10-Q 1 f2q0210q.txt QUARTER ENDED 11/30/01 SECURITIES AND EXCHANGE COMMISSION Washington, D.C. 20549 FORM 10-Q FOR QUARTERLY REPORTS UNDER SECTION 13 OR 15 (d) OF THE SECURITIES AND EXCHANGE ACT OF 1934 For the Quarter Ended November 30, 2001 Commission file number - 1-10635 NIKE, Inc. (Exact name of registrant as specified in its charter) OREGON 93-0584541 (State or other jurisdiction of (I.R.S. Employer incorporation or organization) Identification No.) One Bowerman Drive, Beaverton, Oregon 97005-6453 (Address of principal executive offices) (Zip Code) Registrant's telephone number, including area code (503) 671-6453 Indicate by check mark whether the registrant (1) has filed all reports required to be filed by Section 13 or 15 (d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days Yes X No . ___ ___ Common Stock shares outstanding as of November 30, 2001 were: _______________ Class A 98,621,904 Class B 169,404,495 ___________ 268,026,399 =========== PART 1 - FINANCIAL INFORMATION Item 1. Financial Statements NIKE, Inc.

The accompanying Notes to Condensed Consolidated Financial Statements are an integral part of this statement. NIKE, Inc. CONDENSED CONSOLIDATED STATEMENT OF INCOME

The accompanying Notes to Condensed Consolidated Financial Statements are an integral part of this statement. NIKE, Inc. CONDENSED CONSOLIDATED STATEMENT OF CASH FLOWS

The accompanying Notes to Condensed Consolidated Financial Statements are an integral part of this statement. NIKE, Inc. NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS NOTE 1 - Summary of Significant Accounting Policies: ___________________________________________ Basis of presentation: The accompanying unaudited condensed consolidated financial statements reflect all adjustments (consisting of normal recurring accruals) which are, in the opinion of management, necessary for a fair presentation of the results of operations for the interim periods. The interim financial information and notes thereto should be read in conjunction with the Company's latest annual report on Form 10-K. The results of operations for the six (6) months ended November 30, 2001 are not necessarily indicative of results to be expected for the entire year. Certain prior year amounts have been reclassified to conform to fiscal year 2002 presentation. These changes had no impact on previously reported results of operations or shareholders' equity. NOTE 2 - Financial Risk Management and Derivatives: _________________________________________ In addition to the financial risks discussed in Note 2 to our Condensed Consolidated Financial Statements in our Form 10-Q for the period ended August 31, 2001, the Company is exposed to the risk of changes in the fair value of certain fixed-rate debt attributable to changes in interest rates. As discussed in the previous quarter, in August 2001 the Company issued a $250 million corporate bond, maturing in August 2006, with a fixed interest rate of 5.5%. In November 2001 the Company entered into interest rate swap agreements totaling $250 million and maturing in August 2006, whereby the Company receives fixed interest payments at 5.5% and pays variable interest payments based on the London Inter Bank Offering Rate (LIBOR) plus a spread. LIBOR for the swap agreements resets every three months, beginning in February 2002. At November 30, 2001, the interest rates on the swap agreements were approximately 3.4%. The interest rate swap agreements are designated as fair value hedges of the $250 million corporate bond and meet the shortcut method requirements under Statement of Financial Accounting Standard No. 133, "Accounting for Derivative Instruments and Hedging Activities". Accordingly, interest expense on the corporate bond is recorded based on the variable rates paid under the interest rate swap agreements, and changes in the fair values of the interest rate swap agreements exactly offset changes in the fair value of the corporate bond. The critical terms of the interest rate swap agreements exactly match the critical terms of the corporate bond. Therefore, the swaps are perfectly effective. The fair values of the interest rate swap agreements are classified in the Company's balance sheet at November 30, 2001 as other long-term liabilities and totaled a $7.4 million unrealized loss. As noted above, this unrealized loss is exactly offset by an unrealized gain of $7.4 million on the corporate bond, which is classified as long-term debt. NOTE 3 - Comprehensive Income: ____________________ Comprehensive income, net of taxes, is as follows:

NOTE 4 - Earnings Per Common Share: _________________________ The following represents a reconciliation from basic earnings per share to diluted earnings per share. Options to purchase 7.7 million and 9.7 million shares of common stock were outstanding at November 30, 2001 and November 30, 2000, respectively, but were not included in the computation of diluted earnings per share because the options' exercise prices were greater than the average market price of common shares and, therefore, the effect would be antidilutive.

NOTE 5 - Inventories: ___________ Inventories by major classification are as follows: Nov. 30, May 31, 2001 2001 ________ ________ (in millions) Finished goods $1,415.2 $1,399.4 Work-in-progress 12.6 15.1 Raw materials 8.0 9.6 ________ ________ $1,435.8 $1,424.1 ======== ======== NOTE 6 - Operating Segments: __________________ The Company's major operating segments are defined by geographic regions for subsidiaries participating in NIKE brand sales activity. "Other" as shown below represents activity for Cole-Haan Holdings, Inc., Bauer NIKE Hockey, Inc., and NIKE IHM, Inc., which are considered immaterial for individual disclosure. Where applicable, "Corporate" represents items necessary to reconcile to the consolidated financial statements, which generally include corporate activity and corporate eliminations. The segments are evidence of the structure of the Company's internal organization. Each NIKE brand geographic segment operates predominantly in one industry: the design, production, marketing and selling of sports and fitness footwear, apparel, and equipment. Net revenues as shown below represent sales to external customers for each segment. Intercompany revenues have been eliminated and are immaterial for separate disclosure. The Company evaluates performance of individual operating segments based on management pre-tax income. On a consolidated basis, this amount represents Income before income taxes and cumulative effect of accounting change as shown in the Condensed Consolidated Statement of Income. Reconciling items for management pre-tax income represent corporate costs that are not allocated to the operating segments for management reporting and intercompany eliminations for specific income statement items. Accounts receivable, inventory, and fixed assets for operating segments are regularly reviewed and therefore provided:

