10-Q 1 d481614d10q.htm FORM 10-Q Form 10-Q
Table of Contents

 

 

UNITED STATES

SECURITIES AND EXCHANGE COMMISSION

WASHINGTON, D.C. 20549

 

 

FORM 10-Q

 

 

QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF

THE SECURITIES EXCHANGE ACT OF 1934

For the Quarterly Period Ended February 28, 2013

Commission file number-001-10635

 

 

 

LOGO

NIKE, Inc.

(Exact name of registrant as specified in its charter)

 

 

 

OREGON   93-0584541

(State or other jurisdiction of

incorporation or organization)

 

(I.R.S. Employer

Identification No.)

One Bowerman Drive,

Beaverton, Oregon

  97005-6453
(Address of principal executive offices)   (Zip Code)

Registrant’s telephone number, including area code: (503) 671-6453

 

 

Indicate by check mark whether the registrant: (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days.    Yes  x    No  ¨

Indicate by check mark whether the registrant has submitted electronically and posted on its corporate Web site, if any, every Interactive Data File required to be submitted and posted pursuant to Rule 405 of Regulation S-T (§ 232.405 of this chapter) during the preceding 12 months (or for such shorter period that the registrant was required to submit and post such files).    Yes  x    No  ¨

Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, a non-accelerated filer, or a smaller reporting company. See the definitions of “large accelerated filer,” “accelerated filer” and “smaller reporting company” in Rule 12b-2 of the Exchange Act.

 

Large accelerated filer

 

x

  

Accelerated filer

 

¨

Non-accelerated filer

 

¨

  

Smaller Reporting Company

 

¨

Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Exchange Act).    Yes  ¨    No  x

Shares of Common Stock outstanding as of February 28, 2013 were:

 

Class A

     177,957,876   

Class B

     715,656,697   
  

 

 

 
     893,614,573   

 

 

 


Table of Contents

NIKE, INC.

FORM 10-Q

Table of Contents

PART I — FINANCIAL INFORMATION

 

 

ITEM 1.     

Financial Statements

     3   
    

Unaudited Condensed Consolidated Balance Sheets

     3   
    

Unaudited Condensed Consolidated Statements of Income

     4   
    

Unaudited Condensed Consolidated Statements of Comprehensive Income

     5   
    

Unaudited Condensed Consolidated Statements of Cash Flows

     6   
    

Notes to Unaudited Condensed Consolidated Financial Statements

     7   
ITEM 2.     

Management’s Discussion and Analysis of Financial Condition and Results of Operations

     18   
ITEM 3.     

Quantitative and Qualitative Disclosures about Market Risk

     30   
ITEM 4.      

Controls and Procedures

     30   

PART II — OTHER INFORMATION

 

 

 

ITEM 1.     

Legal Proceedings

     32   
ITEM 1A.     

Risk Factors

     32   
ITEM 2.     

Unregistered Sales of Equity Securities and Use of Proceeds

     32   
ITEM 6.     

Exhibits

     32   
    

Signatures

     33   

 

 

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PART I – FINANCIAL INFORMATION

 

ITEM 1. FINANCIAL STATEMENTS

UNAUDITED CONDENSED CONSOLIDATED BALANCE SHEETS

 

 

(In millions)    February 28,
2013
     May 31,
2012
 

ASSETS

                 

Current assets:

                 

Cash and equivalents

   $             2,557       $             2,317   

Short-term investments (Note 5)

     1,485         1,440   

Accounts receivable, net

     3,232         3,132   

Inventories (Note 2)

     3,329         3,222   

Deferred income taxes (Note 6)

     275         262   

Prepaid expenses and other current assets (Notes 5 and 9)

     882         857   

Assets of discontinued operations (Note 10)

     29         615   

Total current assets

     11,789         11,845   

Property, plant and equipment

     5,370         5,057   

Less accumulated depreciation

     3,110         2,848   

Property, plant and equipment, net

     2,260         2,209   

Identifiable intangible assets, net (Note 3)

     376         370   

Goodwill (Note 3)

     131         131   

Deferred income taxes and other assets (Notes 5, 6 and 9)

     1,059         910   

TOTAL ASSETS

   $ 15,615       $ 15,465   

LIABILITIES AND SHAREHOLDERS’ EQUITY

                 

Current liabilities:

                 

Current portion of long-term debt

   $ 57       $ 49   

Notes payable

     103         108   

Accounts payable

     1,241         1,548   

Accrued liabilities (Notes 4 and 9)

     1,899         1,941   

Income taxes payable (Note 6)

     138         65   

Liabilities of discontinued operations (Note 10)

     62         187   

Total current liabilities

     3,500         3,898   

Long-term debt

     161         228   

Deferred income taxes and other liabilities (Notes 6 and 9)

     1,287         958   

Commitments and contingencies (Note 12)

     -           -     

Redeemable preferred stock

     -           -     

Shareholders’ equity:

                 

Common stock at stated value:

                 

Class A convertible — 178 and 180 shares outstanding

     -           -     

Class B — 716 and 738 shares outstanding

     3         3   

Capital in excess of stated value

     4,977         4,641   

Accumulated other comprehensive income

     231         149   

Retained earnings

     5,456         5,588   

Total shareholders’ equity

     10,667         10,381   

TOTAL LIABILITIES AND SHAREHOLDERS’ EQUITY

   $ 15,615       $ 15,465   

 

 

The accompanying Notes to Unaudited Condensed Consolidated Financial Statements are an integral part of this statement.

 

 

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UNAUDITED CONDENSED CONSOLIDATED STATEMENTS OF INCOME

 

 

     Three Months Ended
February 28 and 29,
         Nine Months Ended
February 28 and 29,
 
(In millions, except per share data)    2013     2012           2013     2012  

Income from continuing operations:

                                     

Revenues

   $             6,187      $             5,656           $             18,616      $             17,095   

Cost of sales

     3,451        3,171             10,522        9,616   

Gross profit

     2,736        2,485             8,094        7,479   

Demand creation expense

     619        592             2,103        1,872   

Operating overhead expense

     1,244        1,116             3,655        3,297   

Total selling and administrative expense

     1,863        1,708             5,758        5,169   

Interest (income) expense, net

     (2     -               (6     3   

Other expense (income), net

     17        (10          (28     17   

Income before income taxes

     858        787             2,370        2,290   

Income tax expense (Note 6)

     196        218             602        580   

NET INCOME FROM CONTINUING OPERATIONS

     662        569             1,768        1,710   

NET INCOME (LOSS) FROM DISCONTINUED OPERATIONS

     204        (9          49        (36

NET INCOME

   $ 866      $ 560           $ 1,817      $ 1,674   

Earnings per share from continuing operations:

                                     

Basic earnings per common share

   $ 0.74      $ 0.62           $ 1.97      $ 1.86   

Diluted earnings per common share

   $ 0.73      $ 0.61           $ 1.93      $ 1.82   

Earnings per share from discontinued operations:

                                     

Basic earnings per common share

   $ 0.23      $ (0.01        $ 0.05      $ (0.04

Diluted earnings per common share

   $ 0.22      $ (0.01        $ 0.05      $ (0.04

Dividends declared per common share

   $ 0.21      $ 0.18           $ 0.60      $ 0.52   

 

 

The accompanying Notes to Unaudited Condensed Consolidated Financial Statements are an integral part of this statement.

 

 

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UNAUDITED CONDENSED CONSOLIDATED STATEMENTS OF COMPREHENSIVE INCOME

 

 

     Three Months Ended          Nine Months Ended  
     February 28 and 29,          February 28 and 29,  
(In millions)    2013     2012           2013     2012  

Net income

   $             866      $             560           $             1,817      $             1,674   

Other comprehensive income (loss), net of tax:

                                     

Foreign currency translation and other (1)

     10        41             40        (92

Net (loss) gain on cash flow hedges (2)

     103        (9          54        152   

Net (loss) gain on net investment hedges (3)

     -          (2          -          23   

Reclassification to net income of previously deferred (gains) losses related to hedge derivative instruments (4)

     (21     (2          (95     65   

Release of cumulative translation loss related to Umbro (5) (Note 10)

     1        -               83        -     

Total other comprehensive income, net of tax

     93        28             82        148   

TOTAL COMPREHENSIVE INCOME

   $ 959      $ 588           $ 1,899      $ 1,822   

 

(1)

Net of tax (expense) benefit of $(7) million, $(37) million, $(23) million and $29 million, respectively.

(2)

Net of tax (expense) benefit of $(18) million, $3 million, $(16) million and $(7) million, respectively.

(3)

Net of tax (expense) benefit of $0 million, $0 million, $0 million and $(12) million, respectively.

(4)

Net of tax (benefit) expense of $(1) million, $0 million, $(3) million and $(12) million, respectively.

(5)

Net of tax expense of $0 million, $0 million, $47 million and $0 million, respectively.

 

 

The accompanying Notes to Unaudited Condensed Consolidated Financial Statements are an integral part of this statement.

 

 

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UNAUDITED CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS

 

 

     Nine Months Ended
February 28 and 29,
 
(In millions)    2013     2012  

Cash provided by operations:

                

Net income

   $             1,817      $             1,674   

Income charges (credits) not affecting cash:

                

Depreciation

     322        272   

Deferred income taxes

     (56     (7

Stock-based compensation

     128        95   

Amortization and other

     37        48   

Net gain on divestitures

     (124     -     

Changes in certain working capital components and other assets and liabilities:

                

Decrease (increase) in accounts receivable

     38        (233

Increase in inventories

     (69     (691

Increase in prepaid expenses and other current assets

     (79     (149

Decrease in accounts payable, accrued liabilities and income taxes payable

     (346     (84

Cash provided by operations

     1,668        925   

Cash provided by investing activities:

                

Purchases of short-term investments

     (1,881     (1,901

Maturities of short-term investments

     885        2,101   

Sales of short-term investments

     938        1,192   

Additions to property, plant and equipment

     (401     (379

Disposals of property, plant and equipment

     1        1   

Proceeds from divestitures

     786        -     

Increase in other assets, net of other liabilities

     (18     (30

Settlement of net investment hedges

     -          14   

Cash provided by investing activities

     310        998   

Cash used by financing activities:

                

Reductions in long-term debt, including current portion

     (47     (201

Decrease in notes payable

     (7     (87

Proceeds from exercise of stock options and other stock issuances

     184        372   

Excess tax benefits from share-based payment arrangements

     34        85   

Repurchase of common stock

     (1,432     (1,585

Dividends — common and preferred

     (515     (454

Cash used by financing activities

     (1,783     (1,870

Effect of exchange rate changes

     45        13   

Net increase in cash and equivalents

     240        66   

Cash and equivalents, beginning of period

     2,317        1,955   

CASH AND EQUIVALENTS, END OF PERIOD

   $ 2,557      $ 2,021   

Supplemental disclosure of cash flow information:

                

Dividends declared and not paid

   $ 188      $ 165   

 

 

The accompanying Notes to Unaudited Condensed Consolidated Financial Statements are an integral part of this statement.

