10-Q 1 nke10q03030414ver12.txt UNITED STATES SECURITIES AND EXCHANGE COMMISSION Washington, D.C. 20549 FORM 10-Q FOR QUARTERLY REPORTS UNDER SECTION 13 OR 15(d) OF THE SECURITIES AND EXCHANGE ACT OF 1934 For the Quarter Ended February 28, 2003 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 is an accelerated filer (as defined in Rule 12b-2 of the Exchange Act). Yes X No ___ ___ 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, 2003 were: _______________ Class A 97,914,905 Class B 166,070,067 _______________ 263,984,972 =============== PART 1 - FINANCIAL INFORMATION Item 1. FINANCIAL STATEMENTS NIKE, Inc. UNAUDITED CONDENSED CONSOLIDATED BALANCE SHEETS
February 28, May 31, 2003 2002 ________ _______ (in millions) ASSETS Current assets: Cash and equivalents $ 443.2 $ 575.5 Accounts receivable, net 1,949.4 1,807.1 Inventories (Note 5) 1,519.2 1,373.8 Deferred income taxes 190.8 140.8 Prepaid expenses and other current assets 244.4 260.5 ________ ________ Total current assets 4,347.0 4,157.7 Property, plant and equipment 2,906.2 2,741.7 Less accumulated depreciation 1,291.1 1,127.2 ________ ________ 1,615.1 1,614.5 Identifiable intangible assets (Note 2) 118.3 206.0 Goodwill (Note 2) 65.6 232.7 Deferred income taxes and other assets 255.0 232.1 ________ ________ $6,401.0 $6,443.0 ======== ======== LIABILITIES AND SHAREHOLDERS' EQUITY Current liabilities: Current portion of long-term debt $ 205.6 $ 55.3 Notes payable 216.6 425.2 Accounts payable 467.5 504.4 Accrued liabilities 910.2 768.3 Income taxes payable 55.3 83.0 ________ ________ Total current liabilities 1,855.2 1,836.2 Long-term debt 542.8 625.9 Deferred income taxes and other liabilities 167.5 141.6 Commitments and contingencies (Note 7) -- -- Redeemable preferred stock 0.3 0.3 Shareholders' equity: Common stock at stated value: Class A convertible-97.9 and 98.1 shares outstanding 0.2 0.2 Class B-166.1 and 168.0 shares outstanding 2.6 2.6 Capital in excess of stated value 553.1 538.7 Unearned stock compensation (1.4) (5.1) Accumulated other comprehensive income (224.4) (192.4) Retained earnings 3,505.1 3,495.0 ________ ________ Total shareholders' equity 3,835.2 3,839.0 ________ ________ $6,401.0 $6,443.0 ======== ========
The accompanying Notes to Unaudited Condensed Consolidated Financial Statements are an integral part of this statement. NIKE, Inc. UNAUDITED CONDENSED CONSOLIDATED STATEMENTS OF INCOME
Three Months Ended Nine Months Ended February 28, February 28, ___________________ ________________ 2003 2002 2003 2002 ____ ____ ____ ____ (in millions, except per share data) Revenues $2,400.9 $2,260.3 $7,711.9 $7,210.8 _________ _________ _________ _________ Costs and expenses: Cost of sales 1,424.9 1,376.8 4,568.7 4,403.0 Selling and administrative 753.9 682.5 2,311.6 2,056.4 Interest 10.8 12.1 32.2 37.4 Other expense, net 23.9 (0.1) 48.3 11.8 _________ _________ _________ _________ 2,213.5 2,071.3 6,960.8 6,508.6 _________ _________ _________ _________ Income before income taxes and cumulative effect of accounting change 187.4 189.0 751.1 702.2 Income taxes 62.7 62.7 257.2 242.3 _________ _________ _________ _________ Income before cumulative effect of accounting change 124.7 126.3 493.9 459.9 Cumulative effect of accounting change, net of income taxes -- -- 266.1 5.0 _________ _________ _________ _________ Net income $ 124.7 $ 126.3 $ 227.8 $ 454.9 ========= ========= ========= ========= Basic earnings per common share (Note 4): Before accounting change $ 0.47 $ 0.47 $ 1.87 $ 1.71 Cumulative effect of accounting change -- -- (1.01) (0.02) _________ _________ _________ _________ $ 0.47 $ 0.47 $ 0.86 $ 1.69 ========= ========= ========= ========= Diluted earnings per common share (Note 4): Before accounting change $ 0.47 $ 0.46 $ 1.84 $ 1.69 Cumulative effect of accounting change -- -- (0.99) (0.02) _________ _________ _________ _________ $ 0.47 $ 0.46 $ 0.85 $ 1.67 ========= ========= ========= ========= Dividends declared per common share $ 0.14 $ 0.12 $ 0.40 $ 0.36 ========= ========= ========= =========
The accompanying Notes to Unaudited Condensed Consolidated Financial Statements are an integral part of this statement. NIKE, Inc. UNAUDITED CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS
Nine Months Ended February 28, _________________ 2003 2002 ____ ____ (in millions) Cash provided (used) by operations: Net income $ 227.8 $ 454.9 Income charges (credits) not affecting cash: Cumulative effect of accounting change 266.1 5.0 Depreciation 176.5 164.0 Deferred income taxes (1.0) (3.9) Amortization and other 9.4 26.2 Income tax benefit from exercise of stock options 2.6 11.3 Net increase in other working capital components (252.6) (153.4) ________ ________ Cash provided by operations 428.8 504.1 ________ ________ Cash provided (used) by investing activities: Additions to property, plant and equipment (138.6) (173.2) Disposals of property, plant and equipment 9.6 11.8 Increase in other assets (40.3) (37.3) Increase (decrease) in other liabilities 1.1 (0.3) ________ ________ Cash used by investing activities (168.2) (199.0) ________ ________ Cash provided (used) by financing activities: Proceeds from long-term debt issuance 90.2 328.0 Reductions in long-term debt including current portion (54.4) (78.9) Decrease in notes payable (208.6) (377.5) Proceeds from exercise of stock options 15.4 32.5 and other stock issuances Repurchase of stock (125.7) (56.8) Dividends on common stock (100.8) (96.6) ________ ________ Cash used by financing activities (383.9) (249.3) ________ ________ Effect of exchange rate changes on cash (9.0) (10.2) Net (decrease) increase in cash and equivalents (132.3) 45.6 Cash and equivalents, May 31, 2002 and 2001 575.5 304.0 ________ ________ Cash and equivalents, February 28, 2003 and 2002 $ 443.2 $ 349.6 ======== ========
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 presentation of the results of operations for the interim period. 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, 2003 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 2003 presentation. These changes had no impact on previously reported results of operations or shareholders' equity. Recently Issued Accounting Standards In June 2001, the Financial Accounting Standards Board (FASB) issued Statement of Financial Accounting Standards (SFAS) No. 143, "Accounting for Asset Retirement Obligations" (FAS 143). This statement requires that a liability for an asset retirement obligation be recognized at fair value in the period the obligation is incurred and the associated retirement costs be capitalized as part of the carrying amount of the tangible long-lived asset. All provisions of this statement will be effective for the Company on June 1, 2003. It is not expected that the adoption of FAS 143 will have a material impact on the Company's consolidated financial position or results of operations. In October 2001, the FASB issued SFAS No. 144, "Accounting for the Impairment or Disposal of Long-Lived Assets" (FAS 144). This statement supercedes SFAS No. 121, "Accounting for the Impairment of Long-Lived Assets and for Long-Lived Assets to be Disposed Of" (FAS 121), and amends Accounting Principles Board Statement No. 30, "Reporting the Effects of Disposal of a Segment of a Business, and Extraordinary, Unusual and Infrequently Occurring Events and Transactions" (APB 30). FAS 144 requires that long-lived assets, such as property, plant, and equipment, that are to be disposed of by sale be measured at the lower of book value or fair value less costs to sell. FAS 144 retains the fundamental provisions of FAS 121 for (a) recognition and measurement of the impairment of long-lived assets to be held and used and (b) measurement of long-lived assets to be disposed of by sale. This statement also retains APB 30's requirement that companies report discontinued operations separately from continuing operations. All provisions of FAS 144 were effective for the Company on June 1, 2002. The adoption of FAS 144 did not have an impact on the Company's consolidated financial position or results of operations, and we do not expect any impact in the foreseeable future. In June 2002, the FASB issued SFAS No. 146 "Accounting for Costs Associated with Exit or Disposal Activities" (FAS 146). This statement supercedes Emerging Issues Task Force (EITF) Issue No. 94-3 "Liability Recognition for Certain Employee Termination Benefits and