10-Q 1 l3q0210q.txt QUARTERLY REPORT SECURITIES AND EXCHANGE COMMISSION Washington, D.C. 20549 FORM 10-Q FOR QUARTERLY REPORTS UNDER SECTION 13 OR 15 (d) OF THE SECURITIES AND EXCHANGE ACT OF 1934 For the Quarter Ended February 28, 2002 Commission file number - 1-10635 NIKE, Inc. (Exact name of registrant as specified in its charter) OREGON 93-0584541 (State or other jurisdiction of (I.R.S. Employer incorporation or organization) Identification No.) One Bowerman Drive, Beaverton, Oregon 97005-6453 (Address of principal executive offices) (Zip Code) Registrant's telephone number, including area code (503) 671-6453 Indicate by check mark whether the registrant (1) has filed all reports required to be filed by Section 13 or 15 (d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days Yes X No . ___ ___ Common Stock shares outstanding as of February 28, 2002 were: _______________ Class A 98,183,961 Class B 170,251,332 ___________ 268,435,293 =========== 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 nine (9) months ended February 28, 2002 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 - Comprehensive Income: ____________________ Comprehensive income, net of taxes, is as follows:

NOTE 3 - Earnings Per Common Share: _________________________ The following represents a reconciliation from basic earnings per share to diluted earnings per share. Options to purchase 4.5 million and 9.1 million shares of common stock were outstanding at February 28, 2002 and February 28, 2001, 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 4 - Inventories: ___________ Inventories by major classification are as follows: Feb. 28, May 31, 2002 2001 (unaudited) ________ ________ (in millions) Finished goods $1,407.1 $1,399.4 Work-in-progress 17.0 15.1 Raw materials 8.5 9.6 ________ ________ $1,432.6 $1,424.1 ======== ======== NOTE 5 - 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 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 6 - Commitments and Contingencies: _____________________________ At February 28, 2002, the Company had letters of credit outstanding totaling $748.9 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 Critical Accounting Policies ____________________________ Our discussion and analysis of our financial condition and results of operations following 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 below have the greatest potential impact on our financial statements, so we consider these to be our critical accounting policies. Because of the uncertainty inherent in these matters, 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, which would result in materially different amounts being reported. Revenue Recognition ___________________ We record wholesale revenues when title passes and the risks and rewards of ownership have passed to the customer, based on the terms of sale. Retail store revenues are recorded at the time of sale. For wholesale shipments, title generally passes either upon shipment of goods from our warehouse or upon receipt of goods by the customer, depending on the sales terms in effect in each country in which we operate. In some instances, we ship product directly from our supplier to the customer. In these cases, we recognize revenue when the product is delivered to the customer. Our revenues may fluctuate in cases when our customers delay accepting shipment of product for periods up to several weeks. In certain countries outside of the U.S., precise information regarding the date of receipt by the customer is not readily available. In these cases, we estimate the date of receipt by the customer based upon historical delivery times by geographic location. On the basis of our tests of actual transactions, we have no indication that these estimates have been materially inaccurate historically. As part of our revenue recognition policy, we record estimated sales returns and miscellaneous claims from customers as reductions to revenues at the time revenues are recorded. We base our estimates on historical rates of product returns and claims, and specific identification of outstanding claims and outstanding returns not yet received from customers. In the past, actual returns and claims have not exceeded our reserves. However, actual returns and claims in any future period are inherently uncertain and thus may differ from our estimates. If actual or expected future returns and claims were significantly greater than the reserves we had established, we would record a reduction to net revenues in the period in which we made such determination. Reserve for Uncollectible Accounts Receivable _____________________________________________ We make ongoing estimates relating to the collectibility of our accounts receivable and maintain a reserve for estimated losses resulting from the inability of our customers to make required payments. In determining the amount of the reserve, we consider our historical level of credit losses and make judgments about the creditworthiness of significant customers based on ongoing credit evaluations. Historically, losses from uncollectible accounts have not exceeded our reserves. Since we cannot predict future changes in the financial stability of our customers, actual future losses from uncollectible accounts may differ from our estimates. If the financial condition of our customers were to deteriorate, resulting in their inability to make payments, a larger reserve might be required. In the event we determined that a smaller or larger reserve was appropriate, we would record a credit or a charge to selling and administrative expense in the period in which we made such a determination. Inventory Reserves __________________ We also make ongoing estimates relating to the market value of inventories, based upon our assumptions about future demand and market conditions. If we estimate that the net realizable value of our inventory is less than the cost of the inventory recorded on our books, we record a reserve equal to the difference between the cost of the inventory and the estimated market value. This reserve is recorded as a charge to cost of sales. If changes in market conditions result in reductions in the estimated market value of our inventory below our previous estimate, we would increase our reserve in the period in which we made such a determination and record a charge to cost of sales. Contingent Payments under Endorsement Contracts _______________________________________________ A significant portion of our demand creation (marketing and promotion) expense relates to payments under endorsement contracts. In general, endorsement payments are expensed uniformly over the term of the contract. However, certain