NOTE 7 - Commitments and Contingencies: _____________________________ At November 30, 2001, the Company had letters of credit outstanding totaling $883.7 million. These letters of credit were issued for the purchase of inventory. There have been no other significant subsequent developments relating to the commitments and contingencies reported on the Company's most recent Form 10-K. Item 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF RESULTS OF OPERATIONS AND FINANCIAL CONDITION Operating Results _________________ Net income for the second quarter of fiscal 2002 was $129.3 million, an 8.3% increase compared to net income reported in the second quarter of fiscal 2001. The increase in net income for the quarter reflected a 5.8% increase in pre-tax income. The increase in quarterly pre-tax income was driven by a 6.3% increase in revenues, from $2,198.7 million to $2,336.8 million, as well as lower selling and administrative expense as a percentage of revenues and lower interest expense. A decrease in our gross margin percentage from 39.6% to 38.3% and higher other expense partially offset these improvements to pre-tax income. Quarterly net income improved at a higher rate than pre-tax income due to a 1.5 point reduction in our effective tax rate. Quarterly earnings per share improved 9.1%, from $0.44 to $0.48, a slightly higher rate than net income due to share repurchases over the past year. Year-to-date net income in fiscal 2002 (excluding a loss of $5.0 million related to the cumulative effect of an accounting change) was $333.5 million, an increase of 1.2% over the same period in fiscal 2001. Slower revenue growth on a year-to-date basis drove year-to-date net income growth down as compared to the growth in net income in the second quarter. Consolidated revenues increased 6.3% for the quarter. Had foreign exchange rates remained constant, the increase in revenues for the quarter would have been 7.6%. Most of our revenue growth occurred in our international regions, which accounted for 45.4% of total company revenues in the second quarter of fiscal 2002, compared to 43.2% in the second quarter of fiscal 2001. Revenues from our international regions reported in U.S. dollars increased 11.6%, a 14.6% increase in constant dollars. In the Europe, Middle East, and Africa (EMEA) region, quarterly reported revenues increased 13.8%, or 10.6% in constant dollars. Strong growth in EMEA footwear revenues, which posted a 24.4% increase in the quarter, drove the result. This increase was due to higher prices and higher unit sales, as well as a higher-priced product mix as compared to the second quarter of last year. In the Asia Pacific region, quarterly reported revenues increased 11.2% in the second quarter but 22.5% in constant dollars, reflecting significant Asian currency weakness compared to the U.S. dollar year-over-year. We achieved revenue growth in all business units in the region during the quarter, reflecting increasingly strong demand for NIKE brand products. In the Americas region, reported revenues were up 4.5% in the second quarter, which represented 12.9% growth in constant dollars. Current uncertain economic conditions in Argentina may negatively affect revenues in this region during the remainder of the fiscal year, although we do not expect that the negative effect will be significant to our consolidated operating results. Revenues in the U.S. region were up 2.5% in the second quarter of fiscal 2002. Growth in the U.S. apparel and equipment businesses drove the revenue increase for the region. U.S. apparel revenues increased 9.9% in the second quarter, as increased demand for NIKE brand apparel more than offset declines in licensed apparel sales due to the expiration of our agreement with the National Football League. Close-out sales of apparel increased during the quarter due to our decision to manage apparel inventory levels more aggressively, improving storage efficiency in our warehouses and minimizing the amount of inventory converted into the new supply chain systems implemented in December. U.S. equipment revenues grew 14.3% in the second quarter, driven by growth in sales of golf products as well as bags, socks, and sports accessories. In addition, a portion of the U.S. revenue increase reflected early shipments of footwear, apparel, and equipment products prior to our warehouse shutdown in November, due to the implementation of new U.S. supply chain systems at the beginning of December. U.S. NIKE brand footwear revenues decreased 2.2%, reflecting a slight increase in in-line sales, offset by a drop in close-out sales. These results represent an improvement over the last quarter, when U.S. footwear sales decreased 7.0% as compared to the previous year. Consolidated revenues increased 2.4% for the year-to-date period. Had foreign exchange rates remained constant, the increase in revenues for the year-to-date period would have been 5.1%. Year-to-date revenue growth was not as strong as the second quarter revenue growth primarily due to the drop in sales of U.S. footwear in the first quarter of this year compared to the first quarter of last year. The uncertain economic conditions following the terrorist attacks of September 11, 2001 negatively affected U.S. NIKE brand revenues in the second quarter, particularly at NIKE-owned retail stores and wholesale sales of equipment. (Our apparel and footwear wholesale businesses were not affected as severely because a large portion of their second quarter revenues derived from orders placed several months in advance, prior to the September 11 attacks.) In addition, revenues from our Cole Haan business were also negatively affected, most significantly at company-owned retail stores. Although significant uncertainty continues to exist with respect to the future prospects for the U.S. and world economies, we continue to expect earnings growth for the full fiscal year. The breakdown of revenues follows. "Other" as shown below includes revenues from our subsidiaries Bauer NIKE Hockey, Inc. and Cole-Haan Holdings, Inc.