Other Costs to Exit an Activity (including Certain Costs Incurred in a Restructuring)". FAS 146 requires that a liability for a cost associated with an exit or disposal activity be recognized when the liability is incurred. Under EITF 94-3, a liability is recognized at the date an entity commits to an exit plan. FAS 146 also establishes that the liability should initially be measured and recorded at fair value. The provisions of FAS 146 are effective for any exit and disposal activities initiated after December 31, 2002. We have not entered into any significant exit or disposal activities since the effective date of this rule. As such, FAS 146 has not had any impact on the Company's consolidated financial position or results of operations. In November 2002, the FASB issued FASB Interpretation No. 45, "Guarantor's Accounting and Disclosure Requirements for Guarantees, Including Indirect Guarantees of Indebtedness of Others" (FIN 45). FIN 45 requires that upon issuance of a guarantee, a guarantor must recognize a liability for the fair value of an obligation assumed under a guarantee. FIN 45 also requires additional disclosures by a guarantor in its interim and annual financial statements about the obligations associated with guarantees issued. The recognition provisions of FIN 45 are effective for any guarantees issued or modified after December 31, 2002. The disclosure requirements of FIN 45 are effective for the current quarter ended February 28, 2003. In connection with various contracts and agreements, the Company provides routine indemnifications relating to the enforceability of intellectual property, coverage for legal issues that arise, and other items that fall under the scope of FIN 45. Currently, the Company has several such agreements in place. However, based on the Company's historical experience and estimated probability of future loss, the Company has determined that the fair value of such indemnifications is not material. Hence, the adoption of FIN 45 has not had an impact on the Company's consolidated financial position or results of operations, and no impact is expected in the foreseeable future. In December 2002, the FASB issued SFAS No. 148 "Accounting for Stock- Based Compensation - Transition and Disclosure - an amendment of FASB Statement No. 123" (FAS 148). This statement amends SFAS No. 123 "Accounting for Stock Based Compensation" (FAS 123) to provide alternative methods of voluntarily transitioning to the fair value based method of accounting for stock-based employee compensation. FAS 148 also amends the disclosure requirements of FAS 123 to require disclosure of the method used to account for stock-based employee compensation and the effect of the method on reported results in both annual and interim financial statements. The disclosure provisions will be effective for the Company beginning with the Company's year ended May 31, 2003 10-K filing. The annual impact of a change to the fair value model prescribed by FAS 123 has been disclosed in the Company's previous annual 10-K filings. At this time, the Company plans to continue to account for stock-based compensation using the intrinsic value method prescribed in Accounting Principles Board Opinion No. 25, "Accounting for Stock Issued to Employees", rather than change to the FAS 123 fair value method. In January 2003, the FASB issued FASB Interpretation No. 46, "Consolidation of Variable Interest Entities" (FIN 46). This interpretation of Accounting Research Bulletin No. 51, "Consolidated Financial Statements", addresses consolidation of variable interest entities. FIN 46 requires certain variable interest entities to be consolidated by the primary beneficiary if the entity does not effectively disperse risks among the parties involved. The provisions of FIN 46 are effective immediately for those variable interest entities created after January 31, 2003. The provisions are effective for the first period beginning after June 15, 2003 for those variable interests held prior to February 1, 2003. The Company does not currently have any variable interest entities as defined in FIN 46. Accordingly, the Company does not expect the provisions of FIN 46 to affect the Company's consolidated financial position or results of operations. NOTE 2 - Identifiable Intangible Assets and Goodwill: ___________________________________________ Adoption of FAS 142 The Company adopted SFAS No. 142,"Goodwill and Other Intangible Assets" (FAS 142) effective June 1, 2002. In accordance with FAS 142, goodwill and intangible assets with indefinite lives will no longer be amortized but instead will be measured for impairment at least annually, or when events indicate that an impairment exists. Intangible assets that are determined to have definite lives will continue to be amortized over their useful lives. As required by FAS 142, the Company performed impairment tests on goodwill and other intangible assets with indefinite lives, which consisted only of certain trademarks, as of June 1, 2002. As a result of the impairmenttests, the Company recorded a $266.1 million cumulative effect of accounting change. Under FAS 142, goodwill impairment exists if the net book value of a reporting unit exceeds its estimated fair value. The Company estimated the fair value of its reporting units by using a combination of discounted cash flow analyses and comparisons with the market values of similar publicly-traded companies. Included in the Company's $266.1 million impairment charge was a $178.5 million charge related to the impairment of the goodwill associated with the Bauer NIKE Hockey ("Bauer") and Cole Haan reporting units. These reporting units are reflected in the Company's "Other" operating segment. Since the Company's purchase of Bauer in 1995, the hockey equipment and apparel markets have not grown as fast as expected and the in-line skate market has contracted significantly. As a result, we determined that the goodwill acquired at Bauer had been impaired. The goodwill impairment at Cole Haan reflected the significantly lower fair value calculated on the basis of reduced operating income in the year following the September 11, 2001 terrorist attacks. The remaining $87.6 million of the impairment charge relates to trademarks associated with Bauer. Under FAS 142, impairment of an indefinite-lived asset exists if the net book value of the asset exceeds its fair value. The Company estimated the fair value of trademarks using the relief-from-royalty approach, which is a standard form of discounted cash flow analysis typically used for the valuation of trademarks. The impairment of the Bauer trademarks reflects the same circumstances as described above related to the Bauer goodwill impairment. The following table summarizes the Company's identifiable intangible assets and goodwill balances as of February 28, 2003 and May 31, 2002:
February 28, 2003 May 31, 2002 ______________________ ______________________ Gross Gross Carrying Accumulated Carrying Accumulated Amount Amortization Amount Amortization ________ ____________ ________ ____________ (in millions) Intangible assets subject to amortization: Patents $ 24.5 $ (9.9) $ 23.1 $ (8.8) Trademarks 12.7 (10.3) 12.0 (9.8) Other 7.5 (0.9) 7.5 (0.2) _________ _________ _________ _________ Total $ 44.7 $ (21.1) $ 42.6 $ (18.8) ========= ========= ========= ========= Carrying Carrying Amount Amount ________ ________ Intangible assets not subject to amortization: Goodwill $ 65.6 $ 232.7 Trademarks 94.7 182.2 _________ _________ Total $ 160.3 $ 414.9 ========= =========
Amortization expense, which is included in selling and administrative expense, was $0.9 million and $2.7 million for the three-month and nine-month periods ended February 28, 2003, respectively. The estimated amortization expense for intangible assets subject to amortization for each of the succeeding years ended May 31, 2003 through May 31, 2007 are as follows: 2003: $3.5 million; 2004: $3.0 million; 2005: $2.8 million; 2006: $2.7 million; 2007: $2.1 million. The results for the three-month and nine-month periods ended February 28, 2002 do not reflect the provisions of FAS 142. The reported net income before cumulative effect of accounting change was $126.3 million and $459.9 million for the three-month and nine-month periods ended February 28, 2002, respectively. Had the Company adopted FAS 142 on June 1, 2001, for the three-month period ending February 28, 2002, we would have recorded net income before cumulative effect of accounting change of $129.6 million as a result of not recording $2.2 million in goodwill amortization and $1.1 million in trademark amortization. For the nine-month period ended February 28, 2002, net income before cumulative effect of accounting change would have been $470.0 million as a result of not recording $6.7 million in goodwill amortization and $3.4 million in trademark amortization. Basic and diluted earnings per common share before accounting change would have increased $0.01 and $0.04 for the three-month and nine-month periods ended February 28, 2002, respectively. NOTE 3 - Comprehensive Income: ___________________________ Comprehensive income, net of taxes, is as follows:
