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UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
Form 10-K
(Mark One)
| þ | ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934 |
For the fiscal year ended May 31, 2011
or
| ¨ | TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934 |
For the transition period from to .
Commission File No. 1-10635
NIKE, Inc.
(Exact name of Registrant as specified in its charter)
| Oregon | 93-0584541 | |
| (State or other jurisdiction of incorporation) |
(IRS Employer Identification No.) | |
| One Bowerman Drive | (503) 671-6453 | |
| Beaverton, Oregon 97005-6453 | (Registrant’s Telephone Number, Including Area Code) | |
| (Address of principal executive offices) (Zip Code) |
Securities registered pursuant to Section 12(b) of the Act:
| Class B Common Stock | New York Stock Exchange | |
| (Title of Each Class) | (Name of Each Exchange on Which Registered) |
Securities registered pursuant to Section 12(g) of the Act:
None
Indicate by check mark if the registrant is a well-known seasoned issuer, as defined in Rule 405 of the Securities Act. Yes þ No ¨
Indicate by check mark if the registrant is not required to file reports pursuant to Section 13 or Section 15(d) of the Act. Yes ¨ No þ
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 þ No ¨
Indicate by check mark whether the registrant has submitted electronically and posted on its corporate Website, if any, every Interactive Data File required to be submitted and posted pursuant to Rule 405 of Regulation S-T (§229.405 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 þ No ¨
Indicate by check mark if disclosure of delinquent filers pursuant to Item 405 of Regulation S-K (§229.405 of this chapter) is not contained herein, and will not be contained, to the best of Registrant’s knowledge, in definitive proxy or information statements incorporated by reference in Part III of this Form 10-K or any amendment to this Form 10-K. ¨
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 þ |
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 Act). Yes ¨ No þ
As of November 30, 2010, the aggregate market value of the Registrant’s Class A Common Stock held by non-affiliates of the Registrant was $2,005,831,959 and the aggregate market value of the Registrant’s Class B Common Stock held by non-affiliates of the Registrant was $33,459,424,185.
As of July 18, 2011, the number of shares of the Registrant’s Class A Common Stock outstanding was 89,989,447 and the number of shares of the Registrant’s Class B Common Stock outstanding was 384,840,843.
DOCUMENTS INCORPORATED BY REFERENCE:
Parts of Registrant’s Proxy Statement for the Annual Meeting of Shareholders to be held on September 19, 2011 are incorporated by reference into Part III of this Report.
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NIKE, INC.
ANNUAL REPORT ON FORM 10-K
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PART I
| Item 1. | Business |
NIKE, Inc. was incorporated in 1968 under the laws of the state of Oregon. As used in this report, the terms “we”, “us”, “NIKE” and the “Company” refer to NIKE, Inc. and its predecessors, subsidiaries and affiliates, unless the context indicates otherwise. Our Internet address is www.nike.com. On our NIKE Corporate web site, located at www.nikebiz.com, we post the following filings as soon as reasonably practicable after they are electronically filed with or furnished to the Securities and Exchange Commission: our annual report on Form 10-K, our quarterly reports on Form 10-Q, our current reports on Form 8-K and any amendments to those reports filed or furnished pursuant to Section 13(a) or 15(d) of the Securities and Exchange Act of 1934, as amended. All such filings on our NIKE Corporate web site are available free of charge. Also available on the NIKE Corporate web site are the charters of the committees of our board of directors, as well as our corporate governance guidelines and code of ethics; copies of any of these documents will be provided in print to any shareholder who submits a request in writing to NIKE Investor Relations, One Bowerman Drive, Beaverton, Oregon 97005-6453.
Our principal business activity is the design, development and worldwide marketing and selling of high quality footwear, apparel, equipment, and accessory products. NIKE is the largest seller of athletic footwear and athletic apparel in the world. We sell our products to retail accounts, through NIKE-owned retail stores and internet sales, which we refer to as our “Direct to Consumer” operations, and through a mix of independent distributors and licensees, in over 170 countries around the world. Virtually all of our products are manufactured by independent contractors. Virtually all footwear and apparel products are produced outside the United States, while equipment products are produced both in the United States and abroad.
NIKE’s athletic footwear products are designed primarily for specific athletic use, although a large percentage of the products are worn for casual or leisure purposes. We place considerable emphasis on high quality construction and innovation in products designed for men, women and children. Running, training, basketball, soccer, sport-inspired casual shoes, and kids’ shoes are currently our top-selling footwear categories and we expect them to continue to lead in product sales in the near future. We also market footwear designed for baseball, cheerleading, football, golf, lacrosse, outdoor activities, skateboarding, tennis, volleyball, walking, wrestling, and other athletic and recreational uses.
We sell sports apparel and accessories covering most of the above categories, sports-inspired lifestyle apparel, as well as athletic bags and accessory items. NIKE apparel and accessories feature the same trademarks and are sold through the same marketing and distribution channels. We often market footwear, apparel and accessories in “collections” of similar design or for specific purposes. We also market apparel with licensed college and professional team and league logos.
We sell a line of performance equipment under the NIKE Brand name, including bags, socks, sport balls, eyewear, timepieces, electronic devices, bats, gloves, protective equipment, golf clubs, and other equipment designed for sports activities. We also sell small amounts of various plastic products to other manufacturers through our wholly-owned subsidiary, NIKE IHM, Inc.
In addition to the products we sell directly to customers through our Direct to Consumer operations, we have entered into license agreements that permit unaffiliated parties to manufacture and sell certain apparel, electronic devices and other equipment designed for sports activities.
Our wholly-owned subsidiary, Cole Haan (“Cole Haan”), headquartered in New York, New York, designs and distributes dress and casual footwear, apparel and accessories for men and women under the Cole Haan® trademark.
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Our wholly-owned subsidiary, Converse Inc. (“Converse”), headquartered in North Andover, Massachusetts, designs, distributes and licenses athletic and casual footwear, apparel and accessories under the Converse®, Chuck Taylor®, All Star®, One Star®, Star Chevron and Jack Purcell® trademarks.
Our wholly-owned subsidiary, Hurley International LLC (“Hurley”), headquartered in Costa Mesa, California, designs and distributes a line of action sports and youth lifestyle apparel and accessories under the Hurley® trademark.
Our wholly-owned subsidiary, Umbro International Limited (“Umbro”), headquartered in Cheadle, United Kingdom, designs, distributes and licenses athletic and casual footwear, apparel and equipment, primarily for the sport of football (soccer), under the Umbro® trademark.
Financial information about geographic and segment operations appears in Note 18 of the accompanying Notes to the Consolidated Financial Statements on page 83.
We experience moderate fluctuations in aggregate sales volume during the year. Historically, revenues in the first and fourth fiscal quarters have slightly exceeded those in the second and third quarters. However, the mix of product sales may vary considerably as a result of changes in seasonal and geographic demand for particular types of footwear, apparel and equipment.
Because NIKE is a consumer products company, the relative popularity of various sports and fitness activities and changing design trends affect the demand for our products. We must therefore respond to trends and shifts in consumer preferences by adjusting the mix of existing product offerings, developing new products, styles and categories, and influencing sports and fitness preferences through aggressive marketing. Failure to respond in a timely and adequate manner could have a material adverse effect on our sales and profitability. This is a continuing risk.