 

 

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Notes to Unaudited Condensed Consolidated Financial Statements

 

 

 

Note 1

  

Summary of Significant Accounting Policies

     8   

Note 2

  

Inventories

     8   

Note 3

  

Identifiable Intangible Assets and Goodwill

     8   

Note 4

  

Accrued Liabilities

     9   

Note 5

  

Fair Value Measurements

     9   

Note 6

  

Income Taxes

     10   

Note 7

  

Stock-Based Compensation

     11   

Note 8

  

Earnings Per Share

     11   

Note 9

  

Risk Management and Derivatives

     12   

Note 10

  

Discontinued Operations

     15   

Note 11

  

Operating Segments

     16   

Note 12

  

Commitments and Contingencies

     17   

 

 

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NOTE 1 — Summary of Significant Accounting Policies

 

Basis of Presentation

The accompanying unaudited condensed consolidated financial statements reflect all normal adjustments which are, in the opinion of management, necessary for a fair statement of the results of operations for the interim period. The year-end condensed consolidated balance sheet data as of May 31, 2012 was derived from audited financial statements, but does not include all disclosures required by accounting principles generally accepted in the United States of America (“U.S. GAAP”). 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 three and nine months ended February 28, 2013 are not necessarily indicative of results to be expected for the entire year.

The Company completed the sale of Cole Haan during the third quarter ended February 28, 2013 and completed the sale of Umbro during the second quarter ended November 30, 2012. As a result, the Company reports the operating results of Cole Haan and Umbro in the net income (loss) from discontinued operations line in the condensed consolidated statements of income for all periods presented. In addition, the assets and liabilities associated with these businesses are reported as assets of discontinued operations and liabilities of discontinued operations, as appropriate, in the condensed consolidated balance sheets (refer to Note 10 — Discontinued Operations). Unless otherwise indicated, the disclosures accompanying the condensed consolidated financial statements reflect the Company’s continuing operations.

On November 15, 2012 the Company announced a two-for-one split of both NIKE Class A and Class B Common shares. The stock split was a 100 percent stock dividend payable on December 24, 2012 to shareholders of record at the close of business December 10, 2012. Common stock began trading at the split-adjusted price on December 26, 2012. All share numbers and per share amounts presented reflect the stock split.

Recently Adopted Accounting Standards

In September 2011, the Financial Accounting Standards Board (“FASB”) issued updated guidance on the periodic testing of goodwill for impairment. This guidance will allow companies to assess qualitative factors to determine if it is more-likely-than-not that goodwill might be impaired and whether it is necessary to perform the two-step goodwill impairment test required under current accounting standards. This new guidance became effective for the Company beginning June 1, 2012. The adoption did not have a material effect on the Company’s consolidated financial position or results of operations.

In June 2011, the FASB issued guidance on the presentation of comprehensive income. This new guidance eliminates the current option to report other comprehensive income and its components in the statement of shareholders’ equity. Companies are now required to present the components of net income and other comprehensive income in either one continuous statement, referred to as the statement of comprehensive income, or in two separate, but consecutive statements. This requirement was effective for the Company beginning June 1, 2012. Further, this guidance required companies to present reclassification adjustments out of accumulated other comprehensive income by component in both the statement in which net income is presented and the statement in which other comprehensive income is presented. This requirement will be effective for the Company beginning June 1, 2013. As this guidance only amends the presentation of the components of comprehensive income, the adoption did not have an impact on the Company’s consolidated financial position or results of operations.

Recently Issued Accounting Standards

In July 2012, the FASB issued an accounting standard update intended to simplify how an entity tests indefinite-lived intangible assets other than goodwill for impairment by providing entities with an option to perform a qualitative assessment to determine whether further impairment testing is necessary. This accounting standard update will be effective for the Company beginning June 1, 2013, and early adoption is permitted. The Company does not anticipate the adoption will have an impact on its consolidated financial position or results of operations.

In December 2011, the FASB issued guidance enhancing disclosure requirements surrounding the nature of an entity’s right to offset and related arrangements associated with its financial instruments and derivative instruments. This new guidance requires companies to disclose both gross and net information about instruments and transactions eligible for offset in the statement of financial position and instruments and transactions subject to master netting arrangements. This new guidance is effective for the Company beginning June 1, 2013. As this guidance only requires expanded disclosures, the Company does not anticipate the adoption will have an impact on its consolidated financial position or results of operations.

NOTE 2 — Inventories

 

Inventory balances of $3,329 million and $3,222 million at February 28, 2013 and May 31, 2012, respectively, were substantially all finished goods.

NOTE 3 — Identifiable Intangible Assets and Goodwill

 

The following table summarizes the Company’s identifiable intangible asset balances at February 28, 2013 and May 31, 2012:

 

     February 28, 2013           May 31, 2012  

(In millions)

   Gross
Carrying
Amount
     Accumulated
Amortization
    Net Carrying
Amount
           Gross
Carrying
Amount
     Accumulated
Amortization
    Net Carrying
Amount
 

Amortized intangible assets:

                                    

Patents

   $             110       $             (34   $             76            $             99       $             (29   $             70   

Trademarks

     45         (32     13              40         (26     14   

Other

     20         (15     5              19         (16     3   

TOTAL

   $ 175       $ (81   $ 94            $ 158       $ (71   $ 87   

Unamortized intangible assets – Trademarks

                      282                               283   

IDENTIFIABLE INTANGIBLE ASSETS, NET

                    $ 376                             $ 370   

Amortization expense, which is included in selling and administrative expense, was $3 million and $4 million for the three month periods ended February 28, 2013 and February 29, 2012, respectively, and $10 million and $11 million for the nine month periods ended February 28, 2013 and February 29, 2012, respectively. The estimated amortization expense for intangible assets subject to amortization for the remainder of fiscal year 2013 and each of the years ending May 31, 2014 through May 31, 2017 are as follows: remainder of 2013: $4 million; 2014: $12 million; 2015: $9 million; 2016: $8 million; 2017: $7 million.

 

 

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Goodwill was $131 million at February 28, 2013 and May 31, 2012, respectively, and is included in the Company’s “Other Businesses” categories for segment reporting purposes. There were no accumulated impairment balances for goodwill as of either period end.

NOTE 4 — Accrued Liabilities

 

Accrued liabilities included the following:

 

     February 28,      May 31,  
(In millions)    2013      2012  

Compensation and benefits, excluding taxes

   $ 633       $ 691   

Taxes other than income taxes

     221         169   

Endorsement compensation

     213         288   

Dividends payable

     188         165   

Advertising and marketing

     118         94   

Import and logistics costs

     101         133   

Fair value of derivatives

     62         55   

Other(1)

     363         346   

TOTAL ACCRUED LIABILITIES

   $             1,899       $             1,941   

 

(1)

Other consists of various accrued expenses with no individual item accounting for more than 5% of the balance at February 28, 2013 and May 31, 2012.

NOTE 5 — Fair Value Measurements

 

The Company measures certain financial assets and liabilities at fair value on a recurring basis, including derivatives and available-for-sale securities. Fair value is the price the Company would receive to sell an asset or pay to transfer a liability in an orderly transaction with a market participant at the measurement date. The Company uses a three-level hierarchy established by the FASB that prioritizes fair value measurements based on the types of inputs used for the various valuation techniques (market approach, income approach, and cost approach).

The levels of hierarchy are described below:

 

 

Level 1: Observable inputs such as quoted prices in active markets for identical assets or liabilities.

 

 

Level 2: Inputs other than quoted prices that are observable for the asset or liability, either directly or indirectly; these include quoted prices for similar assets or liabilities in active markets and quoted prices for identical or similar assets or liabilities in markets that are not active.

 

 

Level 3: Unobservable inputs for which there is little or no market data available, which require the reporting entity to develop its own assumptions.

The Company’s assessment of the significance of a particular input to the fair value measurement in its entirety requires judgment and considers factors specific to the asset or liability. Financial assets and liabilities are classified in their entirety based on the most conservative level of input that is significant to the fair value measurement.

Pricing vendors are utilized for certain Level 1 and Level 2 investments. These vendors either provide a quoted market price in an active market or use observable inputs without applying significant adjustments in their pricing. Observable inputs include broker quotes, interest rates and yield curves observable at commonly quoted intervals, volatilities and credit risks. The Company’s fair value processes include controls that are designed to ensure appropriate fair values are recorded. These controls include an analysis of period-over-period fluctuations and comparison to another independent pricing vendor.

The following table presents information about the Company’s financial assets and liabilities measured at fair value on a recurring basis as of February 28, 2013 and May 31, 2012 and indicates the fair value hierarchy of the valuation techniques utilized by the Company to determine such fair value.