Three Months Ended Nine Months Ended February 28, February 28, __________________ _________________ 2003 2002 2003 2002 ____ ____ ____ ____ (in millions) Net Income $124.7 $126.3 $227.8 $454.9 Other Comprehensive Income: Change in cumulative translation adjustment and other 49.4 (35.8) 66.6 (42.5) Recognition in net income of previously deferred unrealized loss on securities, due to accounting change -- -- -- 3.4 Changes due to cash flow hedging instruments: Initial recognition of net deferred gain as of June 1, 2001 due to accounting change -- -- -- 53.4 (Loss) Gain on hedge derivatives (85.7) 20.6 (178.2) 22.4 Reclassification to net income of previously deferred gains and losses related to hedge derivative instruments 31.7 (5.1) 79.6 (14.9) _______ _______ _______ _______ Other Comprehensive Income (4.6) (20.3) (32.0) 21.8 _______ _______ _______ _______ Total Comprehensive Income $120.1 $106.0 $195.8 $476.7 ======= ======= ======== =======
NOTE 4 - Earnings Per Common Share: ________________________________ The following represents a reconciliation from basic earnings per share to diluted earnings per share. Options to purchase 12.0 million and 4.5 million shares of common stock were outstanding at February 28, 2003 and February 28, 2002, 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.
Three Months Ended Nine Months Ended February 28, February 28, __________________ ________________ 2003 2002 2003 2002 ____ ____ ____ ____ (in millions, except per share data) Determination of shares: Average common shares outstanding 263.9 268.4 264.6 268.3 Assumed conversion of dilutive stock options and awards 2.8 5.0 3.1 3.9 _________ _________ _________ _________ Diluted average common shares outstanding 266.7 273.4 267.7 272.2 ========= ========= ========= ========= Basic earnings per common share: Before cumulative effect of accounting change $ 0.47 $ 0.47 $ 1.87 $ 1.71 Cumulative effect of accounting change -- -- (1.01) (0.02) _________ _________ _________ _________ $ 0.47 $ 0.47 $ 0.86 $ 1.69 ========= ========= ========= ========= Diluted earnings per common share: Before cumulative effect of accounting change $ 0.47 $ 0.46 $ 1.84 $ 1.69 Cumulative effect of accounting change -- -- (0.99) (0.02) _________ _________ _________ _________ $ 0.47 $ 0.46 $ 0.85 $ 1.67 ========= ========= ========= =========
NOTE 5 - Inventories: ___________ Inventories by major classification are as follows:
February 28, May 31, 2003 2002 ________ ________ (in millions) Finished goods $1,488.3 $1,348.2 Work-in-progress 16.0 13.0 Raw materials 14.9 12.6 ________ ________ $1,519.2 $1,373.8 ======== ========
NOTE 6 - 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 with operations participating in NIKE brand sales activity. 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, Inc., Bauer NIKE Hockey, Inc., Hurley International LLC, NIKE Golf, and NIKE IHM, Inc., which are considered immaterial for individual disclosure. In prior years, operating activity for NIKE Golf was classified within each region. Effective June 1, 2002, NIKE Golf revenues and income from the Company's largest golf markets have been reclassified to the Other category, which reflects that the Company has begun managing these operations as a separate business. Certain NIKE Golf inventories, receivables, and property, plant, and equipment continue to be managed by the regions, and as a result, no reclassifications for these balances have been made. NIKE Golf information for the applicable prior year period has been reclassified to conform to the current year presentation. Where applicable, "Corporate" represents items necessary to reconcile to the consolidated financial statements, which generally include corporate activity and corporate eliminations. Certain miscellaneous operating activities have been reclassified between Corporate and the applicable regional operating segment as of June 1, 2002, reflecting a change in the management of these activities. With respect to these classifications, the applicable prior year period has been reclassified to conform to the current year presentation. 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 Unaudited 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 items in the Unaudited Condensed Consolidated Statement of Income. Accounts receivable, inventory, and property, plant, and equipment for operating segments are regularly reviewed and therefore provided below:
Three Months Ended Nine Months Ended February 28, February 28, __________________ _________________ 2003 2002 2003 2002 _____ _____ _____ _____ Revenues USA $1,127.9 $1,094.3 $3,443.1 $3,482.3 EUROPE, MIDDLE EAST, AFRICA 645.8 600.0 2,296.4 1,932.7 ASIA PACIFIC 335.1 286.0 996.2 844.6 AMERICAS 107.4 112.0 383.2 426.4 OTHER 184.7 168.0 593.0 524.8 __________ __________ __________ __________ $2,400.9 $2,260.3 $7,711.9 $7,210.8 ========== ========== ========== ========== Management Pre-Tax Income USA $ 210.0 $ 213.6 $ 664.9 $ 721.7 EUROPE, MIDDLE EAST, AFRICA 80.9 106.4 367.8 289.6 ASIA PACIFIC 81.3 55.7 216.7 172.3 AMERICAS 18.2 13.0 71.9 67.8 OTHER (10.0) 2.7 (13.8) 9.5 CORPORATE (193.0) (202.4) (556.4) (558.7) __________ __________ __________ __________ $ 187.4 $ 189.0 $ 751.1 $ 702.2 ========== ========== ========== ========== Feb. 28, May 31, 2003 2002 _________ _________ Accounts Receivable, net USA $ 710.1 $ 654.4 EUROPE, MIDDLE EAST, AFRICA 700.5 571.1 ASIA PACIFIC 216.5 189.6 AMERICAS 109.5 125.3 OTHER 189.8 249.5 CORPORATE 23.0 17.2 __________ __________ $1,949.4 $1,807.1 ========== ========== Inventories USA $ 608.8 $ 613.4 EUROPE, MIDDLE EAST, AFRICA 400.9 336.5 ASIA PACIFIC 149.2 148.0 AMERICAS 79.0 62.9 OTHER 270.1 203.8 CORPORATE 11.2 9.2 __________ __________ $1,519.2 $1,373.8 ========== ========== Property, Plant and Equipment, net USA $ 220.5 $ 241.9 EUROPE, MIDDLE EAST, AFRICA 223.5 212.2 ASIA PACIFIC 385.6 378.4 AMERICAS 11.5 12.4 OTHER 109.6 113.3 CORPORATE 664.4 656.3 __________ __________ $1,615.1 $1,614.5 ========== ==========
NOTE 7 - Commitments and Contingencies: _____________________________ At February 28, 2003, the Company had letters of credit outstanding totaling $847.5 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 FINANCIAL CONDITION AND RESULTS OF OPERATIONS 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. 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 that would result in materially different amounts being reported. As a result of our adoption of Statement of Financial Accounting Standards No. 142, "Goodwill and Other Intangible Assets" (FAS 142), we have made changes to our accounting policy for goodwill and intangible assets since May 31, 2002. The revised policy is described following. We adopted FAS 142 effective June 1, 2002. In accordance with FAS 142, goodwill and intangible assets with indefinite lives will no longer be amortized but instead will be measured for impairment at least annually, or when events indicate that an impairment exists. As required by FAS 142, in our impairment tests for goodwill and other indefinite-lived intangible assets, we compare the estimated fair value of goodwill and other intangible assets to the carrying value. If the carrying value exceeds our estimate of fair value, we calculate impairment as the excess of the carrying value over our estimate of fair value. Our estimates of fair value utilized in goodwill and other indefinite-lived intangible asset tests may be based upon a number of factors, including our assumptions about the expected future operating performance of our reporting units. Our estimates may change in future periods due to, among other