We report our NIKE Brand operations based on our internal geographic organization. Each NIKE Brand geography operates predominantly in one industry: the design, development, marketing and selling of athletic footwear, apparel, and equipment. Effective June 1, 2009, we began operating under our new organizational structure for the NIKE Brand, which consists of the following six geographies: North America, Western Europe, Central & Eastern Europe, Greater China, Japan, and Emerging Markets. Previously, NIKE Brand operations were organized into the following four geographic regions: U.S., Europe, Middle East and Africa (collectively, “EMEA”), Asia Pacific, and Americas. Our NIKE Brand Direct to Consumer operations are managed within each geographic segment.
In fiscal 2011, sales in the United States including U.S. sales of our Other Businesses accounted for approximately 43% of total revenues, compared to 42% in fiscal 2010 and 2009. Our Other Businesses were primarily comprised of our affiliate brands; Cole Haan, Converse, Hurley and Umbro (which was acquired on March 3, 2008); and NIKE Golf. We estimate that we sell to more than 20,000 retail accounts in the United States. The NIKE Brand domestic retail account base includes a mix of footwear stores, sporting goods stores, athletic specialty stores, department stores, skate, tennis and golf shops, and other retail accounts. During fiscal 2011, our three largest customers accounted for approximately 23% of sales in the United States.
We make substantial use of our “futures” ordering program, which allows retailers to order five to six months in advance of delivery with the commitment that their orders will be delivered within a set time period at a fixed price. In fiscal 2011, 87% of our U.S. wholesale footwear shipments (excluding our Other Businesses) were made under the futures program, compared to 89% in fiscal 2010 and 2009. In fiscal 2011, 60% of our U.S. wholesale apparel shipments (excluding our Other Businesses) were made under the futures program, compared to 62% in fiscal 2010 and 60% in fiscal 2009.
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We utilize 18 NIKE sales offices to solicit sales in the United States. We also utilize 4 independent sales representatives to sell specialty products for golf and 5 for skateboarding and snowboarding products. In addition, our Direct to Consumer operations sell NIKE Brand products through our internet website, www.nikestore.com, and the following retail outlets in the United States:
| U.S. Retail Stores |
Number | |||
| NIKE factory stores |
150 | |||
| NIKE stores |
16 | |||
| NIKETOWNs |
9 | |||
| NIKE employee-only stores |
3 | |||
| Cole Haan stores (including factory stores) |
107 | |||
| Converse stores (including factory stores) |
58 | |||
| Hurley stores (including factory and employee stores) |
20 | |||
| Total |
363 | |||
NIKE’s three significant distribution centers in the United States for NIKE Brand products, including NIKE Golf, are located in Memphis, Tennessee. NIKE also operates and leases one facility in Memphis, Tennessee for NIKE Brand product returns. NIKE Brand apparel and equipment products are also shipped from our Foothill Ranch, California distribution center. Cole Haan products are distributed primarily from Greenland, New Hampshire, and Converse and Hurley products are shipped primarily from Ontario, California.
In fiscal 2011, non-U.S. sales (including non-U.S. sales of our Other Businesses) accounted for 57% of total revenues, compared to 58% in fiscal 2010 and 2009. We sell our products to retail accounts, through our own Direct to Consumer operations, and through a mix of independent distributors and licensees around the world. We estimate that we sell to more than 20,000 retail accounts outside the United States, excluding sales by independent distributors and licensees. We operate 16 distribution centers outside of the United States. In many countries and regions, including Canada, Asia, some Latin American countries, and Europe, we have a futures ordering program for retailers similar to the United States futures program described above. During fiscal 2011, NIKE’s three largest customers outside of the U.S. accounted for approximately 9% of total non-U.S. sales.
Our Direct to Consumer business operates the following retail outlets outside the United States:
| Non-U.S. Retail Stores |
Number | |||
| NIKE factory stores |
243 | |||
| NIKE stores |
50 | |||
| NIKETOWNs |
3 | |||
| NIKE employee-only stores |
13 | |||
| Cole Haan stores |
83 | |||
| Hurley stores |
1 | |||
| Total |
393 | |||
International branch offices and subsidiaries of NIKE are located in Argentina, Australia, Austria, Belgium, Bermuda, Brazil, Canada, Chile, China, Croatia, Cyprus, the Czech Republic, Denmark, Finland, France, Germany, Greece, Hong Kong, Hungary, Indonesia, India, Ireland, Israel, Italy, Japan, Korea, Lebanon, Macau, Malaysia, Mexico, New Zealand, the Netherlands, Norway, the Philippines, Poland, Portugal, Russia, Singapore, Slovakia, Slovenia, South Africa, Spain, Sri Lanka, Sweden, Switzerland, Taiwan, Thailand, Turkey, the United Arab Emirates, the United Kingdom, Uruguay and Vietnam.
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No customer accounted for 10% or more of our net sales during fiscal 2011.
Worldwide futures and advance orders for NIKE Brand athletic footwear and apparel, scheduled for delivery from June through November 2011, were $10.3 billion compared to $8.8 billion for the same period last year. This futures and advance order amount is calculated based upon our forecast of the actual exchange rates under which our revenues will be translated during this period, which approximate current spot rates. Reported futures and advance orders are not necessarily indicative of our expectation of revenues for this period. This is because the mix of orders can shift between futures/advance and at-once orders and the fulfillment of certain of these futures/advance orders may fall outside of the scheduled time period noted above. In addition, foreign currency exchange rate fluctuations as well as differing levels of order cancellations and discounts can cause differences in the comparisons between futures and advance orders and actual revenues. Moreover, a significant portion of our revenue is not derived from futures and advance orders, including at-once and 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.
Product Research and Development
We believe our research and development efforts are a key factor in our past and future success. Technical innovation in the design of footwear, apparel, and athletic equipment receive continued emphasis as NIKE strives to produce products that help to reduce injury, enhance athletic performance and maximize comfort.
In addition to NIKE’s own staff of specialists in the areas of biomechanics, chemistry, exercise physiology, engineering, industrial design, and related fields, we also utilize research committees and advisory boards made up of athletes, coaches, trainers, equipment managers, orthopedists, podiatrists, and other experts who consult with us and review designs, materials, concepts for product improvements and compliance with product safety regulations around the world. Employee athletes, athletes engaged under sports marketing contracts and other athletes wear-test and evaluate products during the design and development process.
Virtually all of our footwear is produced by factories we contract with outside of the United States. In fiscal 2011, contract factories in Vietnam, China, Indonesia, and India manufactured approximately 39%, 33%, 24% and 2% of total NIKE Brand footwear, respectively. We also have manufacturing agreements with independent factories in Argentina, Brazil, India, and Mexico to manufacture footwear for sale primarily within those countries. The largest single footwear factory that we have contracted with accounted for approximately 6% of total fiscal 2011 NIKE Brand footwear production. Almost all of NIKE Brand apparel is manufactured outside of the United States by independent contract manufacturers located in 33 countries. Most of this apparel production occurred in China, Thailand, Vietnam, Malaysia, Sri Lanka, Indonesia, Turkey, Cambodia, El Salvador, and Mexico. The largest single apparel factory that we have contracted with accounted for approximately 7% of total fiscal 2011 apparel production.