 

     February 28, 2013
     Fair Value
Measurements Using
     Assets /
Liabilities at
      
(In millions)    Level 1      Level 2      Level 3      Fair Value      Balance Sheet Classification

ASSETS

                                        

Derivatives:

                                        

Foreign exchange forwards and options

   $ -         $ 260       $ -         $ 260       Other current assets and other long-term assets

Interest rate swap contracts

     -           12         -           12       Other long-term assets

Total derivatives

     -           272         -           272        

Available-for-sale securities:

                                        

U.S. Treasury securities

     690         -           -           690       Cash and equivalents

Commercial paper and bonds

     -           368         -           368       Cash and equivalents

Money market funds

     -           565         -           565       Cash and equivalents

U.S. Treasury securities

     807         -           -           807       Short-term investments

U.S. Agency securities

     -           286         -           286       Short-term investments

Commercial paper and bonds

     -           392         -           392       Short-term investments

Non-marketable preferred stock

     -           -           5         5       Other long-term assets

Total available-for-sale securities

     1,497         1,611         5         3,113        

TOTAL ASSETS

   $ 1,497       $ 1,883       $ 5       $ 3,385        

LIABILITIES

                                        

Derivatives:

                                        

Foreign exchange forwards and options

     -           62         -           62       Accrued liabilities and other long-term liabilities

TOTAL LIABILITIES

   $ -         $ 62       $ -         $ 62        

 

 

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     May 31, 2012
     Fair Value
Measurements Using
     Assets /
Liabilities at
      
(In millions)    Level 1      Level 2      Level 3      Fair Value      Balance Sheet Classification

ASSETS

                                        

Derivatives:

                                        

Foreign exchange forwards and options

   $ -         $ 265       $ -         $ 265       Other current assets and other long-term assets

Embedded derivatives

     -           1         -           1       Other current assets

Interest rate swap contracts

     -           15         -           15       Other current assets and other long-term assets

Total derivatives

     -           281         -           281        

Available-for-sale securities:

                                        

U.S. Treasury securities

     226         -           -           226       Cash and equivalents

U.S. Agency securities

     -           254         -           254       Cash and equivalents

Commercial paper and bonds

     -           159         -           159       Cash and equivalents

Money market funds

     -           770         -           770       Cash and equivalents

U.S. Treasury securities

     927         -           -           927       Short-term investments

U.S. Agency securities

     -           230         -           230       Short-term investments

Commercial paper and bonds

     -           283         -           283       Short-term investments

Non-marketable preferred stock

     -           -           3         3       Other long-term assets

Total available-for-sale securities

     1,153         1,696         3         2,852        

TOTAL ASSETS

   $ 1,153       $ 1,977       $ 3       $ 3,133        

LIABILITIES

                                        

Derivatives:

                                        

Foreign exchange forwards and options

   $ -         $ 55       $ -         $ 55       Accrued liabilities and other long-term liabilities

TOTAL LIABILITIES

   $ -         $ 55       $ -         $ 55        

Derivative financial instruments include foreign exchange forwards and options, embedded derivatives and interest rate swap contracts. The fair value of derivative contracts is determined using observable market inputs such as the daily market foreign currency rates, forward pricing curves, currency volatilities, currency correlations and interest rates, and considers nonperformance risk of the Company and that of its counterparties. Adjustments relating to these nonperformance risks were not material at February 28, 2013 or May 31, 2012. Refer to Note 9 — Risk Management and Derivatives for additional detail.

Available-for-sale securities comprise investments in U.S. Treasury and agency securities, money market funds, and corporate commercial paper and bonds. These securities are valued using market prices on both active markets (Level 1) and less active markets (Level 2).

The Company’s Level 3 assets comprise investments in certain non-marketable preferred stock. These investments are valued using internally developed models with unobservable inputs. These Level 3 investments are an immaterial portion of our portfolio. Changes in Level 3 investment assets were immaterial during the nine months ended February 28, 2013 and the year ended May 31, 2012.

No transfers among the levels within the fair value hierarchy occurred during the nine months ended February 28, 2013 and the year ended May 31, 2012.

As of February 28, 2013 and May 31, 2012, the Company had no assets or liabilities that were required to be measured at fair value on a non-recurring basis.

Short-Term Investments

As of February 28, 2013 and May 31, 2012, short-term investments consisted of available-for-sale securities. As of February 28, 2013, the Company held $1,199 million of available-for-sale securities with maturity dates within one year from purchase date and $286 million with maturity dates over one year and less than five years from purchase date within short-term investments. As of May 31, 2012, the Company held $1,129 million of available-for-sale securities with maturity dates within one year from purchase date and $311 million with maturity dates over one year and less than five years from purchase date within short-term investments.

Short-term investments classified as available-for-sale consist of the following at fair value:

 

     February 28,      May 31,  
(In millions)    2013      2012  

Available-for-sale investments:

                 

U.S. treasury and agencies

   $ 1,093       $ 1,157   

Commercial paper and bonds

     392         283   

TOTAL AVAILABLE-FOR-SALE INVESTMENTS

   $             1,485       $             1,440   

Interest income related to cash and equivalents and short-term investments included within interest (income) expense, net was $6 million and $7 million for each of the three month periods ended February 28, 2013 and February 29, 2012, respectively, and $20 million and $22 million for each of the nine month periods ended February 28, 2013 and February 29, 2012, respectively.

Fair Value of Long-Term Debt and Notes Payable

The Company’s long-term debt is recorded at adjusted cost, net of amortized premiums and discounts and interest rate swap fair value adjustments. The fair value of long-term debt is estimated based upon quoted prices for similar instruments (Level 2). The fair value of the Company’s long-term debt, including the current portion, was approximately $223 million at February 28, 2013 and $283 million at May 31, 2012.

The carrying amounts reflected in the unaudited condensed consolidated balance sheets for notes payable approximate fair value.

NOTE 6 — Income Taxes

 

The effective tax rate on continuing operations was 25.4% and 25.3% for the nine months ended February 28, 2013 and February 29, 2012, respectively. The increase in the Company’s effective tax rate was primarily driven by an increase in the effective tax rate on foreign operations as a result of changes in the geographical mix of earnings partially offset by a benefit from the retroactive reinstatement of the U.S. research and development credit by the American Taxpayer Relief Act of 2012.

 

 

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As of February 28, 2013, total gross unrecognized tax benefits, excluding related interest and penalties, were $419 million, $213 million of which would affect the Company’s effective tax rate if recognized in future periods. As of May 31, 2012, total gross unrecognized tax benefits, excluding interest and penalties, were $285 million, $150 million of which would affect the Company’s effective tax rate if recognized in future periods. The gross liability for payment of interest and penalties increased $34 million during the nine months ended February 28, 2013. As of February 28, 2013, accrued interest and penalties related to uncertain tax positions was $142 million (excluding federal benefit).

The Company is subject to taxation primarily in the United States, China, the Netherlands and Brazil as well as various other state and foreign jurisdictions. The Company has concluded substantially all U.S. federal income tax matters through fiscal year 2010, and is currently under examination by the Internal Revenue Service (“IRS”) for the fiscal 2011 and 2012 tax years. The Company’s major foreign jurisdictions, China, the Netherlands, and Brazil have concluded substantially all income tax matters through calendar 2002, fiscal 2006, and calendar 2006, respectively. The Company estimates that it is reasonably possible that the total gross unrecognized tax benefits could decrease by up to $58 million within the next 12 months as a result of resolutions of global tax examinations and the expiration of applicable statutes of limitations.

NOTE 7 — Stock-Based Compensation

 

In 1990, the Board of Directors adopted, and the shareholders approved, the NIKE, Inc. 1990 Stock Incentive Plan (the “1990 Plan”). The 1990 Plan provides for the issuance of up to 326 million previously unissued shares of Class B Common Stock in connection with stock options and other awards granted under the plan. The 1990 Plan authorizes the grant of non-statutory stock options, incentive stock options, stock appreciation rights, restricted stock, restricted stock units, and performance-based awards. The exercise price for stock options and stock appreciation rights may not be less than the fair market value of the underlying shares on the date of grant. A committee of the Board of Directors administers the 1990 Plan. The committee has the authority to determine the employees to whom awards will be made, the amount of the awards, and the other terms and conditions of the awards. Substantially all stock option grants outstanding under the 1990 Plan were granted in the first quarter of each fiscal year, vest ratably over four years, and expire 10 years from the date of grant.

In addition to the 1990 Plan, the Company gives employees the right to purchase shares at a discount to the market price under employee stock purchase plans (“ESPPs”). Employees are eligible to participate through payroll deductions of up to 10% of their compensation. At the end of each six-month offering period, shares are purchased by the participants at 85% of the lower of the fair market value at the beginning or the end of the offering period.

The Company accounts for stock-based compensation by estimating the fair value of options granted under the 1990 Plan and employees’ purchase rights under the ESPPs using the Black-Scholes option pricing model. The Company recognizes this fair value as operating overhead expense over the vesting period using the straight-line method.

The following table summarizes the Company’s total stock-based compensation expense recognized in selling and administrative expense:

 

     Three Months Ended           Nine Months Ended  
     February 28 and 29,           February 28 and 29,  
(In millions)    2013      2012            2013      2012  

Stock options(1)

   $ 32       $ 26            $ 90       $ 70   

ESPPs

     4         4              14         12   

Restricted stock

     9         4              24         13   

TOTAL STOCK-BASED COMPENSATION EXPENSE

   $ 45       $ 34            $ 128       $ 95   

 

(1)

Expense for stock options includes the expense associated with stock appreciation rights. Accelerated stock option expense is recorded for employees eligible for accelerated stock option vesting upon retirement. Accelerated stock option expense was $6 million and $4 million for the three month periods ended February 28, 2013 and February 29, 2012, respectively, and $16 million and $12 million for the nine month periods ended February 28, 2013 and February 29, 2012, respectively.

As of February 28, 2013, the Company had $232 million of unrecognized compensation costs from stock options, net of estimated forfeitures, to be recognized as selling and administrative expense over a weighted average period of 2.5 years.

The weighted average fair value per share of the options granted during the nine months ended February 28, 2013 and February 29, 2012, as computed using the Black-Scholes pricing model, was $12.71, and $11.07, respectively. The weighted average assumptions used to estimate these fair values are as follows:

 

     Nine Months Ended  
     February 28 and 29,  
      2013     2012  

Dividend yield

     1.5     1.4

Expected volatility

     35.0     29.5

Weighted average expected life (in years)

     5.3        5.0   

Risk-free interest rate

     0.6     1.4

The Company estimates the expected volatility based on the implied volatility in market traded options on the Company’s common stock with a term greater than one year, along with other factors. The weighted average expected life of options is based on an analysis of historical and expected future exercise patterns. The interest rate is based on the U.S. Treasury (constant maturity) risk-free rate in effect at the date of grant for periods corresponding with the expected term of the options.

NOTE 8 — Earnings Per Share

 

The following is a reconciliation from basic earnings per share to diluted earnings per share. Options to purchase an additional 14.5 million and 13.5 million shares of common stock were outstanding for the three month periods ended February 28, 2013 and February 29, 2012, respectively, and 12.6 million and 13.4 million shares of common stock were outstanding for the nine month periods ended February 28, 2013 and February 29, 2012, respectively, but were not included in the computation of diluted earnings per share because the options were anti-dilutive.

On November 15, 2012 the Company announced a two-for-one stock split of both NIKE Class A and Class B Common shares. Common stock began trading at the split-adjusted price on December 26, 2012. All share numbers and per share amounts presented reflect the stock split.