things, technological change, economic conditions, or changes to our business operations. Such changes may result in impairment charges recorded in future periods. As discussed further below, upon adoption of FAS 142 on June 1, 2002, we recorded an impairment charge related to goodwill and other indefinite-lived intangible assets of $266.1 million. This charge is shown on our statement of income as the cumulative effect of accounting change. In future periods, any goodwill impairment charges would be classified as a separate line item on our statement of income as part of income from continuing operations. Other indefinite-lived intangible asset impairment charges would be classified as other expense, also as part of income from continuing operations. Intangible assets that are determined to have definite lives will continue to be amortized over their useful lives and are measured for impairment only when events or circumstances indicate the carrying value may be impaired. In these cases, 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 value. Any impairment charges would be classified as other expense. Operating Results _________________ Revenue growth in our international regions drove a 6% increase in consolidated revenues in the third quarter of fiscal 2003 as compared to the third quarter of fiscal 2002, due in part to the strengthening of the euro versus the U.S. dollar. Changes in currency exchange rates, primarily the euro, drove 4% of the consolidated revenue growth. Consolidated revenues increased 7% in the first nine months of fiscal 2003 as compared to the first nine months of fiscal 2002, also driven by increased revenues in our international regions. These year-to-date revenues reflected 3% growth due to the change in currency exchange rates. Our largest international region, Europe, Middle East, and Africa (EMEA), reported 8% revenue growth in the third quarter of fiscal 2003 compared to the third quarter of fiscal 2002. This growth reflected a 15% improvement due to translation of sales at a higher euro exchange rate and an 11% reduction due to changes in shipment timing due to our December 2002 supply chain system implementation. Consistent with our approach to the systems implementation in the U.S. last year, we closed our European distribution center from November 27, 2002 to December 6, 2002 to prepare for the new system implementation. Prior to the shut down period, we accelerated futures orders and deliveries from December to October and November. In addition, we aggressively liquidated closeout inventory prior to the shutdown. We estimate that these operational adjustments moved approximately $66 million of revenue from the third quarter to the second quarter, reducing third quarter fiscal 2003 revenue growth by approximately eleven points. Excluding the benefit from the change in exchange rates, revenue growth for the region was led by increased sales in Spain and Portugal. Although year-to-date revenues for the UK market were essentially the same as the prior year, excluding the benefit of the change in exchange rates, revenues for the third quarter declined year-over- year partially as a result of the acceleration of third quarter shipments into the second quarter. In the first nine months of fiscal 2003, EMEA reported revenues grew 19% as compared to the first nine months of fiscal 2002; 12 points of this growth were due to changes in currency exchange rates. Excluding the benefit of the change in exchange rates, revenues grew in all three business units (footwear, apparel, and equipment) and in most countries across the region, especially the emerging markets in central and eastern Europe. EMEA management pre-tax income declined from $106.4 million in the third quarter of fiscal 2002 to $80.9 million in the third quarter of fiscal 2003. The decline was driven by the shift in third quarter revenues to the second quarter and incremental selling and administrative costs, partially offset by an improvement in EMEA's gross margin percentage. In contrast, for the first nine months of fiscal 2003, EMEA management pre-tax income grew 27%, to $367.8 million from $289.6 million in the first nine months of fiscal 2002. Higher year-to-date revenues and improved gross margins drove the increase, more than offsetting incremental selling and administrative costs. In Asia Pacific, revenues increased 17% in the third quarter of fiscal 2003; 5 points of this growth were due to changes in currency exchange rates. Revenues increased 18% in the first nine months of fiscal 2003; 3 points of this growth came from changes in currency exchange rates. As in recent quarters, each of our three business units experienced growth across the region, and most countries in Asia Pacific reported higher revenues, particularly China, Korea, and Japan. Management pre-tax income for the Asia Pacific region increased from $55.7 million in the third quarter of fiscal 2002 to $81.3 million in the third quarter of fiscal 2003 and from $172.3 million in the first nine months of fiscal 2002 to $216.7 million in the first nine months of fiscal 2003. These increases reflected higher revenues and improved gross margins that more than offset higher selling and administrative costs incurred to support the higher level of revenues. In the Americas region, third quarter fiscal 2003 revenues decreased 4% compared to the third quarter of fiscal 2002, which reflected a higher level of sales more than offset by a 15% decline due to weaker currencies in Latin American markets. Likewise, year-to-date revenues decreased 10%, driven by a 16% decline due to changes in currency exchange rates. Excluding the currency exchange rate impact, the region experienced sales growth in Latin America partially offset by weakness in Canada. Third quarter management pre-tax income for the Americas region grew from $13.0 million in fiscal 2002 to $18.2 million in fiscal 2003. On a year-to- date basis, management pre-tax income grew 6% from $67.8 million in fiscal 2002 to $71.9 million in fiscal 2003. For both periods, management pre-tax income improved despite lower reported revenues primarily due to an improved gross margin percentage. In the U.S. region, reported revenues grew 3% in the third quarter of fiscal 2003 versus the third quarter of last year, but declined 1% in the first nine months of fiscal 2003 versus the first nine months of last year. The improved revenue trend in the third quarter was partially due to last year's acceleration of deliveries from the third quarter to the second quarter in advance of the U.S. supply chain system implementation in December 2001. We estimate last year's revenue acceleration improved the U.S. third quarter fiscal 2003 revenue growth rate by four points. This revenue acceleration did not affect year-to-date revenue growth. Our U.S. apparel and equipment businesses grew on a quarterly and year- to-date basis as compared to the same periods last year. However, our U.S. footwear business experienced declines during the third quarter and year-to- date period as compared to the same periods last year. Lower sales to our largest customer, Foot Locker, and a lower average price per pair sold drove the year-over-year decline in U.S. footwear revenues. We expect U.S. sales to Foot Locker to be below prior year levels at least through the first half of fiscal 2004. This is a result of both lower orders from Foot Locker and limitations we have imposed on this customer's purchase of certain products. We are continuing to pursue incremental sales with other retailers in order to offset the decline in revenues from Foot Locker. Although we do not expect to fully offset the revenue loss from Foot Locker in the U.S. in the short term, we believe we will ultimately succeed in realigning distribution of our products to meet consumer demand and generate profitable revenue growth in the U.S. footwear business. The reduction in average price per pair in U.S. footwear between fiscal 2003 and fiscal 2002 reflected a shift in sales mix toward classic footwear and kids models, which have a lower average price than our more complex adult performance models. Outstanding futures orders indicate that this trend will continue in the near term, although we expect the rate of decline versus the prior year to slow. U.S. region management pre-tax income declined 2%, from $213.6 million in the third quarter