The principal materials used in our footwear products are natural and synthetic rubber, plastic compounds, foam cushioning materials, nylon, leather, canvas, and polyurethane films used to make Air-Sole cushioning components. During fiscal 2011, NIKE IHM, Inc., a wholly-owned subsidiary of NIKE, as well as independent contractors in China and Taiwan, were our largest suppliers of the Air-Sole cushioning components used in footwear. The principal materials used in our apparel products are natural and synthetic fabrics and threads, plastic and metal hardware, and specialized performance fabrics designed to repel rain, retain heat, or efficiently transport body moisture. NIKE’s independent contractors and suppliers buy raw materials in bulk for the manufacturing of our footwear, apparel and equipment products. Most raw materials are available and purchased
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by those independent contractors and suppliers in the countries where manufacturing takes place. We have thus far experienced little difficulty in satisfying our raw material requirements.
Since 1972, Sojitz Corporation of America (“Sojitz America”), a large Japanese trading company and the sole owner of our redeemable preferred stock, has performed significant import-export financing services for us. During fiscal 2011, Sojitz America provided financing and purchasing services for NIKE Brand products sold in Argentina, Uruguay, Canada, Brazil, India, Indonesia, the Philippines, Malaysia, South Africa, China, Korea, and Thailand, excluding products produced and sold in the same country. Approximately 19% of NIKE Brand sales occurred in those countries. Any failure of Sojitz America to provide these services or any failure of Sojitz America’s banks could disrupt our ability to acquire products from our suppliers and to deliver products to our customers in those jurisdictions. Such a disruption could result in cancelled orders that would adversely affect sales and profitability. However, we believe that any such disruption would be short-term in duration due to the ready availability of alternative sources of financing at competitive rates. Our current agreements with Sojitz America expire on May 31, 2014.
International Operations and Trade
Our international operations and sources of supply are subject to the usual risks of doing business abroad, such as possible revaluation of currencies, export and import duties, anti-dumping measures, quotas, safeguard measures, trade restrictions, restrictions on the transfer of funds and, in certain parts of the world, political instability and terrorism. We have not, to date, been materially affected by any such risk, but cannot predict the likelihood of such developments occurring.
The global economic recession resulted in a significant slow-down in international trade and a sharp rise in protectionist actions around the world. These trends are affecting many global manufacturing and service sectors, and the footwear and apparel industries, as a whole, are not immune. Companies in our industry are facing trade protectionist challenges in many different regions, and in nearly all cases we are working together to address trade issues to reduce the impact to the industry, while observing applicable competition laws. Notwithstanding our efforts, such actions, if implemented, could result in increases in the cost of our products, which could adversely affect our sales or profitability and the imported footwear and apparel industry as a whole. Accordingly, we are actively monitoring the developments described below.
Footwear Imports into the European Union
In 2005, at the request of the European domestic footwear industry, the European Commission (“EC”) initiated investigations into leather footwear imported from China and Vietnam. Together with other companies in our industry, we took the position that Special Technology Athletic Footwear (STAF) (i) should not be within the scope of the investigation, and (ii) does not meet the legal requirements of injury and price in an anti-dumping investigation. Our arguments were successful and the EU agreed in October 2006 on definitive duties of 16.5% for China and 10% for Vietnam for non-STAF leather footwear, but excluded STAF from the final measures. Prior to the scheduled expiration in October 2008 of the measures imposed on the non-STAF footwear, the domestic industry requested and the EC agreed to review a petition to extend these restrictions on non-STAF leather footwear. In December 2009, following a review of the ongoing restrictions, EU member states voted to extend the measures for an additional 15 months, until March 31, 2011. In early 2011, the EC declined to further extend the measures and since April 1, 2011 these restrictions have been terminated. The EC noted that it will be monitoring leather footwear imports from Vietnam and China over the next 12 months and it is hoped that any increases will not result in renewed trade defense actions by the EC.
On February 3, 2010, the Chinese government announced it would seek to refer the EU decision (both on the original measures and subsequent review decision) to the World Trade Organization (“WTO”) for its further review and decision. On May 18, 2010, the Dispute Settlement Body of the WTO agreed to establish a panel to rule on China’s claims against the EU with respect to the above anti-dumping measures. The ruling from the WTO panel is expected in late July or August 2011, after which either party may accept or appeal the findings.
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Footwear, Apparel and Equipment Imports into Brazil and Argentina
At the request of certain domestic footwear industry participants, both Brazil and Argentina have initiated independent anti-dumping investigations against footwear made in China. Over the last two years, we have been working with a broad coalition of other companies in our industry to challenge these cases on the basis that the athletic footwear being imported from China (i) should not be within the scope of the investigation, and (ii) does not meet the legal requirements of injury and price in an anti-dumping investigation. In the case of Argentina, in 2010, the final determination made by the administering authorities was favorable to us. In the case of Brazil, the administering authorities agreed to impose an anti-dumping duty against nearly all footwear from China, which we believe will impact all brands in the footwear industry. Although we do not currently expect that this decision will materially affect us, we are working with the same broad coalition of footwear companies to challenge this decision in domestic Brazilian courts as well as international forums such as the WTO.
Many products, including footwear, apparel and equipment products, that we and others in our industry import into Argentina and Brazil are subject to the WTO non-automatic licensing requirements, which means that it may take up to 60 days for those products to clear customs and enter into those jurisdictions. From time to time, in addition to these WTO licensing requirements, these jurisdictions impose further importation restrictions or limitations. As a result, we have experienced delays in our ability to import our products or it has taken longer than the time allowed under the WTO for us to import our products. To date, our business has not been materially affected by these restrictions or delays. In the future, however, if we are unable to import our products into these jurisdictions due to these or other restrictions or if we experience increasing or more frequent delays beyond the WTO-permitted 60 days to import our products, our business could be materially affected.
Footwear, Apparel and Equipment Imports into Turkey
In 2006, Turkey introduced safeguard measures in the form of additional duties on all imported footwear into Turkey with the goal of protecting its local shoe manufacturing industry until August 2009. In June 2009, Turkish shoe-manufacturers submitted, and the Turkish Government agreed to review, a request for extension of the safeguard measures claiming that the rehabilitation process of the local Turkish industry was interrupted due to the continuing increase of footwear imports. Despite the importers opposition to the continuation of the safeguard measures, the Turkish authorities extended these safeguard measures until August 2012, but reduced the duty from $3 per pair of footwear to $1.60 per pair of footwear.
In 2011, two new safeguard measures and reviews were initiated by the Turkish Undersecretariat of Foreign Trade (“UFT”) on apparel and equipment imports. In January 2011, the UFT began an investigation on apparel imports that could result in a 20-30% increase in import duties applied to imported apparel products, regardless of country of origin and with only a few exceptions for countries that currently have a Free Trade Agreement with Turkey. A decision is expected in late July 2011 and if approved, these higher import duties will be in place through July 2014. Together with other companies in our industry, we are advocating for exclusion of certain apparel products used for sporting activities that cannot be manufactured in Turkey and therefore should not be subject to a higher import duty. In February 2011, the UFT began a review of existing safeguard measure on travel goods, handbags and similar accessories and containers listed under applicable regulations. One Turkish bag manufacturers association has requested the continuation of the safeguard measures through April 2014, with the application of an additional import duty of 2.70 USD/kg (max. 4.25 USD/unit), regardless of country of origin. Together with other companies in our industry, we are advocating for the exclusion of non-leather bags from the scope of the continued safeguards.
Trade Relations with China
China represents an important sourcing country and consumer marketing country for us. Many governments around the world are concerned about China’s growing and fast-paced economy, compliance with WTO rules, currency valuation, and high trade surpluses. As a result, a wide range of legislative proposals have been introduced to address these concerns. While some of these concerns may be justified, we are working with broad
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coalitions of global businesses and trade associations representing a wide variety of sectors (e.g., services, manufacturing, and agriculture) to help ensure any legislation enacted and implemented (i) addresses legitimate and core concerns, (ii) is consistent with international trade rules, and (iii) reflects and considers China’s domestic economy and the important role it has in the global economic community. We believe other companies in our industry as well as most other multi-national companies are in a similar position regarding these trade measures.
