
risks and uncertainties are detailed from time to time in reports filed by
NIKE with the S.E.C., including Forms 8-K, 10-Q, and 10-K, and include, among
others, the following: international, national and local general economic and
market conditions; the size and growth of the overall athletic footwear,
apparel, and equipment markets; intense competition among designers,
marketers, distributors and sellers of athletic footwear, apparel, and
equipment for consumers and endorsers; demographic changes; changes in
consumer preferences; popularity of particular designs, categories of
products, and sports; seasonal and geographic demand for NIKE products;
difficulties in anticipating or forecasting changes in consumer preferences,
consumer demand for NIKE products, and the various market factors described
above; difficulties in implementing, operating, and maintaining NIKE's
increasingly complex information systems and controls, including, without
limitation, the systems related to demand and supply planning, and inventory
control; fluctuations and difficulty in forecasting operating results,
including, without limitation, the fact that advance "futures" orders may not
be indicative of future revenues due to the changing mix of futures and at-
once orders; the ability of NIKE to sustain, manage or forecast its growth and
inventories; the size, timing and mix of purchases of NIKE's products; new
product development and introduction; the ability to secure and protect
trademarks, patents, and other intellectual property performance and
reliability of products; customer service; adverse publicity; the loss of
significant customers or suppliers; dependence on distributors; business
disruptions; increased costs of freight and transportation to meet delivery
deadlines; changes in business strategy or development plans; general risks
associated with doing business outside the United States, including, without
limitation, exchange rate fluctuations, import duties, tariffs, quotas and
political and economic instability; changes in government regulations;
liability and other claims asserted against NIKE; the ability to attract and
retain qualified personnel; and other factors referenced or incorporated by
reference in this report and other reports.
The risks included here are not exhaustive. Other sections of this report
may include additional factors which could adversely affect NIKE's business
and financial performance. Moreover, NIKE operates in a very competitive and
rapidly changing environment. New risk factors emerge from time to time and it
is not possible for management to predict all such risk factors, nor can it
assess the impact of all such risk factors on NIKE's business or the extent to
which any factor, or combination of factors, may cause actual results to
differ materially from those contained in any forward-looking statements.
Given these risks and uncertainties, investors should not place undue reliance
on forward-looking statements as a prediction of actual results.
Investors should also be aware that while NIKE does, from time to time,
communicate with securities analysts, it is against NIKE's policy to disclose
to them any material non-public information or other confidential commercial
information. Accordingly, shareholders should not assume that NIKE agrees with
any statement or report issued by any analyst irrespective of the content of
the statement or report. Furthermore, NIKE has a policy against issuing or
confirming financial forecasts or projections issued by others. Thus, to the
extent that reports issued by securities analysts contain any projections,
forecasts or opinions, such reports are not the responsibility of NIKE.
Part II - Other Information
Item 1. Legal Proceedings
There have been no significant developments with respect to the
information previously reported under Item 4 of the Company's Annual Report on
Form 10-K for the fiscal year ended May 31, 2006.
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, 2006.
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 November 30, 2006. In June 2006, our Board of
Directors approved a new four-year $3.0 billion share repurchase program.
During the first quarter ended August 31, 2006, we completed the previous $1.5
billion share repurchase program authorized by the Board of Directors
in June 2004.
Total Number of Maximum Dollar Value
Shares Purchased as of Shares that May
Total Number Average Part of Publicly Yet Be Purchased
Of Shares Price Paid Announced Plans Under the Plans
Period Purchased Per Share or Programs or Programs
______ ____________ __________ ___________________ ____________________
(in millions)
September 1 - 30, 2006 927,400 $ 82.31 927,400 $2,609.6
October 1 - 31, 2006 447,000 $ 89.01 447,000 $2,569.8
November 1 - 30, 2006 104,400 $ 95.05 104,400 $2,559.8
_________ _______ _________
Total 1,478,800 $ 85.23 1,478,800
========= ======= =========
Item 4. Submission of Matters to a Vote of Security Holders
The Company's annual meeting of shareholders was held on September 18,
2006. The voting results are as follows:
Proposal 1 - Election of Directors:
Votes Cast Broker
For Withheld Non-Votes
___ __________ _________
Directors Elected by holders of Class A Common Stock:
John G. Connors 63,088,671 -0- -0-
Timothy D. Cook 63,088,671 -0- -0-
Ralph D. DeNunzio 63,088,671 -0- -0-
Douglas G. Houser 63,088,671 -0- -0-
Philip H. Knight 63,088,671 -0- -0-
Mark G. Parker 63,088,671 -0- -0-
Orin C. Smith 63,088,671 -0- -0-
John R. Thompson, Jr. 63,088,671 -0- -0-
Directors Elected by holders of Class B Common Stock:
Jill K. Conway 160,199,653 3,858,591 -0-
Alan B. Graf, Jr. 161,964,518 2,093,726 -0-
Jeanne P. Jackson 160,988,462 3,069,782 -0-
Proposal 2 - Shareholder Proposal Regarding a Charitable Contributions Report:
A shareholder proposal regarding a charitable contributions report was not
submitted to a vote of the shareholders.
Proposal 3 - Ratify the appointment of PricewaterhouseCoopers LLP as
Independent registered public accounting firm:
Class A and Class B Common Stock Voting Together:
Broker
For Against Abstain Non-Votes
___ _______ _______ _________
222,772,427 3,143,671 1,230,816 -0-
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 November 18, 2004).
4.1 Restated Articles of Incorporation, as amended (see Exhibit
3.1).
4.2 Third Restated Bylaws, as amended (see Exhibit 3.2).
10.1 Employment Agreement, dated September 17, 2006, between NIKE,
Inc. and Adam Helfant (incorporated by reference from Exhibit
10.2 to the Company's Current Report on Form 8-K filed
September 21, 2006)*
12.1 Computation of Ratio of Earnings to Fixed Charges.
31.1 Rule 13(a)-14(a) Certification of Chief Executive Officer.
31.2 Rule 13(a)-14(a) Certification of Chief Financial Officer.
32.1 Section 1350 Certificate of Chief Executive Officer.
32.2 Section 1350 Certificate of Chief Financial Officer.
_______________________
* Management Contract or Compensatory Plan or Agreement
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: January 4, 2007