of fiscal 2002 to $210.0 million in the third quarter of fiscal 2003 as higher selling and administrative costs more than offset the increase in revenues and a slight increase in gross margin percentage. On a year-to-date basis, U.S. management pre-tax income declined 8%, from $721.7 million in the first nine months of fiscal 2002 to $664.9 million in the first nine months of fiscal 2003, reflecting lower revenues and higher selling and administrative costs, partially offset by improvement in gross margins. Other revenues include revenues from Bauer NIKE Hockey, Inc., Cole Haan Holdings, Inc., Hurley International LLC, and NIKE Golf. Beginning in the first quarter of fiscal 2003, the revenues from NIKE Golf operations in our largest golf markets have been excluded from the revenues of the regions and reported in the Other category, reflecting that we have begun managing these operations as a separate business. This NIKE Golf information for the prior year period has been reclassified to conform to the current year presentation. Other revenues grew 10% in the third quarter of fiscal 2003 as compared to the third quarter of fiscal 2002 and 13% in the first nine months of fiscal 2003 as compared to the first nine months of fiscal 2002. The addition of revenues from our Hurley business, purchased in the fourth quarter of fiscal 2002, drove the increase in Other revenues in both the third quarter and year- to-date period. Lower NIKE Golf revenues in the third quarter of fiscal 2003 partially offset the increase from the Hurley business in the third quarter. (NIKE Golf business further discussed below.) Other management pre-tax income declined from income of $2.7 million in the third quarter of fiscal 2002 to a loss of $10.0 million in the third quarter of fiscal 2003, and declined from income of $9.5 million in the first nine months of fiscal 2002 to a loss of $13.8 million in the first nine months of fiscal 2003. Reduced NIKE Golf profits drove these declines. The reduced NIKE Golf profits resulted from weaker demand in the U.S. golf market in the current year and start-up issues we experienced at a third-party distribution facility. We expect that demand for golf products throughout the industry and for our business may remain weak in the near term due to the current slowdown of the U.S. economy. In addition, while we are actively working to resolve the startup issues at our new distribution facility, those issues may continue to affect our NIKE Golf revenues and profitability during the fourth quarter of fiscal 2003. The breakdown of revenues follows:
Three Months Ended Nine Months Ended February 28, February 28 ___________________ __________________ % % 2003 2002 change 2003 2002 change ______ _______ _______ _______ _______ ______ (in millions) U.S.A. REGION FOOTWEAR $ 761.4 $ 769.0 -1% $2,222.5 $2,313.5 -4% APPAREL 307.1 273.2 12% 1,005.3 957.0 5% EQUIPMENT AND OTHER 59.4 52.1 14% 215.3 211.8 2% ________ ________ ________ ________ TOTAL U.S.A. 1,127.9 1,094.3 3% 3,443.1 3,482.3 -1% EMEA REGION FOOTWEAR 363.1 338.7 7% 1,292.5 1,079.0 20% APPAREL 239.4 225.5 6% 845.1 725.9 16% EQUIPMENT AND OTHER 43.3 35.8 21% 158.8 127.8 24% ________ ________ ________ ________ TOTAL EMEA 645.8 600.0 8% 2,296.4 1,932.7 19% ASIA PACIFIC REGION FOOTWEAR 186.1 159.4 17% 537.7 482.5 11% APPAREL 116.0 99.9 16% 366.3 287.1 28% EQUIPMENT AND OTHER 33.0 26.7 24% 92.2 75.0 23% ________ ________ ________ ________ TOTAL ASIA PACIFIC 335.1 286.0 17% 996.2 844.6 18% AMERICAS REGION FOOTWEAR 69.1 70.3 -2% 245.1 267.7 -8% APPAREL 29.8 33.9 -12% 108.9 129.3 -16% EQUIPMENT AND OTHER 8.5 7.8 9% 29.2 29.4 -1% ________ ________ ________ ________ TOTAL AMERICAS 107.4 112.0 -4% 383.2 426.4 -10% ________ ________ ________ ________ 2,216.2 2,092.3 6% 7,118.9 6,686.0 6% OTHER 184.7 168.0 10% 593.0 524.8 13% ________ ________ ________ ________ TOTAL REVENUES $2,400.9 $2,260.3 6% $7,711.9 $7,210.8 7% ======== ======== ======== ========
The previous discussion includes disclosure of "management pre-tax income" for our operating segments. We have reported management pre-tax income in accordance with Statement of Financial Accounting Standard No. 131, "Disclosures about Segments of an Enterprise and Related Information". As discussed in Note 6-Operating Segments in the attached Notes to Unaudited Condensed Consolidated Financial Statements, certain corporate costs are not included in the management pre-tax income of our operating segments. Worldwide futures and advance orders for our footwear and apparel scheduled for delivery from March 2003 to July 2003 were 5.8% higher than such orders booked in the comparable period of fiscal 2002. The percentage growth in these orders is not necessarily indicative of our expectation of revenue growth in subsequent periods. This is because the mix of orders can shift between advance/futures and at-once orders. In addition, exchange rate fluctuations as well as differing levels of order cancellations can cause differences in the comparisons between future orders and actual revenues. Moreover, a significant portion of our revenues is not derived from futures orders, including wholesale sales of equipment, U.S. licensed team apparel, Bauer NIKE Hockey, Cole Haan, NIKE Golf, Hurley, and retail sales across all brands. In the third quarter of fiscal 2003, our quarterly gross margin percentage improved 1.6 points as compared to the third quarter of fiscal 2002, continuing the trend of quarter-on-quarter increases over the previous four quarters. Likewise, for the first nine months of fiscal 2003 compared to the first nine months of fiscal 2002, our gross margin percentage improved 1.9 points. The primary driver of the consolidated gross margin improvement was higher in-line apparel margins, reflecting our global initiatives to lower sourcing and distribution costs. The apparel improvement was partially offset by apparel sourcing issues related to production scheduling and factory deliveries we have experienced in the U.S. region throughout fiscal 2003. Lower pricing of NIKE Golf products as a result of the market conditions discussed above also had a negative impact on margins during the third quarter of fiscal 2003. Third quarter selling and administrative expense increased as a percentage of revenues from 30.2% in fiscal 2002 to 31.4% in fiscal 2003. Year-to-date selling and administrative expense increased as a percentage of revenues from 28.5% in fiscal 2002 to 30.0% in fiscal 2003. Both demand creation and operating overhead expense increased as a percentage of revenues in the third quarter and year-to-date period. Third quarter demand creation expense grew from $242.1 million to $271.7 million while year-to-date demand creation expense increased from $734.2 million to $867.6 million. Higher costs incurred in the EMEA region drove the growth in demand creation expense, reflecting, 1) a stronger euro currency exchange rate compared to the U.S. dollar, which resulted in higher U.S. dollar expenses for costs that are euro- denominated, 2) our new endorsement agreement with the Manchester United soccer team that became effective in August 2002, and 3) a comparison to relatively low spending in the third quarter of the prior year as we shifted resources to the World Cup marketing campaign beginning in late fiscal 2002. For the year-to-date period, the increase in demand creation expense also reflected significant first quarter costs for our World Cup 2002 campaign. In addition, we increased demand creation spending in the U.S. region despite lower revenues, in order to drive continued consumer demand while we undergo the realignment of product distribution discussed above. Operating overhead increased between the third quarter of fiscal 2003 and the third quarter of fiscal 2002, from $440.4 million to $482.2 million, and increased between the first nine months of fiscal 2003 and the first nine months of fiscal 2002, from $1,322.2 million to $1,444.0 million. Major drivers of these increases were the stronger euro, costs related to the supply chain systems implementation in EMEA, investments in our NIKE Golf business infrastructure, and overhead costs associated with our recently acquired Hurley business. Third quarter interest expense decreased from $12.1 million in fiscal 2002 to $10.8 million in fiscal 2003, a decline of 11%. Year-to-date interest expense decreased from $37.4 million in fiscal 