In the event any of these trade protection measures are implemented, we believe that we have the ability to develop, over a period of time, adequate alternative sources of supply for the products obtained from our present suppliers. If events prevented us from acquiring products from our suppliers in a particular country, our operations could be temporarily disrupted and we could experience an adverse financial impact. However, we believe we could abate any such disruption, and that much of the adverse impact on supply would, therefore, be of a short-term nature. We believe our principal competitors are subject to similar risks.
The athletic footwear, apparel, and equipment industry is keenly competitive in the United States and on a worldwide basis. We compete internationally with a significant number of athletic and leisure shoe companies, athletic and leisure apparel companies, sports equipment companies, and large companies having diversified lines of athletic and leisure shoes, apparel, and equipment, including Adidas, Puma, and others. The intense competition and the rapid changes in technology and consumer preferences in the markets for athletic and leisure footwear and apparel, and athletic equipment, constitute significant risk factors in our operations.
NIKE is the largest seller of athletic footwear and athletic apparel in the world. Performance and reliability of shoes, apparel, and equipment, new product development, price, product identity through marketing and promotion, and customer support and service are important aspects of competition in the athletic footwear, apparel, and equipment industry. To help market our products, we contract with prominent and influential athletes, coaches, teams, colleges and sports leagues to endorse our brands and use our products, and we actively sponsor sporting events and clinics. We believe that we are competitive in all of these areas.
We utilize trademarks on nearly all of our products and believe having distinctive marks that are readily identifiable is an important factor in creating a market for our goods, in identifying our brands and the Company, and in distinguishing our goods from the goods of others. We consider our NIKE® and Swoosh Design® trademarks to be among our most valuable assets and we have registered these trademarks in over 150 countries. In addition, we own many other trademarks that we utilize in marketing our products. We continue to vigorously protect our trademarks against infringement.
NIKE has an exclusive, worldwide license to make and sell footwear using patented “Air” technology. The process utilizes pressurized gas encapsulated in polyurethane. Some of the early NIKE AIR® patents have expired, which may enable competitors to use certain types of similar technology. Subsequent NIKE AIR® patents will not expire for several years. We also have hundreds of U.S. and foreign utility patents, and thousands of U.S. and foreign design patents covering components and features used in various athletic and leisure shoes, apparel, and equipment. These patents expire at various times, and patents issued for applications filed this year will last from now to 2025 for design patents, and from now to 2031 for utility patents. We believe our success depends primarily upon skills in design, research and development, production, and marketing rather than upon our patent position. However, we have followed a policy of filing applications for United States and foreign patents on inventions, designs, and improvements that we deem valuable.
As of May 31, 2011, we had approximately 38,000 employees worldwide, which includes retail and part-time employees. Management considers its relationship with employees to be excellent. None of our employees
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is represented by a union, except for certain employees in the Emerging Markets geography, where local law requires those employees to be represented by a trade union, and in the United States, where certain employees of Cole Haan are represented by a union. Also, in some countries outside of the United States, local laws require representation for employees by works councils (such as in certain countries in the European Union, in which they are entitled to information and consultation on certain Company decisions) or other employee representation by an organization similar to a union, and in certain European countries, we are required by local law to enter into and/or comply with (industry wide or national) collective bargaining agreements. There has never been a material interruption of operations due to labor disagreements.
Executive Officers of the Registrant
The executive officers of NIKE as of July 14, 2011 are as follows:
Philip H. Knight, Chairman of the Board — Mr. Knight, 73, a director since 1968, is a co-founder of NIKE and, except for the period from June 1983 through September 1984, served as its President from 1968 to 1990 and from June 2000 to December 2004. Prior to 1968, Mr. Knight was a certified public accountant with Price Waterhouse and Coopers & Lybrand and was an Assistant Professor of Business Administration at Portland State University.
Mark G. Parker, Chief Executive Officer and President — Mr. Parker, 55, was appointed CEO and President in January 2006. He has been employed by NIKE since 1979 with primary responsibilities in product research, design and development, marketing, and brand management. Mr. Parker was appointed divisional Vice President in charge of development in 1987, corporate Vice President in 1989, General Manager in 1993, Vice President of Global Footwear in 1998, and President of the NIKE Brand in 2001.
David J. Ayre, Vice President, Global Human Resources — Mr. Ayre, 51, joined NIKE as Vice President, Global Human Resources in 2007. Prior to joining NIKE, he held a number of senior human resource positions with PepsiCo, Inc. since 1990, most recently as head of Talent and Performance Rewards.
Donald W. Blair, Vice President and Chief Financial Officer — Mr. Blair, 53, joined NIKE in November 1999. Prior to joining NIKE, he held a number of financial management positions with PepsiCo, Inc., including Vice President, Finance of Pepsi-Cola Asia, Vice President, Planning of PepsiCo’s Pizza Hut Division, and Senior Vice President, Finance of The Pepsi Bottling Group, Inc. Prior to joining PepsiCo, Mr. Blair was a certified public accountant with Deloitte, Haskins, and Sells.
Charles D. Denson, President of the NIKE Brand — Mr. Denson, 55, has been employed by NIKE since 1979. Mr. Denson held several management positions within the Company, including his appointments as Director of USA Apparel Sales in 1994, divisional Vice President, U.S. Sales in 1994, divisional Vice President European Sales in 1997, divisional Vice President and General Manager, NIKE Europe in 1998, Vice President and General Manager of NIKE USA in 2000, and President of the NIKE Brand in 2001.
Gary M. DeStefano, President, Global Operations — Mr. DeStefano, 54, has been employed by NIKE since 1982, with primary responsibilities in sales and regional administration. Mr. DeStefano was appointed Director of Domestic Sales in 1990, divisional Vice President in charge of domestic sales in 1992, Vice President of Global Sales in 1996, Vice President and General Manager of Asia Pacific in 1997, President of USA Operations in 2001, and President of Global Operations in 2006.
Trevor Edwards, Vice President, Global Brand and Category Management — Mr. Edwards, 48, joined NIKE in 1992. He was appointed Marketing Manager, Strategic Accounts, Foot Locker in 1993, Director of Marketing, the Americas in 1995, Director of Marketing, Europe in 1997, Vice President, Marketing for Europe, Middle East and Africa in 1999, and Vice President, U.S. Brand Marketing in 2000. Mr. Edwards was appointed corporate Vice President, Global Brand Management in 2002 and Vice President, Global Brand and Category Management in 2006. Prior to NIKE, Mr. Edwards was with the Colgate-Palmolive Company.
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Jeanne P. Jackson, President, Direct to Consumer — Ms. Jackson, 59, served as a member of the NIKE, Inc. Board of Directors from 2001 through 2009, when she resigned from our Board and was appointed President, Direct to Consumer. She is founder and CEO of MSP Capital, a private investment company. Ms. Jackson was CEO of Walmart.com from March 2000 to January 2002. She was with Gap, Inc., as President and CEO of Banana Republic from 1995 to 2000, also serving as CEO of Gap, Inc. Direct from 1998 to 2000. Since 1978, she has held various retail management positions with Victoria’s Secret, The Walt Disney Company, Saks Fifth Avenue, and Federated Department Stores. Ms. Jackson is the past President of the United States Ski and Snowboard Foundation Board of Trustees, and is a director of McDonald’s Corporation. She is a former director of Nordstrom, Inc., and Harrah’s Entertainment, Inc.