 

 

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     Three Months Ended
February 28 and 29,
         Nine Months Ended
February 28 and 29,
 
(In millions, except per share data)    2013      2012           2013      2012  

Determination of shares:

                                       

Weighted average common shares outstanding

     893.9         915.1             898.9         921.2   

Assumed conversion of dilutive stock options and awards

     17.8         19.5             17.6         19.1   

DILUTED WEIGHTED AVERAGE COMMON SHARES OUTSTANDING

     911.7         934.6             916.5         940.3   

Earnings per share from continuing operations:

                                       

Basic earnings per common share

   $ 0.74       $ 0.62           $ 1.97       $ 1.86   

Diluted earnings per common share

   $ 0.73       $ 0.61           $ 1.93       $ 1.82   

Earnings per share from discontinued operations:

                                       

Basic earnings per common share

   $ 0.23       $ (0.01        $ 0.05       $ (0.04

Diluted earnings per common share

   $ 0.22       $ (0.01        $ 0.05       $ (0.04

Basic earnings per common share for NIKE, Inc.

   $ 0.97       $ 0.61           $ 2.02       $ 1.82   

Diluted earnings per common share for NIKE, Inc.

   $             0.95       $             0.60           $             1.98       $             1.78   

NOTE 9 — Risk Management and Derivatives

 

The Company is exposed to global market risks, including the effect of changes in foreign currency exchange rates and interest rates, and uses derivatives to manage financial exposures that occur in the normal course of business. The Company does not hold or issue derivatives for trading purposes.

The Company may elect to designate certain derivatives as hedging instruments under the accounting standards for derivatives and hedging. The Company formally documents all relationships between designated hedging instruments and hedged items as well as its risk management objective and strategy for undertaking hedge transactions. This process includes linking all derivatives designated as hedges to either recognized assets or liabilities or forecasted transactions.

The majority of derivatives outstanding as of February 28, 2013 are designated as cash flow or fair value hedges. All derivatives are recognized on the balance sheet at fair value and classified based on the instrument’s maturity date. The total notional amount of outstanding derivatives as of February 28, 2013 was approximately $9 billion, which primarily comprises cash flow hedges for Euro/U.S. Dollar, British Pound/Euro, and Japanese Yen/U.S. Dollar currency pairs.

The following table presents the fair values of derivative instruments included within the consolidated balance sheets as of February 28, 2013 and May 31, 2012:

 

     Asset Derivatives           Liability Derivatives  
(In millions)    Balance Sheet Location    February 28,
2013
     May 31,
2012
          Balance Sheet Location    February 28,
2013
     May 31,
2012
 

Derivatives formally designated as hedging instruments:

                                                  

Foreign exchange forwards and options

   Prepaid expenses and other current assets    $ 122       $ 203            Accrued liabilities    $ 37       $ 35   

Foreign exchange forwards and options

   Deferred income taxes and other long-term assets      73         7            Deferred income taxes and other long-term liabilities      1         -     

Interest rate swap contracts

   Deferred income taxes and other long-term assets      12         15            Deferred income taxes and other long-term liabilities      -           -     

Total derivatives formally designated as hedging instruments

          207         225                   38         35   

Derivatives not designated as hedging instruments:

                                                  

Foreign exchange forwards and options

   Prepaid expenses and other current assets      65         55            Accrued liabilities      24         20   

Embedded derivatives

   Prepaid expenses and other current assets      -           1            Accrued liabilities      -           -     

Total derivatives not designated as hedging instruments

          65         56                   24         20   

TOTAL DERIVATIVES

        $         272       $         281                 $         62       $         55   

 

 

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The following tables present the amounts affecting the consolidated statements of income for the three and nine months ended February 28, 2013 and February 29, 2012:

 

     Amount of Gain (Loss) Recognized
in Other Comprehensive Income
on Derivatives (1)
   Amount of Gain (Loss) Reclassified From Accumulated Other
Comprehensive Income into Income (1)
 
    

Three Months

Ended
February 28,

        

Nine Months

Ended
February 28,

         Location of Gain (Loss) Reclassified
From Accumulated Other
Comprehensive Income Into Income
 

Three Months

Ended
February 28,

        

Nine Months

Ended
February 28,

 
(In millions)    2013           2013             2013           2013  

Derivatives designated as cash flow hedges:

                                                   

Foreign exchange forwards and options

   $ 37           $ 41           Revenue   $ (3        $ (28

Foreign exchange forwards and options

     60             17           Cost of sales     26             109   

Foreign exchange forwards and options

     (1          (3        Selling and
administrative
expense
    1             2   

Foreign exchange forwards and options

     25             15           Other expense
(income), net
    (4          9   

Total designated cash flow hedges

   $ 121           $ 70               $ 20           $ 92   

Derivatives designated as net investment hedges:

                                                   

Foreign exchange forwards and options

   $ -             $ -             Other expense
(income), net
  $ -             $ -     

 

(1)

For the three and nine months ended February 28, 2013, the amounts recorded in other expense (income), net as a result of hedge ineffectiveness and the discontinuance of cash flow hedges because the forecasted transactions were no longer probable of occurring were immaterial.

 

     Amount of Gain (Loss) Recognized
in Other Comprehensive Income
on Derivatives (1)
   Amount of Gain (Loss) Reclassified From Accumulated Other
Comprehensive Income into Income (1)
 
    

Three Months

Ended
February 29,

        

Nine Months

Ended
February 29,

          Location of Gain (Loss) Reclassified
From Accumulated Other
Comprehensive Income Into Income
 

Three Months

Ended
February 29,

        

Nine Months

Ended
February 29,

 
(In millions)    2012           2012              2012           2012  

Derivatives designated as cash flow hedges:

                                                    

Foreign exchange forwards and options

   $ (12        $ 5            Revenue   $ -             $ 14   

Foreign exchange forwards and options

     3             146            Cost of sales     (1          (74

Foreign exchange forwards and options

     -               -              Selling and
administrative
expense
    (1          (3

Foreign exchange forwards and options

     (3          8            Other
expense
(income), net
    4             (14

Total designated cash flow hedges

   $ (12        $ 159                $ 2           $ (77

Derivatives designated as net investment hedges:

                                                    

Foreign exchange forwards and options

   $ (2        $ 35            Other
expense
(income), net
  $ -             $ -     

 

(1)

For the three and nine months ended February 29, 2012, the amounts recorded in other expense (income), net as a result of hedge ineffectiveness and the discontinuance of cash flow hedges because the forecasted transactions were no longer probable of occurring were immaterial.

 

     Amount of Gain (Loss) Recognized in
Income on Derivatives
     
     Three Months Ended
February 28 and 29,
         Nine Months Ended
February 28 and 29,
    Location of Gain (Loss)
Recognized in Income on
Derivatives
(In millions)    2013      2012           2013     2012    

Derivatives designated as fair value hedges:

                                          

Interest rate swaps(1)

   $ 1       $ 1           $ 4      $ 5      Interest (income) expense, net

Derivatives not designated as hedging instruments:

                                          

Foreign exchange forwards and options

   $ 37       $ (17        $ (14   $ (14   Other expense (income), net

Embedded derivatives

   $ -         $ -             $ (3   $ -        Other expense (income), net

 

(1)

All interest rate swap agreements meet the shortcut method requirements under the accounting standards for derivatives and hedging. Accordingly, changes in the fair values of the interest rate swap agreements are considered to exactly offset changes in the fair value of the underlying long-term debt. Refer to “Fair Value Hedges” in this note for additional detail.

Refer to Note 4 — Accrued Liabilities for derivative instruments recorded in accrued liabilities, and Note 5 — Fair Value Measurements for a description of how the above financial instruments are valued.

Cash Flow Hedges

The purpose of the Company’s foreign currency hedging activities is to protect the Company from the risk that the eventual cash flows resulting from transactions in foreign currencies will be adversely affected by changes in exchange rates. Foreign currency exposures that the Company may elect to hedge in this manner include product cost exposures, non-functional currency denominated external and intercompany revenues, selling and administrative expenses, investments in U.S. Dollar-denominated available-for-sale debt securities and certain other intercompany transactions.

Product cost exposures are primarily generated through non-functional currency denominated product purchases and the foreign currency adjustment program described below. NIKE entities primarily purchase products in two ways: 1) Certain NIKE entities purchase product from the NIKE Trading Company (“NTC”), a wholly-owned centralized sourcing hub that buys NIKE branded products from external factories, predominantly in U.S. Dollars. The NTC, whose functional currency is the U.S. Dollar, then sells the products to NIKE entities in their respective functional currencies. When the NTC sells to a NIKE entity with a different functional currency, the result is a foreign currency exposure for the NTC; and 2) Other NIKE entities purchase product directly from external factories in U.S. Dollars. These purchases generate a foreign currency exposure for those NIKE entities with a functional currency other than the U.S. Dollar.

In January 2012, the Company implemented a foreign currency adjustment program with certain factories. The program is designed to more effectively manage foreign currency risk by assuming certain of the factories’ foreign currency exposures, some of which are natural offsets to our existing foreign currency exposures.

 

 

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Under this program, the Company’s payments to these factories are adjusted for rate fluctuations in the basket of currencies (“factory currency exposure index”) in which the labor, materials and overhead costs incurred by the factories in the production of NIKE branded products (“factory input costs”) are denominated. For the portion of the indices denominated in the local or functional currency of the factory, the Company may elect to place formally designated cash flow hedges. For all currencies within the indices, excluding the U.S. Dollar and the local or functional currency of the factory, an embedded derivative is created upon the factory’s acceptance of NIKE’s purchase order. Embedded derivatives are separated from the related purchase order and their accounting treatment is described further below.

The Company’s policy permits the utilization of derivatives to reduce its foreign currency exposures where internal netting or other strategies cannot be effectively employed. Hedged transactions are denominated primarily in Euros, British Pounds and Japanese Yen. The Company may enter into hedge contracts typically starting 12 to 18 months in advance of the forecasted transaction and may place incremental hedges for up to 100% of the exposure by the time the forecasted transaction occurs.