2002 to $32.2 million in 2003, a decline of 14%. The decrease reflected both lower interest rates and lower average debt levels, as we have continued to use operating free cash flow to reduce total debt. Other income/expense was a net expense of $23.9 million compared to net income for the same quarter of last year of $0.1 million. Year-to-date, other income/expense was a net expense of $48.3 million compared to a net expense of $11.8 million in the prior year. Significant amounts included in other income/expense were interest income, profit sharing expense, goodwill amortization (fiscal 2002 only), and certain foreign currency gains and losses. An increase in net foreign currency losses drove the increase in other expense versus the third quarter and first nine months of last year. These foreign currency losses were primarily due to hedge losses on intercompany charges to a European subsidiary, whose functional currency is the euro. The hedge losses reflected that the euro has strengthened considerably since we entered into the related hedge contracts. These losses were offset by favorable translation of foreign-currency denominated profits. Therefore, the net year-over-year effect of these hedge losses and favorable translation of foreign currency-denominated profits is not material to our consolidated net income for either the third quarter or the year-to-date period. We expect these hedge losses will continue in the fourth quarter of fiscal 2003 and will continue to largely offset the positive translation impact of stronger foreign currencies on consolidated net income. In the third quarter, we adjusted our year-to-date tax rate to 34.2%, our estimate of our full year effective tax rate. This rate is relatively consistent with the effective rate for all of fiscal 2002 of 34.3%. This reflects that we expect higher taxes on foreign earnings due to increased taxable income at a foreign tax jurisdiction with a relatively high tax rate, offset by additional research credits as compared to fiscal 2002. Included in net income for the first nine months of fiscal 2003 is a $266.1 million charge for the cumulative effect of implementing FAS 142. This charge related to the impairment of goodwill and trademarks associated with our Bauer NIKE Hockey subsidiary and the goodwill of our Cole Haan subsidiary, reflecting that the fair values we estimated for these assets were less than the carrying values. In addition, the adoption of this accounting standard resulted in a reduction to goodwill and intangible asset amortization of $3.3 million in each quarter of fiscal 2003 as compared to fiscal 2002 ($10.1 million over the year-to-date period). See the accompanying Notes to Unaudited Condensed Consolidated Financial Statements for further information. Current world events, including the conflict in Iraq, have created uncertainty about the future prospects for the U.S. and world economies. Although to date we do not believe these events have had a material impact on our business, the overall effect these events will ultimately have on the demand for NIKE products around the world and our cost of doing business is unclear. In the face of this uncertainty, we are monitoring each of our markets closely to ensure that we respond quickly to changes in local economies and consumer trends. As of the current date, these world events have not caused us to revise our revenue and profit growth goals for the remainder of fiscal 2003. Recently Issued Accounting Standards ____________________________________ In June 2001, the Financial Accounting Standards Board (FASB) issued Statement of Financial Accounting Standards (SFAS) No. 143, "Accounting for Asset Retirement Obligations" (FAS 143). This statement requires that a liability for an asset retirement obligation be recognized at fair value in the period the obligation is incurred and the associated retirement costs be capitalized as part of the carrying amount of the tangible long-lived asset. All provisions of this statement will be effective for the Company on June 1, 2003. We do not expect that the adoption of FAS 143 will have a material impact on our consolidated financial position or results of operations. In October 2001, the FASB issued SFAS No. 144, "Accounting for the Impairment or Disposal of Long-Lived Assets" (FAS 144). This statement supercedes SFAS No. 121, "Accounting for the Impairment of Long-Lived Assets and for Long-Lived Assets to be Disposed Of" (FAS 121), and amends Accounting Principles Board Statement No. 30, "Reporting the Effects of Disposal of a Segment of a Business, and Extraordinary, Unusual and Infrequently Occurring Events and Transactions" (APB 30). FAS 144 requires that long-lived assets such as property, plant, and equipment, that are to be disposed of by sale be measured at the lower of book value or fair value less costs to sell. FAS 144 retains the fundamental provisions of FAS 121 for (a) recognition and measurement of the impairment of long-lived assets to be held and used and (b) measurement of long-lived assets to be disposed of by sale. This statement also retains APB 30's requirement that companies report discontinued operations separately from continuing operations. All provisions of FAS 144 were effective for us on June 1, 2002. The adoption of FAS 144 did not have an impact on our consolidated financial position or results of operations, and we do not expect any impact in the foreseeable future. In June 2002, the FASB issued SFAS No. 146 "Accounting for Costs Associated with Exit or Disposal Activities" (FAS 146). This statement supercedes Emerging Issues Task Force (EITF) Issue No. 94-3 "Liability Recognition for Certain Employee Termination Benefits and Other Costs to Exit an Activity (including Certain Costs Incurred in a Restructuring)". FAS 146 requires that a liability for a cost associated with an exit or disposal activity be recognized when the liability is incurred. Under EITF 94-3, a liability is recognized at the date an entity commits to an exit plan. FAS 146 also establishes that the liability should initially be measured and recorded at fair value. The provisions of FAS 146 are effective for any exit and disposal activities initiated after December 31, 2002. We have not entered into any significant exit or disposal activities since the effective date of this rule. As such, FAS 146 has not had any impact on our consolidated financial position or results of operations. In November 2002, the FASB issued FASB Interpretation No. 45, "Guarantor's Accounting and Disclosure Requirements for Guarantees, Including Indirect Guarantees of Indebtedness of Others" (FIN 45). FIN 45 requires that upon issuance of a guarantee, a guarantor must recognize a liability for the fair value of an obligation assumed under a guarantee. FIN 45 also requires additional disclosures by a guarantor in its interim and annual financial statements about the obligations associated with guarantees issued. The recognition provisions of FIN 45 are effective for any guarantees issued or modified after December 31, 2002. The disclosure requirements of FIN 45 are effective for our third quarter of fiscal 2003. In connection with various contracts and agreements, we provide routine indemnifications relating to the enforceability of intellectual property, coverage for legal issues that arise, and other items that fall under the scope of FIN 45. Currently, we have several such agreements in place. However based on our historical experience and estimated probability of future loss, we have determined that the fair value of such indemnifications is not material. Hence, the adoption of FIN 45 has not had an impact on our consolidated financial position or results of operations, and no impact is expected in the foreseeable future. In December 2002, the FASB issued SFAS No. 148 "Accounting for Stock- Based Compensation- Transition and Disclosure- an amendment of FASB Statement No. 123" (FAS 148). This statement amends SFAS No. 123 "Accounting for Stock Based Compensation" (FAS 123) to provide alternative methods of voluntarily transitioning to the fair value based method of accounting for stock-based employee compensation. FAS 148 also amends the disclosure requirements of FAS 123 to require disclosure of the method used to account for stock-based employee compensation and the effect of the method on reported results in both annual and