Hilary K. Krane, Vice President and General Counsel — Ms. Krane, 47, joined NIKE as Vice President and General Counsel in April 2010. Prior to joining NIKE, Ms. Krane was General Counsel and Senior Vice President for Corporate Affairs at Levi Strauss & Co. where she was responsible for legal affairs and overseeing the global brand protection department from 2006 to 2010. From 1996 to 2006, she was a partner and assistant general counsel at PricewaterhouseCoopers LLP.
Bernard F. Pliska, Vice President, Corporate Controller — Mr. Pliska, 49, joined NIKE as Corporate Controller in 1995. He was appointed Vice President, Corporate Controller in 2003. Prior to NIKE, Mr. Pliska was with Price Waterhouse from 1984 to 1995. Mr. Pliska is a certified public accountant.
John F. Slusher, Vice President, Global Sports Marketing — Mr. Slusher, 42, has been employed by NIKE since 1998 with primary responsibilities in global sports marketing. Mr. Slusher was appointed Director of Sports Marketing for the Asia Pacific and Americas Regions in 2006, divisional Vice President, Asia Pacific & Americas Sports Marketing in September 2007 and Vice President, Global Sports Marketing in November 2007. Prior to joining NIKE, Mr. Slusher was an attorney at the law firm of O’Melveny & Myers from 1995 to 1998.
Eric D. Sprunk, Vice President, Merchandising and Product — Mr. Sprunk, 47, joined NIKE in 1993. He was appointed Finance Director and General Manager of the Americas in 1994, Finance Director, NIKE Europe in 1995, Regional General Manager, NIKE Europe Footwear in 1998, and Vice President & General Manager of the Americas in 2000. Mr. Sprunk was appointed corporate Vice President, Global Footwear in 2001 and Vice President, Merchandising and Product in 2009. Prior to joining NIKE, Mr. Sprunk was a certified public accountant with Price Waterhouse from 1987 to 1993.
Hans van Alebeek, Vice President, Global Operations and Technology — Mr. van Alebeek, 45, joined NIKE as Director of Operations of Europe in 1999, and was appointed Vice President, Operations & Administration in EMEA in 2001, Vice President, Global Operations in 2003, Vice President, Global Operations & Technology in 2004, and Corporate Vice President in November 2005. Prior to joining NIKE, Mr. van Alebeek worked for McKinsey & Company as a management consultant and at N.V. Indivers in business development.
Roger S. Wyett, President, Affiliates — Mr. Wyett, 54, joined NIKE in April 2005 as President and Chief Operating Officer of the Company’s Hurley brand and was appointed Vice President, Global Apparel in 2006. In October 2007, Mr. Wyett returned to the Company’s Hurley brand as President and Chief Executive Officer, and then in February 2011 was appointed President of Affiliates. Mr. Wyett first joined NIKE in 1994, holding a number of management positions in soccer and NIKE Team Sports. From 2000 to 2005, Mr. Wyett was employed by The Walt Disney Company where he was Senior Vice President for Global Apparel, Accessories and Footwear, and later promoted to Executive Vice President for Global Sales and Marketing for Consumer Products.
| Item 1A. | Risk Factors |
Special Note Regarding Forward-Looking Statements and Analyst Reports
Certain written and oral statements, other than purely historical information, including estimates, projections, statements relating to NIKE’s business plans, objectives and expected operating results, and the assumptions upon which those statements are based, made or incorporated by reference from time to time by
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NIKE or its representatives in this report, other reports, filings with the Securities and Exchange Commission, press releases, conferences, or otherwise, are “forward-looking statements” within the meaning of the Private Securities Litigation Reform Act of 1995 and Section 21E of the Securities Exchange Act of 1934, as amended. Forward-looking statements include, without limitation, any statement that may predict, forecast, indicate, or imply future results, performance, or achievements, and may contain the words “believe”, “anticipate”, “expect”, “estimate”, “project”, “will be”, “will continue”, “will likely result”, or words or phrases of similar meaning. Forward-looking statements involve risks and uncertainties which may cause actual results to differ materially from the forward-looking statements. The risks and uncertainties are detailed from time to time in reports filed by NIKE with the Securities and Exchange Commission, including Forms 8-K, 10-Q, and 10-K, and include, among others, the following: international, national and local general economic and market conditions; the size and growth of the overall athletic footwear, apparel, and equipment markets; intense competition among designers, marketers, distributors and sellers of athletic footwear, apparel, and equipment for consumers and endorsers; demographic changes; changes in consumer preferences; popularity of particular designs, categories of products, and sports; seasonal and geographic demand for NIKE products; difficulties in anticipating or forecasting changes in consumer preferences, consumer demand for NIKE products, and the various market factors described above; difficulties in implementing, operating, and maintaining NIKE’s increasingly complex information systems and controls, including, without limitation, the systems related to demand and supply planning, and inventory control; interruptions in data and communications systems; fluctuations and difficulty in forecasting operating results, including, without limitation, the fact that advance “futures” orders may not be indicative of future revenues due to changes in shipment timing, and the changing mix of futures and at-once orders and order cancellations; the ability of NIKE to sustain, manage or forecast its growth and inventories; the size, timing and mix of purchases of NIKE’s products; increases in the cost of materials and energy used to manufacture products, new product development and introduction; the ability to secure and protect trademarks, patents, and other intellectual property; performance and reliability of products; customer service; adverse publicity; the loss of significant customers or suppliers; dependence on distributors and licensees; business disruptions; increased costs of freight and transportation to meet delivery deadlines; increases in borrowing costs due to any decline in our debt ratings; changes in business strategy or development plans; general risks associated with doing business outside the United States, including, without limitation, exchange rate fluctuations, import duties, tariffs, quotas, political and economic instability, and terrorism; changes in government regulations; the impact of, including business and legal developments relating to, climate change; liability and other claims asserted against NIKE; the ability to attract and retain qualified personnel; and other factors referenced or incorporated by reference in this report and other reports.
The risks included here are not exhaustive. Other sections of this report may include additional factors which could adversely affect NIKE’s business and financial performance. Moreover, NIKE operates in a very competitive and rapidly changing environment. New risk factors emerge from time to time and it is not possible for management to predict all such risk factors, nor can it assess the impact of all such risk factors on NIKE’s business or the extent to which any factor, or combination of factors, may cause actual results to differ materially from those contained in any forward-looking statements. Given these risks and uncertainties, investors should not place undue reliance on forward-looking statements as a prediction of actual results.
Investors should also be aware that while NIKE does, from time to time, communicate with securities analysts, it is against NIKE’s policy to disclose to them any material non-public information or other confidential commercial information. Accordingly, shareholders should not assume that NIKE agrees with any statement or report issued by any analyst irrespective of the content of the statement or report. Furthermore, NIKE has a policy against issuing or confirming financial forecasts or projections issued by others. Thus, to the extent that reports issued by securities analysts contain any projections, forecasts or opinions, such reports are not the responsibility of NIKE.
Our products face intense competition.
NIKE is a consumer products company and the relative popularity of various sports and fitness activities and changing design trends affect the demand for our products. The athletic footwear, apparel, and equipment
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industry is keenly competitive in the United States and on a worldwide basis. We compete internationally with a significant number of athletic and leisure shoe companies, athletic and leisure apparel companies, sports equipment companies, and large companies having diversified lines of athletic and leisure shoes, apparel, and equipment. We also compete with other companies for the production capacity of independent manufacturers that produce our products and for import quota capacity.