All changes in fair value of derivatives designated as cash flow hedges, excluding any ineffective portion, are recorded in other comprehensive income until net income is affected by the variability of cash flows of the hedged transaction. In most cases, amounts recorded in other comprehensive income will be released to net income some time after the maturity of the related derivative. Effective hedge results are classified within the consolidated statements of income in the same manner as the underlying exposure, with the results of hedges of non-functional currency denominated revenues and product cost exposures, excluding embedded derivatives as described below, recorded in revenues or cost of sales, when the underlying hedged transaction affects consolidated net income. Results of hedges of selling and administrative expense are recorded together with those costs when the related expense is recorded. Results of hedges of anticipated purchases and sales of U.S. Dollar-denominated available-for-sale securities are recorded in other expense (income), net when the securities are sold. Results of hedges of certain anticipated intercompany transactions are recorded in other expense (income), net when the transaction occurs. The Company classifies the cash flows at settlement from these designated cash flow hedge derivatives in the same category as the cash flows from the related hedged items, generally within the cash provided by operations component of the cash flow statement.

Premiums paid on options are initially recorded as deferred charges. The Company assesses the effectiveness of options based on the total cash flows method and records total changes in the options’ fair value to other comprehensive income to the degree they are effective.

The Company formally assesses, both at a hedge’s inception and on an ongoing basis, whether the derivatives that are used in the hedging transaction have been highly effective in offsetting changes in the cash flows of hedged items and whether those derivatives may be expected to remain highly effective in future periods. Effectiveness for cash flow hedges is assessed based on forward rates. Ineffectiveness was not material for the three and nine month periods ended February 28, 2013 and February 29, 2012.

The Company discontinues hedge accounting prospectively when (1) it determines that the derivative is no longer highly effective in offsetting changes in the cash flows of a hedged item (including hedged items such as firm commitments or forecasted transactions); (2) the derivative expires or is sold, terminated, or exercised; (3) it is no longer probable that the forecasted transaction will occur; or (4) management determines that designating the derivative as a hedging instrument is no longer appropriate.

When the Company discontinues hedge accounting because it is no longer probable that the forecasted transaction will occur in the originally expected period, but is expected to occur within an additional two-month period of time thereafter, the gain or loss on the derivative remains in accumulated other comprehensive income and is reclassified to net income when the forecasted transaction affects consolidated net income. However, if it is probable that a forecasted transaction will not occur by the end of the originally specified time period or within an additional two-month period of time thereafter, the gains and losses that were accumulated in other comprehensive income will be recognized immediately in other expense (income), net. In all situations in which hedge accounting is discontinued and the derivative remains outstanding, the Company will carry the derivative at its fair value on the balance sheet, recognizing future changes in the fair value in other expense (income), net. For the three and nine month periods ended February 28, 2013 and February 29, 2012, the amounts recorded in other expense (income), net as a result of the discontinuance of cash flow hedging because the forecasted transaction was no longer probable of occurring were immaterial.

As of February 28, 2013, $86 million of deferred net gains (net of tax) on both outstanding and matured derivatives accumulated in other comprehensive income are expected to be reclassified to net income during the next 12 months concurrent with the underlying hedged transactions also being recorded in net income. Actual amounts ultimately reclassified to net income are dependent on the exchange rates in effect when derivative contracts that are currently outstanding mature. As of February 28, 2013, the maximum term over which the Company is hedging exposures to the variability of cash flows for its forecasted transactions is 27 months.

Fair Value Hedges

The Company is also exposed to the risk of changes in the fair value of certain fixed-rate debt attributable to changes in interest rates. Derivatives currently used by the Company to hedge this risk are receive-fixed, pay-variable interest rate swaps. As of February 28, 2013, all interest rate swap agreements are designated as fair value hedges of the related long-term debt and meet the shortcut method requirements under the accounting standards for derivatives and hedging. Accordingly, changes in the fair values of the interest rate swap agreements are considered to exactly offset changes in the fair value of the underlying long-term debt. The cash flows associated with the Company’s fair value hedges are periodic interest payments while the swaps are outstanding, which are reflected within the cash provided by operations component of the cash flow statement. The Company recorded no ineffectiveness from its interest rate swaps designated as fair value hedges for the three and nine month periods ended February 28, 2013 or February 29, 2012.

Net Investment Hedges

The Company has hedged and may, in the future, hedge the risk of variability in foreign-currency-denominated net investments in wholly-owned international operations. All changes in fair value of the derivatives designated as net investment hedges, except ineffective portions, are reported in the cumulative translation adjustment component of other comprehensive income along with the foreign currency translation adjustments on those investments. The Company classifies the cash flows at settlement of its net investment hedges within the cash provided or used by investing component of the cash flow statement. The Company assesses hedge effectiveness based on changes in forward rates. The Company recorded no ineffectiveness from its net investment hedges for the three and nine months ended February 28, 2013 or February 29, 2012.

Embedded Derivatives

As part of the foreign currency adjustment program described above, currencies within the factory currency exposure indices that are neither the U.S. Dollar nor the local or functional currency of the factory, create an embedded derivative upon the factory’s acceptance of NIKE’s purchase order. Embedded derivatives are treated as foreign currency forward contracts that are bifurcated from the related purchase order and recorded at fair value as a derivative asset or liability on the balance sheet with their corresponding change in fair value recognized in other expense (income), net from the date a purchase order is accepted by a factory through the date the purchase price is no longer subject to foreign currency fluctuations. At February 28, 2013, the notional amount of embedded derivatives was approximately $121 million.

Undesignated Derivative Instruments

The Company may elect to enter into foreign exchange forwards to mitigate the change in fair value of specific assets and liabilities on the balance sheet and/or the embedded derivative contracts explained above. These forwards are not designated as hedging instruments under the accounting standards for derivatives

 

 

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and hedging. Accordingly, these undesignated instruments are recorded at fair value as a derivative asset or liability on the balance sheet with their corresponding change in fair value recognized in other expense (income), net, together with the re-measurement gain or loss from the hedged balance sheet position or embedded derivative contract. The Company classifies the cash flows at settlement from undesignated instruments in the same category as the cash flows from the related hedged items, generally within the cash provided by operations component of the cash flow statement.

Credit Risk

The Company is exposed to credit-related losses in the event of non-performance by counterparties to hedging instruments. The counterparties to all derivative transactions are major financial institutions with investment grade credit ratings. However, this does not eliminate the Company’s exposure to credit risk with these institutions. This credit risk is limited to the unrealized gains in such contracts should any of these counterparties fail to perform as contracted. To manage this risk, the Company has established strict counterparty credit guidelines that are continually monitored and managed according to prescribed guidelines. The Company also utilizes a portfolio of financial institutions either headquartered or operating in the same countries in which the Company conducts its business.

The Company’s derivative contracts contain credit risk related contingent features designed to protect against significant deterioration in counterparties’ creditworthiness and their ultimate ability to settle outstanding derivative contracts in the normal course of business. The Company’s bilateral credit related contingent features generally require the owing entity, either the Company or the derivative counterparty, to post collateral for the portion of the fair value in excess of $50 million should the fair value of outstanding derivatives per counterparty be greater than $50 million. Additionally, a certain level of decline in credit rating of either the Company or the counterparty could also trigger collateral requirements. As of February 28, 2013, the Company was in compliance with all credit risk related contingent features and the aggregate fair value of derivative instruments with credit risk related contingent features that were in a net liability position was $6 million. Accordingly, the Company was not required to post any collateral as a result of these contingent features. Given the considerations described above, the Company considers the impact of the risk of counterparty default to be immaterial.

NOTE 10 — Discontinued Operations

 

The Company continually evaluates its existing portfolio of businesses to ensure resources are invested in those businesses that are accretive to the NIKE Brand and represent the largest growth potential and highest returns. On May 31, 2012, the Company announced its intention to divest of Umbro and Cole Haan, allowing it to focus its resources on driving growth in the NIKE, Jordan, Converse and Hurley brands.

On February 1, 2013, the Company completed the sale of Cole Haan to Apax Partners for an agreed upon purchase price of $570 million and received at closing $561 million, net of $9 million of purchase price adjustments. The transaction resulted in a gain on sale of $231 million, net of $137 million tax; this gain is included in the net income (loss) from discontinued operations line item on the condensed consolidated statements of income. Beginning November 30, 2012, the Company classified the Cole Haan disposal group as held-for-sale and presented the results of Cole Haan’s operations in the net income (loss) from discontinued operations line item on the condensed consolidated statements of income. Prior to the sale, the assets and liabilities of Cole Haan were recorded in the assets of discontinued operations and liabilities of discontinued operations line items on the condensed consolidated balance sheets, respectively. Previously, these amounts were reported in the Company’s segment presentation as “Businesses to be Divested.”

Under the sale agreement, the Company will provide certain transition services to Cole Haan for an expected period of 3 to 9 months from the date of sale. The company will also license NIKE proprietary Air and Lunar technologies to Cole Haan for a transition period. The continuing cash flows related to these items are not expected to be significant to Cole Haan and the Company will have no significant continuing involvement with Cole Haan beyond the transition services. Additionally, preexisting guarantees of certain Cole Haan lease payments remain in place after the sale; the maximum exposure under the guarantees is $47 million. The fair value of the guarantees is not material.

On November 30, 2012, the Company completed the sale of certain assets of Umbro to Iconix Brand Group (“Iconix”) for $225 million. The Umbro disposal group was classified as held-for-sale as of November 30, 2012 and the results of Umbro’s operations are presented in the net income (loss) from discontinued operations line item on the condensed consolidated statements of income. The remaining assets and liabilities of Umbro are recorded in the assets of discontinued operations and liabilities of discontinued operations line items on the condensed consolidated balance sheets, respectively. Previously, these amounts were reported in the Company’s segment presentation as “Businesses to be Divested.” Upon meeting the held-for-sale criteria, the Company recorded a loss of $107 million, net of tax, on the sale of Umbro and the loss is included in the net income (loss) from discontinued operations line item on the condensed consolidated statements of income. The loss on sale was calculated as the net sales price less Umbro assets of $248 million, including intangibles, goodwill, and fixed assets, other miscellaneous charges of $22 million, and the release of the associated cumulative translation adjustment of $129 million. The tax benefit on the loss was $67 million. There were no adjustments to these recorded amounts as of February 28, 2013.

Under the sale agreement, the Company continues to provide transition services to Iconix while certain markets are converted and transitioned to Iconix-designated licensees. These transition services are expected to be completed by May 31, 2013. The Company expects to substantially wind down the remaining operations of Umbro over the remainder of fiscal 2013. The continuing operating cash flows are not expected to be significant to the Umbro business and the Company will have no significant continuing involvement with the Umbro business beyond the transition period. For the quarter ended February 28, 2013, the Company recognized $18 million in wind down costs.