interim financial statements. The disclosure provisions will be effective for us beginning with our fiscal 2003 10-K filing. The annual impact of a change to the fair value model prescribed by FAS 123 has been disclosed in our previous annual 10-K filings. At this time, we plan to continue to account for stock-based compensation using the intrinsic method prescribed in Accounting Principles Board Opinion No. 25, "Accounting for Stock Issued to Employees", rather than change to the FAS 123 fair value method. In January 2003, the FASB issued FASB Interpretation No. 46, "Consolidation of Variable Interest Entities" (FIN 46). This interpretation of Accounting Research Bulletin No. 51, "Consolidated Financial Statements", addresses consolidation of variable interest entities. FIN 46 requires certain variable interest entities to be consolidated by the primary beneficiary if the entity does not effectively disperse risks among the parties involved. The provisions of FIN 46 are effective immediately for those variable interest entities created after January 31, 2003. The provisions are effective for the first period beginning after June 15, 2003 for those variable interests held prior to February 1, 2003. We do not currently have any variable interest entities as defined in FIN 46. Accordingly, we do not expect the provisions of FIN 46 to affect our consolidated financial position or results of operations. Liquidity and Capital Resources _______________________________ Cash provided by operations was $428.8 million in the first nine months of fiscal 2003, compared to $504.1 million in the first nine months of fiscal 2002. Our primary source of operating cash flow in the current period was Income before accounting change of $493.9 million. Cash provided by operations was less than that of last year primarily due to a greater increase in working capital during the current period. Cash used by investing activities during the first nine months of fiscal 2003 was $168.2 million, compared to $199.0 million in the same period last year. These amounts were comprised primarily of capital expenditures. The most significant capital expenditures in both periods were for computer equipment and software related to our supply chain initiative, the spending for which declined in fiscal 2003 as compared to fiscal 2002. In addition, during both fiscal 2003 and fiscal 2002, we continued investment in NIKE-owned retail stores, primarily outside the U.S. Finally, we incurred costs in various distribution center projects, the most significant of which is the construction of a new storage building in Japan during the current fiscal year, with scheduled opening in the second half of fiscal 2004. Cash used by financing activities for the first nine months of fiscal 2003 was $383.9 million, up from $249.3 million in the same period in fiscal 2002. In both years, these amounts included cash used to reduce short-term debt, repay current maturities of long-term debt, pay dividends to shareholders, and repurchase shares of company stock. These uses of cash were partially offset by proceeds from long-term debt issuances (discussed further below) and the exercise of employee stock options and other stock issuances. The share repurchases were part of a $1 billion, four-year, share repurchase program that began in fiscal 2001. In the third quarter of fiscal 2003, we purchased 0.6 million shares of NIKE's Class B common stock for $26.6 million, and in the first nine months of fiscal 2003, we purchased 2.6 million shares for $115.0 million. To date under the program, we have purchased 10.9 million shares for $509.7 million. We expect to fund this program from operating free cash flow. The timing and the amount of shares purchased will be dictated by our capital needs and stock market conditions. In October 2001, we filed a shelf registration statement with the Securities and Exchange Commission (SEC) for $1.0 billion. In May 2002, we commenced a medium-term note program under the shelf registration that allows us to issue up to $500.0 million in medium-term notes, as our capital needs dictate. As described in our most recent Form 10-K, during the first quarter of fiscal 2003, we issued a total of $90.0 million in notes under this program. The notes have coupon rates that range from 4.80% to 5.66%. The maturities range from July 9, 2007 to August 7, 2012. For each of the notes, we have entered into an interest rate swap agreement whereby we receive fixed interest payments at the same rate as the notes and pay variable interest payments based on the six-month London Inter Bank Offering Rate (LIBOR) plus a spread. Each swap has the same notional amount and maturity date as its respective note. After issuance of these notes, $410.0 million remains available to be issued under our medium-term note program, and another $500.0 million remains available to be issued under the remainder of the shelf registration. We may issue additional notes under the shelf registration in the near future depending on working capital and general corporate needs. As disclosed in our Form 10-K as of May 31, 2002, as of that date, we had two committed credit facilities in place, a $600.0 million, 364-day credit facility and a $500.0 million, multi-year facility with a group of banks. The 364-day facility matured in November 2002, and at that time we renewed and reduced the facility to $500.0 million. Thus, a total of $1.0 billion is available under the two facilities. No borrowings are currently outstanding under these facilities. No other terms for these facilities have changed from those described in our Form 10-K as of May 31, 2002. We are currently in full compliance with each of the covenants contained in these credit agreements and believe it is unlikely we will fail to meet any of these covenants in the foreseeable future. Liquidity is also provided by our commercial paper program, under which there was $106.9 million and $338.3 million outstanding at February 28, 2003 and May 31, 2002, respectively. Our long-term unsecured debt ratings remain at A and A2 from Standard and Poor's Corporation (S&P) and Moody's Investor Services (Moody's), respectively. Our short-term debt ratings remain at A1 and P1 from S&P and Moody's, respectively. We currently believe that cash generated by operations, together with access to external sources of funds as described above, will be sufficient to meet our operating and capital needs in the foreseeable future. Dividends declared per share of common stock in the third quarter of fiscal 2003 were $.14 per share. Item 3. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK There have been no material changes from the information previously reported under Item 7A of our most recent Annual Report on Form 10-K. Item 4. CONTROLS AND PROCEDURES a) Within the 90-day period prior to the date of this report, the Company carried out an evaluation, under the supervision and with the participation of the Company's management, including the Company's Chief Executive Officer and Chief Financial Officer, of the effectiveness of the design and operation of the Company's disclosure controls and procedures pursuant to Rule 13a-14 of the Securities Exchange Act of 1934 (the "Exchange Act"). Based upon that evaluation, the Chief Executive Officer and Chief Financial Officer concluded that the Company's disclosure controls and procedures are effective in timely alerting them to material information relating to the Company (including its consolidated subsidiaries) required to be included in the Company's Exchange Act filings. b) There have been no significant changes in the Company's internal controls or in other factors which could significantly affect internal controls subsequent to the date the Company carried out its internal control evaluation. 