Our competitors’ product offerings, technologies, marketing expenditures (including expenditures for advertising and endorsements), pricing, costs of production, and customer service are areas of intense competition. This, in addition to rapid changes in technology and consumer preferences in the markets for athletic and leisure footwear and apparel, and athletic equipment, constitute significant risk factors in our operations. If we do not adequately and timely anticipate and respond to our competitors, our costs may increase or the consumer demand for our products may decline significantly.
If we are unable to anticipate consumer preferences and develop new products, we may not be able to maintain or increase our net revenues and profits.
Our success depends on our ability to identify, originate and define product trends as well as to anticipate, gauge and react to changing consumer demands in a timely manner. All of our products are subject to changing consumer preferences that cannot be predicted with certainty. Our new products may not receive consumer acceptance as consumer preferences could shift rapidly to different types of performance or other sports apparel or away from these types of products altogether, and our future success depends in part on our ability to anticipate and respond to these changes. If we fail to anticipate accurately and respond to trends and shifts in consumer preferences by adjusting the mix of existing product offerings, developing new products, designs, styles and categories, and influencing sports and fitness preferences through aggressive marketing, we could experience lower sales, excess inventories and lower profit margins, any of which could have an adverse effect on our results of operations and financial condition.
We rely on technical innovation and high quality products to compete in the market for our products.
Although design and aesthetics of our products appear to be the most important factor for consumer acceptance of our products, technical innovation and quality control in the design of footwear, apparel, and athletic equipment is also essential to the commercial success of our products. Research and development plays a key role in technical innovation. We rely upon specialists in the fields of biomechanics, exercise physiology, engineering, industrial design and related fields, as well as research committees and advisory boards made up of athletes, coaches, trainers, equipment managers, orthopedists, podiatrists, and other experts to develop and test cutting edge performance products. While we strive to produce products that help to reduce injury, enhance athletic performance and maximize comfort, if we fail to introduce technical innovation in our products consumer demand for our products could decline, and if we experience problems with the quality of our products, we may incur substantial expense to remedy the problems.
Failure to continue to obtain high quality endorsers of our products could harm our business.
We establish relationships with professional athletes, sports teams and leagues to evaluate, promote, and establish product authenticity with consumers. If certain endorsers were to stop using our products contrary to their endorsement agreements, our business could be adversely affected. In addition, actions taken by athletes, teams or leagues associated with our products that harm the reputations of those athletes, teams or leagues could also harm our brand image with consumers and, as a result, could have an adverse effect on our sales and financial condition. In addition, poor performance by our endorsers, a failure to continue to correctly identify promising athletes to use and endorse our products, or a failure to enter into cost effective endorsement arrangements with prominent athletes and sports organizations could adversely affect our brand and result in decreased sales of our products.
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Failure of our contractors or our licensees’ contractors to comply with our code of conduct, local laws, and other standards could harm our business.
We contract with hundreds of contractors outside of the United States to manufacture our products, and we also have license agreements that permit unaffiliated parties to manufacture or contract to manufacture products using our trademarks. We impose, and require our licensees to impose, on those contractors a code of conduct and other environmental, health, and safety standards for the benefit of workers. We also require these contractors to comply with applicable standards for product safety. However, from time to time contractors may not comply with such standards or applicable local law or our licensees may not require their contractors to comply with such standards or applicable local law. Significant or continuing noncompliance with such standards and laws by one or more contractors could harm our reputation or result in a product recall and, as a result, could have an adverse effect on our sales and financial condition.
Global capital and credit market conditions, and resulting declines in consumer confidence and spending, could have a material adverse effect on our business, operating results, and financial condition.
Continuing volatility and disruption in the global capital and credit markets have led to a tightening of business credit and liquidity, a contraction of consumer credit, business failures, higher unemployment, and declines in consumer confidence and spending in the United States and internationally. If global economic and financial market conditions deteriorate or remain weak for an extended period of time, the following factors could have a material adverse effect on our business, operating results, and financial condition:
| • | Slower consumer spending may result in reduced demand for our products, reduced orders from retailers for our products, order cancellations, lower revenues, increased inventories, and lower gross margins. |
| • | We may be unable to find suitable investments that are safe, liquid, and provide a reasonable return. This could result in lower interest income or longer investment horizons. Disruptions to capital markets or the banking system may also impair the value of investments or bank deposits we currently consider safe or liquid. |
| • | We may be unable to access financing in the credit and capital markets at reasonable rates in the event we find it desirable to do so. |
| • | The failure of financial institution counterparties to honor their obligations to us under credit and derivative instruments could jeopardize our ability to rely on and benefit from those instruments. Our ability to replace those instruments on the same or similar terms may be limited under poor market conditions. |
| • | We conduct transactions in various currencies, which increase our exposure to fluctuations in foreign currency exchange rates relative to the U.S. dollar. Continued volatility in the markets and exchange rates for foreign currencies and contracts in foreign currencies could have a significant impact on our reported financial results and condition. |
| • | Continued volatility in the markets and prices for commodities and raw materials we use in our products and in our supply chain (such as petroleum) could have a material adverse effect on our costs, gross margins, and profitability. |
| • | If retailers of our products experience declining revenues, or retailers experience difficulty obtaining financing in the capital and credit markets to purchase our products, this could result in reduced orders for our products, order cancellations, inability of retailers to timely meet their payment obligations to us, extended payment terms, higher accounts receivable, reduced cash flows, greater expense associated with collection efforts, and increased bad debt expense. |
| • | If retailers of our products experience severe financial difficulty, some may become insolvent and cease business operations, which could reduce the availability of our products to consumers. |
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| • | If contract manufacturers of our products or other participants in our supply chain experience difficulty obtaining financing in the capital and credit markets to purchase raw materials or to finance general working capital needs, it may result in delays or non-delivery of shipments of our products. |
Our business is affected by seasonality, which could result in fluctuations in our operating results and stock price.
We experience moderate fluctuations in aggregate sales volume during the year. Historically, revenues in the first and fourth fiscal quarters have slightly exceeded those in the second and third fiscal quarters. However, the mix of product sales may vary considerably from time to time as a result of changes in seasonal and geographic demand for particular types of footwear, apparel and equipment. In addition, our customers may cancel orders, change delivery schedules or change the mix of products ordered with minimal notice. As a result, we may not be able to accurately predict our quarterly sales. Accordingly, our results of operations are likely to fluctuate significantly from period to period. This seasonality, along with other factors that are beyond our control, including general economic conditions, changes in consumer preferences, weather conditions, availability of import quotas and currency exchange rate fluctuations, could adversely affect our business and cause our results of operations to fluctuate. Our operating margins are also sensitive to a number of factors that are beyond our control, including manufacturing and transportation costs, shifts in product sales mix, geographic sales trends, and currency exchange rate fluctuations, all of which we expect to continue. Results of operations in any period should not be considered indicative of the results to be expected for any future period.
“Futures” orders may not be an accurate indication of our future revenues.