Summarized results of the Company’s results from discontinued operations are as follows:

 

     Three Months Ended          Nine Months Ended  
     February 28 and 29,          February 28 and 29,  
(In millions)    2013      2012           2013      2012  

Revenues

   $ 132       $             190           $ 513       $             563   

Income (loss) before income taxes

                 345         (17                      107         (50

Income tax expense (benefit)

     141         (8          58         (14

Net income (loss) from discontinued operations

   $ 204       $ (9        $ 49       $ (36

 

 

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As of February 28, 2013 and May 31, 2012, the aggregate components of assets and liabilities classified as discontinued operations and included in current assets and current liabilities consisted of the following:

 

     February 28,           May 31,  
(In millions)    2013            2012  

Accounts Receivable, net

   $             25            $             148   

Inventories

     1              128   

Deferred income taxes and other assets

     3              35   

Property, plant and equipment, net

     -                70   

Identifiable intangible assets, net

     -                234   

TOTAL ASSETS

   $ 29            $ 615   

Accounts Payable

     4              42   

Accrued liabilities

     58              112   

Deferred income taxes and other liabilities

     -                33   

TOTAL LIABILITIES

   $ 62            $ 187   

NOTE 11 — Operating Segments

 

The Company’s operating segments are evidence of the structure of the Company’s internal organization. The major segments are defined by geographic regions for operations participating in NIKE Brand sales activity excluding NIKE Golf. Each NIKE Brand geographic segment operates predominantly in one industry: the design, development, marketing and selling of athletic footwear, apparel, and equipment. The Company’s reportable operating segments for the NIKE Brand are: North America, Western Europe, Central & Eastern Europe, Greater China, Japan, and Emerging Markets. The Company’s NIKE Brand Direct to Consumer operations are managed within each geographic segment.

The Company’s “Other” category is broken into two components for presentation purposes to align with the way management views the Company. The “Global Brand Divisions” category primarily represents NIKE Brand licensing businesses that are not part of a geographic operating segment, demand creation and operating overhead expenses that are centrally managed for the NIKE Brand, and costs associated with product development and supply chain operations. The “Other Businesses” category consists of the activities of Converse Inc., Hurley International LLC, and NIKE Golf. Activities represented in the “Other” category are considered immaterial for individual disclosure.

Corporate consists of unallocated general and administrative expenses, including expenses associated with centrally managed departments; depreciation and amortization related to the Company’s headquarters; unallocated insurance, benefit and compensation programs, including stock-based compensation; certain foreign currency gains and losses, including certain hedge gains and losses; corporate eliminations and other items.

The primary financial measure used by the Company to evaluate performance of individual operating segments is earnings before interest and taxes (commonly referred to as “EBIT”), which represents net income before interest (income) expense, net and income taxes in the consolidated statements of income. Reconciling items for EBIT represent corporate expense items that are not allocated to the operating segments for management reporting.

As part of the Company’s centrally managed foreign exchange risk management program, standard foreign currency rates are assigned twice per year to each NIKE Brand entity in our geographic operating segments and certain Other Businesses. These rates are set approximately nine months in advance of the future selling season based on average market spot rates in the calendar month preceding the date they are established. Inventories and cost of sales for geographic operating segments and certain Other Businesses reflect use of these standard rates to record non-functional currency product purchases in the entity’s functional currency. Differences between assigned standard foreign currency rates and actual market rates are included in Corporate, together with foreign currency hedge gains and losses generated from the Company’s centrally managed foreign exchange risk management program and other conversion gains and losses.

Accounts receivable, inventories and property, plant and equipment for operating segments are regularly reviewed by management and are therefore provided below.

Certain prior year amounts have been reclassified to conform to fiscal 2013 presentation.

 

     Three Months Ended          Nine Months Ended  
     February 28 and 29,          February 28 and 29,  
(In millions)    2013     2012           2013     2012  

REVENUE

                                     

North America

   $             2,546      $             2,149           $ 7,673      $ 6,415   

Western Europe

     1,040        962             3,104        3,105   

Central & Eastern Europe

     318        275             926        870   

Greater China

     635        694             1,784        1,872   

Japan

     175        202             577        594   

Emerging Markets

     839        793             2,758        2,541   

Global Brand Divisions

     30        27             84        84   

Total NIKE Brand

     5,583        5,102             16,906        15,481   

Other Businesses

     615        563             1,768        1,636   

Corporate

     (11     (9          (58     (22

TOTAL NIKE CONSOLIDATED REVENUES

   $ 6,187      $ 5,656           $         18,616      $         17,095   

EARNINGS BEFORE INTEREST AND TAXES

                                     

North America

   $ 625      $ 503           $ 1,811      $ 1,468   

Western Europe

     178        149             505        464   

Central & Eastern Europe

     71        60             175        163   

Greater China

     218        273             567        664   

Japan

     24        24             91        93   

Emerging Markets

     221        215             749        652   

Global Brand Divisions

     (324     (299          (1,023     (846

Total NIKE Brand

     1,013        925             2,875        2,658   

Other Businesses

     128        104             329        280   

Corporate

     (285     (242          (840     (645

Total NIKE Consolidated Earnings Before Interest and Taxes

     856        787             2,364        2,293   

Interest (income) expense, net

     (2     0             (6     3   

TOTAL NIKE CONSOLIDATED EARNINGS BEFORE TAXES

   $ 858      $ 787           $ 2,370      $ 2,290   

 

 

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     February 28,      May 31,  
(In millions)    2013      2012  

ACCOUNTS RECEIVABLE, NET

                 

North America

   $             1,260       $             1,149   

Western Europe

     391         420   

Central & Eastern Europe

     328         261   

Greater China

     124         221   

Japan

     100         152   

Emerging Markets

     551         476   

Global Brand Divisions

     32         30   

Total NIKE Brand

     2,786         2,709   

Other Businesses

     425         401   

Corporate

     21         22   

TOTAL ACCOUNTS RECEIVABLE, NET

   $ 3,232       $ 3,132   

INVENTORIES

                 

North America

   $ 1,316       $ 1,272   

Western Europe

     505         488   

Central & Eastern Europe

     167         180   

Greater China

     216         217   

Japan

     90         83   

Emerging Markets

     555         521   

Global Brand Divisions

     37         35   

Total NIKE Brand

     2,886         2,796   

Other Businesses

     429         384   

Corporate

     14         42   

TOTAL INVENTORIES

   $ 3,329       $ 3,222   

PROPERTY, PLANT AND EQUIPMENT, NET

                 

North America

   $ 380       $ 378   

Western Europe

     328         314   

Central & Eastern Europe

     42         30   

Greater China

     204         191   

Japan

     297         359   

Emerging Markets

     80         59   

Global Brand Divisions

     253         205   

Total NIKE Brand

     1,584         1,536   

Other Businesses

     73         76   

Corporate

     603         597   

TOTAL PROPERTY, PLANT AND EQUIPMENT, NET

   $ 2,260       $ 2,209   

NOTE 12 — Commitments and Contingencies

 

At February 28, 2013, the Company had letters of credit outstanding totaling $129 million. These letters of credit were issued primarily for the purchase of inventory and guarantees of the Company’s performance under certain self-insurance and other programs.

There have been no other significant subsequent developments relating to the commitments and contingencies reported on the Company’s latest Annual Report on Form 10-K.

 

 

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ITEM 2. Management’s Discussion and Analysis of Financial Condition and Results of Operations

In the third quarter of fiscal 2013, our revenues from continuing operations increased 9% to $6.2 billion. Excluding the impact of currency exchange rates, revenues from continuing operations would have grown 10%. We delivered net income from continuing operations of $662 million and diluted earnings per share from continuing operations of $0.73, 16% and 20% above the third quarter of fiscal 2012, respectively.

Income before income taxes from continuing operations increased 9% compared to the third quarter of the prior year due to an increase in revenues and higher gross margin, which more than offset an increase in other expense, net. Selling and administrative expense was flat as a percent of revenue. The NIKE Brand, which represents over 90% of NIKE, Inc. revenues, delivered constant currency revenue growth across all product types and most geographies and key categories. Brand strength, innovative products and strong category retail presentation continue to fuel the demand for NIKE Brand products. Revenue from our Other Businesses increased 9%, driven by growth at Converse and NIKE Golf.

Our third quarter net income from continuing operations was positively impacted by a year-on-year decrease in our effective tax rate of 490 basis points, largely due to the benefit of the retroactive reinstatement of the research and development tax credit in the U.S., as well as a lower effective tax rate on foreign operations. Diluted earnings per share also benefited from a decline in the weighted average diluted common shares outstanding, driven by our share repurchase program.

We continually evaluate our existing portfolio of businesses to ensure resources are invested in those businesses that are accretive to the NIKE Brand, and have the greatest potential to deliver profitable growth and high returns on capital. During the fourth quarter of fiscal 2012, we announced our intention to divest of Cole Haan and Umbro, allowing us to focus our resources on driving growth in the NIKE, Jordan, Converse and Hurley brands. On November 30, 2012, we completed the sale of certain assets of Umbro to Iconix Brand Group for $225 million, recognizing an after tax loss on sale of $107 million. On February 1, 2013, we completed the sale of Cole Haan to Apax Partners for an agreed upon purchase price of $570 million and received at closing $561 million, net of $9 million of purchase price adjustments. The transaction resulted in an after tax gain on sale of $231 million. For the third quarter ended February 28, 2013, the results of Cole Haan and Umbro operations, including the gain on sale of Cole Haan, and financial position are presented as discontinued operations.