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; and that futures ordering periods may vary among products and regions; 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: NIKE settled the securities class action lawsuits that were consolidated under the caption IN RE NIKE, INC. SECURITIES LITIGATION, CV-01-332-KI, in the United States District Court for the District of Oregon. The settlement was approved by the court on February 24, 2003. We paid $8.9 million in cash, funded by the Company's directors and officers liability insurance. In the settlement, NIKE and the officers and directors named in the lawsuits do not admit, and continue to deny, any and all allegations of wrongdoing, and they received a full release of all claims asserted in the litigation. In a related shareholder derivative lawsuit, Metivier v. Denunzio, et al., 0104-04339, in the Multnomah County Circuit Court of the State of Oregon, the defendants, including the Company and certain directors and officers, filed a motion to dismiss the complaint on March 31, 2003. A decision on the motion is expected in the next several months. There have been no other material changes from the information previously reported under Item 3 of the Company's Annual Report on Form 10-K for the fiscal year ended May 31, 2002. Item 6. Exhibits and Reports on Form 8-K: (a) EXHIBITS: 3.1 Restated Articles of Incorporation, as amended (incorporated by reference from Exhibit 3.1 to the Company's Quarterly Report on Form 10-Q for the fiscal quarter ended August 31, 1995). 3.2 Third Restated Bylaws, as amended (incorporated by reference from Exhibit 3.2 to the Company's Quarterly Report on Form 10-Q for the fiscal quarter ended August 31, 1995). 4.1 Restated Articles of Incorporation, as amended (see Exhibit 3.1). 4.2 Third Restated Bylaws, as amended (see Exhibit 3.2). 4.3 Credit Agreement dated as of November 17, 2000 among NIKE, Inc., Bank of America, N.A., individually and as Agent, and the other banks party thereto (incorporated by reference from Exhibit 10.1 to the Company's Quarterly Report on Form 10-Q for the fiscal quarter ended November 30, 2000). 4.4 First Amendment to Credit Agreement dated as of November 16, 2001 (incorporated by reference from Exhibit 10.2 to the Company's Quarterly Report on Form 10-Q for the fiscal quarter ended November 30, 2001). 4.3 Second Amendment to Credit Agreement dated as of November 15, 2002. (incorporated by reference from Exhibit 10.3 to the Company's Quarterly Report on Form 10-Q for the fiscal quarter ended November 30, 2002). 10.1 NIKE, Inc. Foreign Subsidiary Employee Stock Purchase Plan dated as of February 14, 2003. 10.2 NIKE, Inc. Deferred Compensation Plan dated as of January 1, 2003. * 12.1 Computation of Ratio of Earnings to Charges. 99 Certifications of Chief Executive Officer and Chief Financial Officer furnished pursuant to 18 U.S.C. 1350. * Management contract or compensatory plan or arrangement. (b) Reports on Form 8-K: The following reports on Form 8-K were filed during the fiscal quarter ending February 28, 2003: None SIGNATURES Pursuant to the requirements of the Securities Exchange Act of 1934, the registrant has duly caused this report to be signed on its behalf by the undersigned thereunto duly authorized. NIKE, Inc. An Oregon Corporation BY:/s/ Donald W. Blair ________________________ Donald W. Blair Chief Financial Officer DATED: April 14, 2003 CERTIFICATIONS I, Philip H. Knight, certify that: 1. I have reviewed this quarterly report on Form 10-Q of NIKE, Inc.; 2. Based on my knowledge, this quarterly report does not contain any untrue statement of a material fact or omit to state a material fact necessary to make the statements made, in light of the circumstances under which such statements were made, not misleading with respect to the period covered by this quarterly report; 3. Based on my knowledge, the financial statements, and other financial information included in this quarterly report, fairly present in all material respects the financial condition, results of operations and cash flows of the registrant as of, and for, the periods presented in this quarterly report; 4. The registrant's other certifying officers and I are responsible for establishing and maintaining disclosure controls and procedures (as defined in Exchange Act Rules 13a-14 and 15d-14) for the registrant and we have: a) designed such disclosure controls and procedures to ensure that material information relating to the registrant, including its consolidated subsidiaries, is made known to us by others within those entities, particularly during the period in which this quarterly report is being prepared; b) evaluated the effectiveness of the registrant's disclosure controls and procedures as of a date within 90 days prior to the filing date of this quarterly report (the "Evaluation Date"); and c) presented in this quarterly report our conclusions about the effectiveness of the disclosure controls and procedures based on our evaluation as of the Evaluation Date; 5. The registrant's other certifying officers and I have disclosed, based on our most recent evaluation, to the registrant's auditors and the audit committee of registrant's board of directors (or persons performing the equivalent function): a) all significant deficiencies in the design or operation of internal controls which could adversely affect the registrant's ability to record, process, summarize and report financial data and have identified for the registrant's auditors any material weaknesses in internal controls; and b) any fraud, whether or not material, that involves management or other employees who have a significant role in the registrant's internal controls; and 6. The registrant's other certifying officers and I have indicated in this quarterly report whether or not there were significant changes in internal controls or in other factors that could significantly affect internal controls subsequent to the date of our most recent evaluation, including any corrective actions with regard to significant deficiencies and material weaknesses. Date: April 14, 2003 ____________________ /s/ Philip H. Knight ____________________ Philip H. Knight Chief Executive Officer I, Donald W. Blair, certify that: 1. I have reviewed this quarterly report on Form 10-Q of NIKE, Inc.; 2. Based on my knowledge, this quarterly report does not contain any untrue statement of a material fact or omit to state a material fact necessary to make the statements made, in light of the circumstances under which such statements were made, not misleading with respect to the period covered by this quarterly report; 3. Based on my knowledge, the financial statements, and other financial information included in this quarterly report, fairly present in all material respects the financial condition, results of operations and cash flows of the registrant as of, and for, the periods presented in this quarterly report; 4. The registrant's other certifying officers and I are responsible for establishing and maintaining disclosure controls and procedures (as defined in Exchange Act Rules 13a-14 and 15d-14) for the registrant and we have: a) designed such disclosure controls and procedures to ensure that material information relating to the registrant, including its consolidated subsidiaries, is made known to us by others within those entities, particularly during the period in which this quarterly report is being prepared; b) evaluated the effectiveness of the registrant's disclosure controls and procedures as of a date within 90 days prior to the filing date of this quarterly report (the "Evaluation Date"); and c) presented in this quarterly report our conclusions about the effectiveness of the disclosure controls and procedures based on our evaluation as of the Evaluation Date; 5. The registrant's other certifying officers and I have disclosed, based on our most recent evaluation, to the registrant's auditors and the audit committee of registrant's board of directors (or persons performing the equivalent function): a) all significant deficiencies in the design or operation of internal controls which could adversely affect the registrant's ability to record, process, summarize and report financial data and have identified for the registrant's auditors any material weaknesses in internal controls; and b) any fraud, whether or not material, that involves management or other employees who have a significant role in the registrant's internal controls; and 6. The registrant's other certifying officers and I have indicated in this quarterly report whether or not there were significant changes in internal controls or in other factors that could significantly affect internal controls subsequent to the date of our most recent evaluation, including any corrective actions with regard to significant deficiencies and material weaknesses. Date: April 14, 2003 ____________________ /s/ Donald W. Blair ____________________ Donald W. Blair Chief Financial Officer