We make substantial use of our “futures” ordering program, which allows retailers to order five to six months in advance of delivery with the commitment that their orders will be delivered within a set period of time at a fixed price. Our futures ordering program allows us to minimize the amount of products we hold in inventory, purchasing costs, the time necessary to fill customer orders, and the risk of non-delivery. We report changes in futures orders in our periodic financial reports. Although we believe futures orders are an important indicator of our future revenues, reported futures orders are not necessarily indicative of our expectation of changes in revenues for any future period. This is because the mix of orders can shift between advance/futures and at-once orders. In addition, foreign currency exchange rate fluctuations, order cancellations, returns, and discounts can cause differences in the comparisons between futures orders and actual revenues. Moreover, a significant portion of our revenue is not derived from futures and advance 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.
Our “futures” ordering program does not prevent excess inventories or inventory shortages, which could result in decreased operating margins and harm to our business.
We purchase products from manufacturers outside of our futures ordering program and in advance of customer orders, which we hold in inventory and resell to customers. There is a risk we may be unable to sell excess products ordered from manufacturers. Inventory levels in excess of customer demand may result in inventory write-downs, and the sale of excess inventory at discounted prices could significantly impair our brand image and have an adverse effect on our operating results and financial condition. Conversely, if we underestimate consumer demand for our products or if our manufacturers fail to supply products we require at the time we need them, we may experience inventory shortages. Inventory shortages might delay shipments to customers, negatively impact retailer and distributor relationships, and diminish brand loyalty.
The difficulty in forecasting demand also makes it difficult to estimate our future results of operations and financial condition from period to period. A failure to accurately predict the level of demand for our products could adversely affect our net revenues and net income, and we are unlikely to forecast such effects with any certainty in advance.
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We may be adversely affected by the financial health of our retailers.
We extend credit to our customers based on an assessment of a customer’s financial condition, generally without requiring collateral. To assist in the scheduling of production and the shipping of seasonal products, we offer customers the ability to place orders five to six months ahead of delivery under our “futures” ordering program. These advance orders may be cancelled, and the risk of cancellation may increase when dealing with financially ailing retailers or retailers struggling with economic uncertainty. In the past, some customers have experienced financial difficulties, which have had an adverse effect on our business. As a result, retailers may be more cautious than usual with orders as a result of weakness in the retail economy. A slowing economy in our key markets could have an adverse effect on the financial health of our customers, which in turn could have an adverse effect on our results of operations and financial condition. In addition, product sales are dependent in part on high quality merchandising and an appealing store environment to attract consumers, which requires continuing investments by retailers. Retailers who experience financial difficulties may fail to make such investments or delay them, resulting in lower sales and orders for our products.
Consolidation of retailers or concentration of retail market share among a few retailers may increase and concentrate our credit risk, and impair our ability to sell our products.
The athletic footwear, apparel, and equipment retail markets in some countries are dominated by a few large athletic footwear, apparel, and equipment retailers with many stores. These retailers have in the past increased their market share and may continue to do so in the future by expanding through acquisitions and construction of additional stores. These situations concentrate our credit risk with a relatively small number of retailers, and, if any of these retailers were to experience a shortage of liquidity, it would increase the risk that their outstanding payables to us may not be paid. In addition, increasing market share concentration among one or a few retailers in a particular country or region increases the risk that if any one of them substantially reduces their purchases of our products, we may be unable to find a sufficient number of other retail outlets for our products to sustain the same level of sales and revenues.
Failure to adequately protect our intellectual property rights could adversely affect our business.
We utilize trademarks on nearly all of our products and believe that having distinctive marks that are readily identifiable is an important factor in creating a market for our goods, in identifying us, and in distinguishing our goods from the goods of others. We consider our NIKE® and Swoosh Design® trademarks to be among our most valuable assets and we have registered these trademarks in over 150 countries. In addition, we own many other trademarks that we utilize in marketing our products. We believe that our trademarks, patents, and other intellectual property rights are important to our brand, our success, and our competitive position. We periodically discover products that are counterfeit reproductions of our products or that otherwise infringe on our intellectual property rights. If we are unsuccessful in challenging a party’s products on the basis of trademark or design or utility patent infringement, continued sales of these products could adversely affect our sales and our brand and result in the shift of consumer preference away from our products. The actions we take to establish and protect trademarks, patents, and other intellectual property rights may not be adequate to prevent imitation of our products by others or to prevent others from seeking to block sales of our products as violations of proprietary rights.
In addition, the laws of certain foreign countries may not protect intellectual property rights to the same extent as the laws of the United States. We may face significant expenses and liability in connection with the protection of our intellectual property rights outside the United States, and if we are unable to successfully protect our rights or resolve intellectual property conflicts with others, our business or financial condition may be adversely affected.
We are subject to periodic litigation and other regulatory proceedings, which could result in unexpected expense of time and resources.
From time to time we are called upon to defend ourselves against lawsuits and regulatory actions relating to our business. Due to the inherent uncertainties of litigation and regulatory proceedings, we cannot accurately
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predict the ultimate outcome of any such proceedings. An unfavorable outcome could have an adverse impact on our business, financial condition and results of operations. In addition, any significant litigation in the future, regardless of its merits, could divert management’s attention from our operations and result in substantial legal fees.
Our international operations involve inherent risks which could result in harm to our business.
Virtually all of our athletic footwear and apparel is manufactured outside of the United States, and the majority of our products are sold outside of the United States. Accordingly, we are subject to the risks generally associated with global trade and doing business abroad, which include foreign laws and regulations, varying consumer preferences across geographic regions, political unrest, disruptions or delays in cross-border shipments, and changes in economic conditions in countries in which we manufacture or sell products. In addition, disease outbreaks, terrorist acts and military conflict have increased the risks of doing business abroad. These factors, among others, could affect our ability to manufacture products or procure materials, our ability to import products, our ability to sell products in international markets, and our cost of doing business. If any of these or other factors make the conduct of business in a particular country undesirable or impractical, our business could be adversely affected. In addition, many of our imported products are subject to duties, tariffs, or quotas that affect the cost and quantity of various types of goods imported into the United States and other countries. Any country in which our products are produced or sold may eliminate, adjust or impose new quotas, duties, tariffs, safeguard measures, anti-dumping duties, cargo restrictions to prevent terrorism, restrictions on the transfer of currency, climate change legislation, product safety regulations or other charges or restrictions, any of which could have an adverse effect on our results of operations and financial condition.
Changes in tax laws and unanticipated tax liabilities could adversely affect our effective income tax rate and profitability.
We are subject to income taxes in the United States and numerous foreign jurisdictions. Our effective income tax rate in the future could be adversely affected by a number of factors, including: changes in the mix of earnings in countries with differing statutory tax rates, changes in the valuation of deferred tax assets and liabilities, changes in tax laws, the outcome of income tax audits in various jurisdictions around the world, and any repatriation of non-US earnings for which we have not previously provided for U.S. taxes. We regularly assess all of these matters to determine the adequacy of our tax provision, which is subject to significant discretion.
Currency exchange rate fluctuations could result in higher costs and decreased margins and earnings.
A majority of our products are sold outside of the United States. As a result, we conduct transactions in various currencies, which increase our exposure to fluctuations in foreign currency exchange rates relative to the U.S. dollar. Our international revenues and expenses generally are derived from sales and operations in foreign currencies, and these revenues and expenses could be affected by currency fluctuations, including amounts recorded in foreign currencies and translated into U.S. dollars for consolidated financial reporting. Currency exchange rate fluctuations could also disrupt the business of the independent manufacturers that produce our products by making their purchases of raw materials more expensive and more difficult to finance. Foreign currency fluctuations could have an adverse effect on our results of operations and financial condition.