Results of Operations

 

 

    

Three Months Ended

February 28 and 29,

        

Nine Months Ended

February 28 and 29,

 
(Dollars in millions, except per share data)    2013     2012     % Change           2013     2012     % Change  

Revenues

   $         6,187      $         5,656        9        $         18,616      $         17,095        9

Cost of sales

     3,451        3,171        9          10,522        9,616        9

Gross profit

     2,736        2,485        10          8,094        7,479        8

Gross margin %

     44.2     43.9                  43.5     43.7        

Demand creation expense

     619        592        5          2,103        1,872        12

Operating overhead expense

     1,244        1,116        11          3,655        3,297        11

Total selling and administrative expense

     1,863        1,708        9          5,758        5,169        11

% of Revenues

     30.1     30.2                  30.9     30.2        

Income before income taxes

     858        787        9          2,370        2,290        3

Net income from continuing operations

     662        569        16          1,768        1,710        3

Net income (loss) from discontinued operations

     204        (9     -             49        (36     -   

Net income

   $ 866      $ 560        55        $ 1,817      $ 1,674        9

Diluted earnings per share — Continuing Operations

   $ 0.73      $ 0.61        20        $ 1.93      $ 1.82        6

Diluted earnings per share — Discontinued Operations

   $ 0.22      $ (0.01     -           $ 0.05      $ (0.04     -   

Consolidated Operating Results

 

Revenues

 

    

Three Months Ended

February 28 and 29,

        

Nine Months Ended

February 28 and 29,

 
(Dollars in millions)    2013     2012     % Change     % Change
Excluding
Currency
Changes (1)
          2013     2012     % Change     % Change
Excluding
Currency
Changes (1)
 

NIKE Brand Revenues by:

                                                                     

Footwear

   $         3,658      $         3,347        9     9        $         10,647      $         9,777        9     12

Apparel

     1,570        1,461        7     8          5,132        4,743        8     11

Equipment

     325        267        22     23          1,043        877        19     22

Global Brand Divisions

     30        27        11     11          84        84        0     5

Total NIKE Brand

     5,583        5,102        9     10          16,906        15,481        9     12

Other Businesses

     615        563        9     9          1,768        1,636        8     8

Corporate(2)

     (11     (9     -        -             (58     (22     -        -   

TOTAL NIKE, INC. REVENUES FROM CONTINUING OPERATIONS

   $ 6,187      $ 5,656        9     10        $ 18,616      $ 17,095        9     12

Supplemental NIKE Brand Revenues Details by:

                                                                     

Sales to Wholesale Customers

   $ 4,452      $ 4,176        7     5        $ 13,659      $ 12,814        7     10

Sales Direct to Consumer

     1,101        899        22     23          3,163        2,583        22     24

Global Brand Divisions

     30        27        11     11          84        84        0     5

TOTAL NIKE BRAND REVENUES

   $ 5,583      $ 5,102        9     10        $ 16,906      $ 15,481        9     12

 

(1)

Results have been restated using actual currency exchange rates in use during the comparative period to enhance the visibility of the underlying business trends by excluding the impact of translation arising from foreign currency exchange rate fluctuations.

 

(2)

Corporate revenues primarily consist of intercompany revenue eliminations and foreign currency revenue-related hedge gains and losses generated by entities within the NIKE Brand geographic operating segments and certain Other Businesses through our centrally managed foreign exchange risk management program.

 

 

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Excluding the effects of changes in currency exchange rates, revenues for NIKE, Inc.’s continuing operations increased 10% for the third quarter and 12% for the first nine months of fiscal 2013, driven by increases in both the NIKE Brand and our Other Businesses. On a currency neutral basis, revenues for the NIKE Brand increased 10% and 12% for the third quarter and year to date period, respectively, while revenues for our Other Businesses increased 9% and 8% for the same respective periods. For both the third quarter and first nine months of fiscal 2013, every NIKE Brand geography except Greater China and Japan delivered higher revenues. North America contributed approximately 8 percentage points to the NIKE Brand revenue increase for the third quarter while Western Europe, Central & Eastern Europe, and Emerging Markets each contributed approximately 1 percentage point for the period. For the year to date period, North America contributed approximately 8 percentage points to the NIKE Brand revenue growth while the Emerging Markets contributed approximately 3 percentage points and Western Europe and Central & Eastern Europe each contributed approximately 1 percentage point. China’s results negatively impacted NIKE Brand revenue growth by approximately 1 percentage point for both the third quarter and year to date periods.

Excluding the effects of changes in currency exchange rates, NIKE Brand footwear and apparel revenues increased 9% and 8% for the third quarter, respectively, while NIKE Brand equipment revenues increased 23%. For the first nine months of fiscal 2013, NIKE Brand footwear and apparel revenues increased 12% and 11%, respectively, while NIKE Brand equipment revenues increased 22%. The increase in footwear revenue for the third quarter was attributable to growth across our Basketball, Running, and Football (Soccer) categories. The year to date growth was driven by our Running, Basketball, Football (Soccer), and Sportswear categories. The growth was primarily reflective of increased demand for our performance products for both periods, most notably those utilizing NIKE Free and Air technologies for the third quarter and NIKE Free and Lunar technologies for the year to date period. For the third quarter of fiscal 2013, unit sales of footwear increased approximately 5% and average selling price per pair increased approximately 4%. For the first nine months of fiscal 2013, unit sales increased approximately 7% and the average selling price per pair increased approximately 5%. The growth in average selling price per pair for the third quarter and year to date period was driven in relatively equal measure by price increases and a shift in mix to higher priced products.

The increase in NIKE Brand apparel revenue for the third quarter and year to date period was driven by our Men’s Training category, which includes our NFL licensed business, as well as strong demand for Basketball and Running products. For the year to date period, growth in our Football (Soccer) category also contributed to the growth. For the third quarter of fiscal 2013, average selling price per unit and unit sales both increased approximately 4%. For the year to date period, average selling price per unit increased approximately 8%, while units sold increased approximately 3%. The growth in average selling price per unit for the third quarter and year to date period primarily reflected a favorable mix of higher priced products, such as performance Running, Basketball, and NFL licensed apparel, and to a lesser extent, the impact of price increases.

While wholesale revenues remain the largest component of overall NIKE Brand revenues, we continue to expand Direct to Consumer revenues on-line and through a growing network of NIKE owned in-line and factory stores. For the third quarter and first nine months of fiscal 2013, Direct to Consumer revenues represented approximately 20% and 19% of our total NIKE Brand revenues, respectively, compared to 18% and 17% for the third quarter and first nine months of fiscal 2012, respectively. Excluding changes in currency exchange rates, Direct to Consumer revenues increased 23% and 24% for the third quarter and first nine months of fiscal 2013, respectively, as comparable store sales increased 12% and 14% over the respective periods. Comparable store sales include revenues from NIKE owned in-line and factory stores for which all three of the following requirements have been met: the store has been open at least one year, square footage has not changed by more than 15% within the past year, and the store has not been permanently repositioned within the past year.

Other Businesses consist of results from Converse, Hurley and NIKE Golf. Excluding the impact of currency changes, total revenues for these businesses increased by 9% and 8% in the third quarter and year to date periods, respectively, reflecting growth in Converse and NIKE Golf.

Futures Orders

Futures orders for NIKE Brand footwear and apparel scheduled for delivery from March 2013 through July 2013 were 6% higher than the orders reported for the comparable prior year period. The U.S. Dollar futures order amount is calculated based upon our internal forecast of the currency exchange rates under which our revenues will be translated during this period. Excluding the impact of currency changes, futures orders increased 7%, as unit orders increased approximately 4 percentage points and average selling price per unit contributed approximately 3 percentage points of growth.

By geography, futures orders growth was as follows:

 

      Reported Futures Orders
Growth
  Futures Orders Excluding
Currency Changes(1)

North America

    11%    11%

Western Europe

     -5%     -5%

Central & Eastern Europe

    11%    11%

Greater China

      4%      3%

Japan

     -8%      5%

Emerging Markets

    12%    16%

TOTAL NIKE BRAND FUTURES ORDERS

      6%      7%

 

(1)

Growth rates have been restated using constant currency exchange rates for the comparative period to enhance the visibility of the underlying business trends excluding changes in foreign currency exchange rates.

The reported futures orders growth is not necessarily indicative of our expectation of revenue growth during this period. This is due to year-over-year changes in shipment timing, the mix of orders which can shift between futures and at-once orders, and the fulfillment of certain orders may fall outside of the schedule noted above. In addition, currency exchange rate fluctuations as well as differing levels of order cancellations, discounts and returns can cause differences in the comparisons between futures orders and actual revenues. Moreover, a significant portion of our revenue is not derived from futures orders, including at-once and close-out sales of NIKE Brand footwear and apparel, sales of NIKE Brand equipment, sales from our Direct to Consumer operations, and sales from our Other Businesses.

Gross Margin

 

    

Three Months Ended

February 28 and 29,

        

Nine Months Ended

February 28 and 29,

 
(Dollars in millions)    2013     2012     % Change           2013     2012     % Change  

Gross Profit

   $         2,736      $         2,485        10        $         8,094      $         7,479        8

Gross Margin %

     44.2     43.9     30 bps             43.5     43.7     (20 ) bps 

For the third quarter and first nine months of fiscal 2013, our consolidated gross margin was 30 basis points higher and 20 basis points lower than the respective prior year periods. For the third quarter, the increase in gross margin was largely attributable to higher average net selling prices (approximately 160 basis points), driven by higher prices and favorable sales mix, partially offset by higher discounts. The positive benefit of higher average net selling prices was partially offset by downsides including higher product costs (approximately 60 basis points), primarily due to higher factory labor costs; a higher mix of off-price sales (approximately 50 basis points); and adverse currency exchange rate movements (approximately 40 basis points).

 

 

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In addition, we have seen significant shifts in the mix of revenues from higher to lower margin segments of our business. While growth in these lower gross margin segments delivers incremental revenue and profits, it has a negative effect on our consolidated gross margin.

For the first nine months of fiscal 2013, the positive impact of higher average net selling prices (approximately 220 basis points) was more than offset by downsides including higher product costs (approximately 160 basis points); higher third party royalties, primarily resulting from NFL licensed product sales in North America (approximately 30 basis points); and unfavorable foreign currency exchange rate movements (approximately 50 basis points).

Selling and Administrative Expense

 

    

Three Months Ended

February 28 and 29,

        

Nine Months Ended

February 28 and 29,

 
(Dollars in millions)    2013     2012     % Change           2013     2012     % Change  

Demand creation expense (1)

   $ 619      $ 592        5        $ 2,103      $ 1,872        12

Operating overhead expense

     1,244        1,116        11          3,655        3,297        11

Selling and administrative expense

   $         1,863      $         1,708        9        $         5,758      $         5,169        11

% of Revenues

     30.1     30.2     (10) bps             30.9     30.2     70 bps   

 

(1)

Demand creation consists of advertising and promotion expenses, including costs of endorsement contracts.

Demand creation expense increased 5% in the third quarter and 12% during the first nine months of fiscal 2013 compared to the same periods in the prior year. Excluding the effects of changes in currency exchange rates, demand creation for the third quarter of fiscal 2013 increased 5% primarily due to higher sports marketing expense and brand events. For the nine months ended February 28, 2013, demand creation expense was 16% higher than the prior year, largely driven by higher sports marketing expense as well as spending around the Olympics and European Football Championships in the first quarter of fiscal 2013.