other contract elements may be accounted for differently, based upon the facts and circumstances of each individual contact. Certain contracts provide for contingent payments to endorsers based upon specific achievements in their sports (e.g. winning a championship). We record selling and administrative expense for these amounts when the endorser achieves the specific goal. Certain contracts provide for payments based upon endorsers maintaining a level of performance in their sport over an extended period of time (e.g. maintaining a top ranking in a sport for a year). These amounts are reported in selling and administrative expense when we determine that it is probable that the specified level of performance will be maintained throughout the period. In these instances, to the extent that actual payments to the endorser differ from our estimate due to changes in the endorser's athletic performance, increased or decreased selling and administrative expense may be reported in a future period. Certain contracts provide for royalty payments to endorsers based upon a predetermined percentage of sales of particular products. We expense these payments in cost of sales as the related sales are made. In certain contracts, we offer minimum guaranteed royalty payments. For contractual obligations for which we estimate that we will not meet the minimum guaranteed amount of royalty fees through sales of product, we record in selling and administrative expense the minimum guaranteed payment amount uniformly over the remaining royalty term. Property, plant and equipment and other long-lived assets _________________________________________________________ Property, plant and equipment, including buildings, equipment, and computer hardware and software, is recorded at cost and is depreciated over its estimated useful life. Changes in circumstances (such as technological advances or changes to our business operations) can result in differences between the actual and estimated useful lives. In those cases where we determine that the useful life of a long-lived asset should be shortened, we increase depreciation expense over the remaining useful life to depreciate the asset's net book value to its salvage value. Under current accounting standards, when circumstances indicate that the carrying value of a long-lived asset may be impaired, we estimate the future undiscounted cash flows to be derived from the asset to determine whether or not a potential impairment exists. If the carrying value exceeds our estimate of future undiscounted cash flows, we then calculate the impairment as the excess of the carrying value of the asset over our estimate of its fair market value. Any impairment charges are recorded as other expense. We estimate future undiscounted cash flows using assumptions about our expected future operating performance. Our estimates of undiscounted cash flows may differ from actual cash flows due to, among other things, technological changes, economic conditions, or changes to our business operations. We have determined that the carrying value of our long-lived assets (including property, plant, and equipment, goodwill, and other intangible assets) is not impaired under current accounting standards. However, as of June 1, 2002, as discussed following, we will adopt Statement of Financial Accounting Standard No. 142, "Goodwill and Other Intangible Assets." Upon adoption, we expect to record an impairment charge related to the goodwill and other intangible assets of our subsidiaries Bauer NIKE Hockey, Inc. and Cole-Haan Holdings, Inc. Hedge Accounting for Derivatives ________________________________ We use forward exchange contracts and option contracts to hedge certain anticipated foreign currency exchange transactions, as well as any resulting receivable or payable balance. When specific criteria required by Statement of Financial Accounting Standard No. 133, "Accounting for Derivative Instruments and Hedging Activities," have been met, changes in fair values of hedge contracts relating to anticipated transactions are recorded in other comprehensive income rather than current earnings. One of these criteria is that the forward exchange contract amount should not be in excess of specifically identified anticipated transactions. By their very nature, our estimates of anticipated transactions may fluctuate over time and may ultimately vary from actual transactions. When anticipated transaction estimates or actual transaction amounts decrease below hedged levels, or when the timing of transactions changes significantly, we are required to reclassify at least a portion of the cumulative changes in fair values of the related hedge contracts from other comprehensive income to current earnings during the quarter in which such changes occur. Once an anticipated transaction estimate or actual transaction amount decreases below hedged levels, we make adjustments to the related hedge contract in order to reduce the amount of the hedge contract to that of the revised anticipated transaction. Taxes _____ We record valuation allowances against our deferred tax assets, when necessary, in accordance with Statement of Financial Accounting Standard No. 109, "Accounting for Income Taxes." Realization of deferred tax assets (such as net operating loss carryforwards) is dependent on future taxable earnings and is therefore uncertain. At least quarterly, we assess the likelihood that our deferred tax asset balance will be recovered from future taxable income. To the extent we believe that recovery is not likely, we establish a valuation allowance against our deferred tax asset, increasing our income tax expense in the period such determination is made. In addition, we have not recorded U.S. federal income tax expense for foreign earnings that we have indefinitely reinvested offshore, thus reducing our overall income tax expense. The amount of earnings designated as indefinitely reinvested offshore is based upon our estimate of the future cash needs of our U.S. and foreign based entities. In the event actual cash needs of our U.S.