Operating overhead expense increased 11% for both the third quarter and first nine months of fiscal 2013. Excluding the effects of changes in currency exchange rates, the growth in operating overhead expense was 12% and 13% for the third quarter and year to date period, respectively, due primarily to investments in our expanding Direct to Consumer operations as well as higher personnel costs to support the growth of our overall business.

Other Expense (Income), net

 

     Three Months Ended
February 28 and 29,
         Nine Months Ended
February 28 and 29,
 
(Dollars in millions)    2013      2012           2013     2012  

Other expense (income), net

   $             17       $             (10        $             (28   $             17   

Other expense (income), net comprises foreign currency conversion gains and losses from the re-measurement of monetary assets and liabilities denominated in non-functional currencies, the impact of certain foreign currency derivative instruments, as well as unusual or non-operating transactions that are outside the normal course of business.

Other expense (income), net for the third quarter of fiscal 2013, represented a $27 million increase in expense versus the third quarter of fiscal 2012. The current year includes net foreign currency losses, while the prior year included net foreign currency gains; this change accounted for $24 million of the increase in expense. For the first nine months of fiscal 2013, other expense (income), net represented a $45 million increase in income versus the first nine months of fiscal 2012. The current year includes net foreign currency gains, while the prior year included net foreign currency losses; this change accounted for $51 million of the increase in income. These impacts were partially offset by changes in other non-operating gains and losses.

We estimate the combination of translation of foreign currency-denominated profits from our international businesses and the year-over-year change in foreign currency related gains and losses included in other expense (income), net had an unfavorable impact on our income before income taxes of $19 million and $38 million for the third quarter and first nine months of fiscal 2013, respectively.

Income Taxes

 

    

Three Months Ended February

28 and 29,

         

Nine Months Ended

February 28 and 29,

 
      2013     2012     % Change            2013     2012     % Change  

Effective tax rate

             22.8             27.7     (490) bps                      25.4             25.3     10 bps     

Our effective tax rate on continuing operations for the third quarter of fiscal 2013 was 490 basis points lower than the prior year. The decrease in our effective tax rate was primarily driven by the benefit of the retroactive reinstatement of the U.S. research and development credit by the American Taxpayer Relief Act of 2012. The decrease was also attributable to a lower effective tax rate on foreign operations as a result of changes in the geographical mix of earnings.

The effective tax rate on continuing operations for the first nine months ended fiscal 2013 was 10 basis points higher than the effective tax rate on continuing operations for the same period in the prior fiscal year. The increase in the Company’s effective tax rate was primarily driven by an increase in the effective tax rate on foreign operations as a result of changes in the geographical mix of earnings, partially offset by a benefit from the retroactive reinstatement of the U.S research and development credit.

We anticipate the effective tax rate for the full fiscal year will be approximately 25.5%, a decrease from estimates in the previous quarters of fiscal 2013 due to the retroactive reinstatement of the U.S. research and development credit in the third quarter of fiscal 2013.

 

 

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Discontinued Operations

On February 1, 2013, the Company completed the sale of Cole Haan to Apax Partners for an agreed upon purchase price of $570 million and received at closing $561 million, net of $9 million of purchase price adjustments. The transaction resulted in a gain on sale of $231 million, net of $137 million tax; this gain is included in the net income (loss) from discontinued operations line item on the condensed consolidated statements of income. Beginning November 30, 2012, we classified the Cole Haan disposal group as held-for-sale and presented the results of Cole Haan’s operations in the net income (loss) from discontinued operations line item on the condensed consolidated statements of income. Prior to the sale, the assets and liabilities of Cole Haan were recorded in the assets of discontinued operations and liabilities of discontinued operations line items on the condensed consolidated balance sheets, respectively. Previously, these amounts were reported in our segment presentation as “Businesses to be Divested.”

Under the sale agreement, we will provide certain transition services to Cole Haan for an expected period of 3 to 9 months from the date of sale. We will also license NIKE proprietary Air and Lunar technologies to Cole Haan for a transition period. The continuing cash flows related to these items are not expected to be significant to Cole Haan and we will have no significant continuing involvement with Cole Haan beyond the transition services. Additionally, preexisting guarantees of certain Cole Haan lease payments remain in place after the sale; the maximum exposure under the guarantees is $47 million. The fair value of these guarantees is not material.

On November 30, 2012, we completed the sale of certain assets of Umbro to Iconix Brand Group (“Iconix”) for $225 million. The results of Umbro’s operations and Umbro’s financial position are presented as discontinued operations on the condensed consolidated statements of income and balance sheets, respectively. Previously, these amounts were reported in our segment presentation as “Businesses to be Divested.” Upon meeting the held-for-sale criteria, we recorded a loss of $107 million, net of tax, on the sale of Umbro. The loss on sale was calculated as the net sales price less the Umbro assets of $248 million, including intangibles, goodwill, and fixed assets, other miscellaneous charges of $22 million, the release of the associated cumulative translation adjustment of $129 million, offset by a tax benefit on the loss of $67 million.

Under the sale agreement, we continue to provide transition services to Iconix while certain markets are converted and transitioned to Iconix-designated licensees. These transition services are expected to be completed by May 31, 2013. We also expect to complete the wind down of the remaining operations of Umbro over the remainder of fiscal 2013. The continuing operating cash flows are not expected to be significant to the Umbro business and we will have no significant continuing involvement with the Umbro business beyond the transition period. For the quarter ended February 28, 2013, we recognized $18 million in wind down costs and expect an additional $12 million to be recognized in the quarter ending May 31, 2013.

Operating Segments

 

Reportable operating segments are based on our internal geographic organization. Each of the NIKE Brand geographies operate predominantly in one industry: the design, development, marketing, and selling of athletic footwear, apparel, and equipment. Our reportable operating segments for the NIKE Brand are: North America, Western Europe, Central & Eastern Europe, Greater China, Japan, and Emerging Markets. Our NIKE Brand Direct to Consumer operations are managed within each geographic segment.

As part of our centrally managed foreign exchange risk management program, standard foreign currency exchange rates are assigned twice per year to each NIKE Brand entity in our geographic operating segments and certain Other Businesses. These rates are set approximately nine months in advance of the future selling season based on average market spot rates in the calendar month preceding the date they are established. Inventories and cost of sales for geographic operating segments and certain Other Businesses reflect use of these standard foreign currency exchange rates to record non-functional currency product purchases into the entity’s functional currency. Differences between assigned standard foreign currency exchange rates and actual market rates are included in Corporate together with foreign currency hedge gains and losses generated from our centrally managed foreign exchange risk management program.

The breakdown of revenues is as follows:

 

     Three Months Ended February 28 and 29,          Nine Months Ended February 28 and 29,  
(Dollars in millions)    2013     2012(1)     % Change     % Change
Excluding
Currency
Changes(2)
          2013     2012(1)     % Change     % Change
Excluding
Currency
Changes(2)
 

North America

   $         2,546      $         2,149        18     18        $ 7,673      $ 6,415        20     20

Western Europe

     1,040        962        8     8          3,104        3,105        0     6

Central & Eastern Europe

     318        275        16     13          926        870        6     12

Greater China

     635        694        -9     -10          1,784        1,872        -5     -6

Japan

     175        202        -13     -6          577        594        -3     0

Emerging Markets

     839        793        6     8          2,758        2,541        9     16

Global Brand Divisions

     30        27        11     11          84        84        0     5

Total NIKE Brand Revenues

     5,583        5,102        9     10          16,906        15,481        9     12

Other Businesses

     615        563        9     9          1,768        1,636        8     8

Corporate (3)

     (11     (9     -        -             (58     (22     -        -   

TOTAL NIKE, INC. REVENUES

   $ 6,187      $ 5,656        9     10        $         18,616      $         17,095        9     12

 

(1)

Certain prior year amounts have been reclassified to conform to fiscal 2013 presentation. These changes had no impact on previously reported results of operations or shareholders’ equity.

 

(2)

Results have been restated using actual currency exchange rates in use during the comparative period to enhance the visibility of the underlying business trends by excluding the impact of translation arising from foreign currency exchange rate fluctuations.

 

(3)

Corporate revenues primarily consist of certain intercompany revenue eliminations and foreign currency hedge gains and losses related to revenues generated by entities within the NIKE Brand geographic operating segments and certain Other Businesses but managed through our central foreign exchange risk management program.

The primary financial measure we use to evaluate the performance of individual operating segments is earnings before interest and taxes (commonly referred to as “EBIT”) which represents net income before interest (income) expense, net and income taxes in the condensed consolidated statements of income. As discussed in Note 11 — Operating Segments in the accompanying notes to unaudited condensed consolidated financial statements, certain corporate costs are not included in EBIT of our operating segments.

 

 

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The breakdown of earnings before interest and taxes is as follows:

 

     Three Months Ended          Nine Months Ended  
     February 28 and 29,          February 28 and 29,  
(Dollars in millions)    2013     2012(1)     % Change           2013     2012(1)     % Change  

North America

   $             625      $             503        24        $         1,811      $         1,468        23

Western Europe

     178        149        19          505        464        9

Central & Eastern Europe

     71        60        18          175        163        7

Greater China

     218        273        -20          567        664        -15

Japan

     24        24        0          91        93        -2

Emerging Markets

     221        215        3          749        652        15

Global Brand Divisions

     (324     (299     -8          (1,023     (846     -21

Total NIKE Brand

     1,013        925        10          2,875        2,658        8

Other Businesses

     128        104        23          329        280        18

Corporate

     (285     (242     -18          (840     (645     -30

TOTAL CONSOLIDATED EARNINGS BEFORE INTEREST AND TAXES

   $ 856      $ 787        9        $ 2,364      $ 2,293        3

Interest (income) expense, net

     (2     -          -               (6     3        -     

TOTAL CONSOLIDATED INCOME BEFORE INCOME TAXES

   $ 858      $ 787        9        $ 2,370      $ 2,290        3

 

(1)

Certain prior year amounts have been reclassified to conform to fiscal 2013 presentation. These changes had no impact on previously reported results of operations or shareholders’ equity.

North America

 

     Three Months Ended          Nine Months Ended  
     February 28 and 29,          February 28 and 29,  
(Dollars in millions)    2013      2012      % Change     % Change
Excluding
Currency
Changes
          2013      2012      % Change     % Change
Excluding
Currency
Changes
 

Revenues by:

                                                                         

Footwear