-based entities exceed our estimates, or the actual cash needs of our foreign-based entities are less than our estimates, we might repatriate these designated earnings to the U.S. Income tax expense would increase during the period in which we determined that the earnings would no longer be indefinitely reinvested offshore. When these earnings are actually repatriated, they would be subject to U.S. taxation; at that time we would record a current income tax liability. On an interim basis, we estimate what our effective tax rate will be for the full fiscal year and record a quarterly income tax provision in accordance with the anticipated annual rate. As the fiscal year progresses, we continually refine our estimate based upon actual events and earnings by jurisdiction during the year. This continual estimation process periodically results in a change to our expected effective tax rate for the fiscal year. When this occurs, we adjust the income tax provision during the quarter in which the change in estimate occurs so that the year-to-date provision equals the expected annual rate. Other Contingencies ___________________ In the ordinary course of business, we are involved in legal proceedings involving contractual and employment relationships, product liability claims trademark rights, and a variety of other matters. We record contingent liabilities resulting from claims against us when it is probable that a liability has been incurred and the amount of the loss is reasonably estimable. We disclose contingent liabilities when there is a reasonable possibility that the ultimate loss will exceed the recorded liability. Estimating probable losses requires analysis of multiple factors, in some cases including judgments about the potential actions of third party claimants and courts. Therefore, actual losses in any future period are inherently uncertain. Currently, we do not believe that any of our pending legal proceedings or claims will have a material impact on our financial position or results of operations. However, if actual or estimated probable future losses exceed our recorded liability for such claims, we would record additional charges as other expense during the period in which the actual loss or change in estimate occurred. Operating Results _________________ Pretax income for the third quarter of fiscal 2002 increased 27.5% versus the third quarter of fiscal 2001, driven by a 4.2% increase in revenues (from $2,170.1 million to $2,260.3 million), a higher gross margin percentage, lower selling and administrative expense as a percentage of revenues, lower interest expense, and improved other income/expense. Net income for the third quarter of fiscal 2002 increased 29.7% versus the third quarter of fiscal 2001 (from $97.4 million to $126.3 million), a higher growth rate than pre-tax income due to a 1.1 point reduction in our effective tax rate. Quarterly earnings per share improved 31.4%, from $0.35 to $0.46, a slightly higher rate than net income due to share repurchases over the past year. Excluding a $5.0 million charge related to the cumulative effect of an accounting change, net income for the first nine months of fiscal 2002 increased 7.7% versus the same period in fiscal 2001. The acceleration in net income growth in the third quarter was primarily due to faster revenue growth and a higher gross margin percentage than in the first half of the year, which was adversely affected by weaker U.S. footwear sales and the uncertain economic conditions following the terrorist attacks of September 11, 2001. Consolidated revenues increased 4.2% for the third quarter. Had foreign exchange rates remained constant, the increase in revenues for the quarter would have been 6.3%. The U.S. region contributed significantly to the consolidated revenue growth, as revenues increased 5.3% versus the same quarter last year. The U.S. growth reflected an increase in footwear revenues, which resulted from greater market demand for in-line NIKE brand footwear products across a broad array of categories and price points. The increase in in-line sales also reflected a comparison to relatively low revenues during this same quarter last year resulting from shipment delays and cancellations due to problems in our implementation of new global demand and supply planning systems. While in-line sales of U.S. footwear increased, close-out sales and inventory levels were lower than the third quarter of fiscal 2001, when weaker than expected sales and supply chain disruptions created higher levels of close-out inventories. U.S. apparel revenues increased 1.0% in the third quarter despite the loss of revenue from the termination of our license agreement with the National Football League as of May 31, 2001. In addition, this year we shifted some third quarter revenues to the second quarter as some December orders were shipped in November in advance of our supply chain system implementation in the U.S. In the U.S. equipment business, the introduction of NIKE brand golf clubs drove the increase in revenues during the quarter. Revenues from our international regions represented 45.2% of revenues in the quarter and grew 2.7% as compared to the third quarter last year. In constant dollars, these revenues grew 7.2% After a recent history of solid growth, reported revenues in the Europe, Middle East, and Africa (EMEA) region declined 0.6%, but increased 1.6% in constant dollars. The EMEA footwear business grew slightly while the apparel and equipment businesses declined slightly. Both footwear and apparel revenues weakened in Southern Europe in the face of competition from fashion brands entering the sportswear market, particularly in Italy. Third quarter revenues were also affected by certain customers delaying acceptance of shipments near the end of the quarter. We expect much of that product will be shipped in the fourth quarter. The Asia Pacific region reported increased revenues of 10.0% over the prior year, which represented 19.4% growth in constant dollars. These results reflected a continuing trend from the second quarter, as we again achieved strong revenue growth in all business units, reflecting strong demand for NIKE brand products despite uncertain economic conditions in the region. Reported revenues for the Americas region increased 2.4%, an 8.2% increase in constant dollars, despite a significant drop-off in sales in Argentina. As a result of that country's ongoing economic crisis, we did not ship product in Argentina during most of January and February; shipments have since resumed to a very limited number of customers. Consolidated revenues increased 2.9% 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 5.6%. The acceleration in revenue growth in the third quarter was primarily due to faster revenue growth in the U.S. region than in the first half of the year, which was adversely affected by weaker footwear sales and a slow down in retail sales in the wake of the terrorist attacks of September 11, 2001. The third quarter rebound in U.S. region revenue growth was partially offset by slower revenue growth in the EMEA and Americas regions. The breakdown of revenues follows. "Other" as shown below includes revenues from our subsidiaries Bauer NIKE Hockey, Inc. and Cole-Haan Holdings, Inc.