Our hedging activities (see Note 17 — Risk Management and Derivatives in the accompanying Notes to the Consolidated Financial Statements), which are designed to minimize and delay, but not to completely eliminate, the effects of foreign currency fluctuations may not sufficiently mitigate the impact of foreign currencies on our financial results. Factors that could affect the effectiveness of our hedging activities include accuracy of sales forecasts, volatility of currency markets, and the availability of hedging instruments. Since the hedging activities are designed to minimize volatility, they not only reduce the negative impact of a stronger U.S. dollar, but they
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also reduce the positive impact of a weaker U.S. dollar. Our future financial results could be significantly affected by the value of the U.S. dollar in relation to the foreign currencies in which we conduct business. The degree to which our financial results are affected for any given time period will depend in part upon our hedging activities.
Our products are subject to risks associated with overseas sourcing, manufacturing, and financing.
The principal materials used in our apparel products — natural and synthetic fabrics and threads, plastic and metal hardware, and specialized performance fabrics designed to repel rain, retain heat, or efficiently transport body moisture — are available in countries where our manufacturing takes place. The principal materials used in our footwear products — natural and synthetic rubber, plastic compounds, foam cushioning materials, nylon, leather, canvas and polyurethane films — are also locally available to manufacturers. NIKE contractors and suppliers buy raw materials in bulk.
There could be a significant disruption in the supply of fabrics or raw materials from current sources or, in the event of a disruption, we might not be able to locate alternative suppliers of materials of comparable quality at an acceptable price, or at all. In addition, we cannot be certain that our unaffiliated manufacturers will be able to fill our orders in a timely manner. If we experience significant increases in demand, or need to replace an existing manufacturer, there can be no assurance that additional supplies of fabrics or raw materials or additional manufacturing capacity will be available when required on terms that are acceptable to us, or at all, or that any supplier or manufacturer would allocate sufficient capacity to us in order to meet our requirements. In addition, even if we are able to expand existing or find new manufacturing or sources of materials, we may encounter delays in production and added costs as a result of the time it takes to train suppliers and manufacturers in our methods, products, quality control standards, and labor, health and safety standards. Any delays, interruption or increased costs in the supply of materials or manufacture of our products could have an adverse effect on our ability to meet retail customer and consumer demand for our products and result in lower revenues and net income both in the short and long-term.
Because independent manufacturers manufacture a majority of our products outside of our principal sales markets, our products must be transported by third parties over large geographic distances. Delays in the shipment or delivery of our products due to the availability of transportation, work stoppages, port strikes, infrastructure congestion, or other factors, and costs and delays associated with consolidating or transitioning between manufacturers, could adversely impact our financial performance. In addition, manufacturing delays or unexpected demand for our products may require us to use faster, but more expensive, transportation methods such as aircraft, which could adversely affect our profit margins. The cost of fuel is a significant component in manufacturing and transportation costs, so increases in the price of petroleum products can adversely affect our profit margins.
In addition, Sojitz America performs significant import-export financing services for most of the NIKE Brand products sold outside of the United States, Europe, Middle East, Africa, and Japan, excluding products produced and sold in the same country. Any failure of Sojitz America to provide these services or any failure of Sojitz America’s banks could disrupt our ability to acquire products from our suppliers and to deliver products to our customers outside of the United States, Europe, Middle East, Africa, and Japan. Such a disruption could result in cancelled orders that would adversely affect sales and profitability.
Natural disasters could negatively impact our operating results and financial condition. The March 11, 2011 Japanese earthquake and resulting tsunami negatively affected our Japanese revenue and profits for the fourth quarter ended May 31, 2011, and we expect those events to continue to adversely affect us during fiscal year 2012.
Natural disasters such as earthquakes, hurricanes, tsunamis or other adverse weather and climate conditions, whether occurring in the U.S. or abroad, and the consequences and effects thereof, including energy shortages and public health issues, could disrupt our operations, or the operations of our vendors and other suppliers, or result in economic instability that may negatively impact our operating results and financial condition.
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On March 11, 2011, Japan experienced a significant earthquake and resulting tsunami. The implications from ongoing events and widespread damage to the nation’s infrastructure, consumer confidence and overall economy remain unclear. Our revenues and profits for our Japan businesses were negatively impacted during the fourth quarter of fiscal year 2011, and although we cannot fully assess the future financial impact of these ongoing events, we do expect our Japanese businesses to continue to be adversely impacted throughout fiscal 2012.
Our success depends on our global distribution facilities.
We distribute our products to customers directly from the factory and through distribution centers located throughout the world. Our ability to meet customer expectations, manage inventory, complete sales and achieve objectives for operating efficiencies depends on the proper operation of our distribution facilities, the development or expansion of additional distribution capabilities, and the timely performance of services by third parties (including those involved in shipping product to and from our distribution facilities). Our distribution facilities could be interrupted by information technology problems and disasters such as earthquakes or fires. Any significant failure in our distribution facilities could result in an adverse affect on our business. We maintain business interruption insurance, but it may not adequately protect us from adverse effects that could be caused by significant disruptions in our distribution facilities.
We rely significantly on information technology to operate our business, including our supply chain and retail operations, and any failure, inadequacy, interruption or security failure of that technology could harm our reputation or our ability to effectively operate our business.
We are heavily dependent on information technology systems across our supply chain, including product design, production, forecasting, ordering, manufacturing, transportation, sales, and distribution. Our ability to effectively manage and maintain our inventory and to ship products to customers on a timely basis depends significantly on the reliability of these supply chain systems. Over the last several years, as part of the ongoing initiative to upgrade our worldwide supply chain, we have implemented new systems in all of our geographical regions in which we operate. Over the next few years, we will work to continue to enhance the systems and related processes in our global operations. The failure of these systems to operate effectively, problems with transitioning to upgraded or replacement systems, or a breach in security of these systems could cause delays in product fulfillment and reduced efficiency of our operations, could require significant capital investments to remediate the problem, and may have an adverse effect on our results of operations and financial condition.
Hackers and data thieves are increasingly sophisticated and operate large scale and complex automated attacks. Any breach of our network may result in the loss of valuable business data, our customers’ or employees’ personal information or a disruption of our business, which could give rise to unwanted media attention, damage our customer relationships and reputation and result in lost sales, fines or lawsuits. In addition, we must comply with increasingly complex regulatory standards enacted to protect this business and personal data. An inability to maintain compliance with these regulatory standards could subject us to legal risks.
Our financial results may be adversely affected if substantial investments in businesses and operations fail to produce expected returns.
From time to time, we may invest in business infrastructure, acquisitions of new businesses, and expansion of existing businesses, such as our retail operations, which require substantial cash investments and management attention. We believe cost effective investments are essential to business growth and profitability. However, significant investments are subject to typical risks and uncertainties inherent in acquiring or expanding a business. The failure of any significant investment to provide the returns or profitability we expect could have a material adverse effect on our financial results and divert management attention from more profitable business operations.
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We depend on key personnel, the loss of whom would harm our business.
Our future success will depend in part on the continued service of key executive officers and personnel. The loss of the services of any key individual could harm us. Our future success also depends on our ability to identify, attract and retain additional qualified personnel. Competition for employees in our industry is intense and we may not be successful in attracting and retaining such personnel.
The sale of a large number of shares held by our Chairman could depress the market price of our common stock.
Philip H. Knight, Co-founder and Chairman of our Board of Directors, beneficially owns over 74.6% of our Class A Common Stock. If all of his Class A Common Stock were converted into Class B Common Stock, Mr. Knight would own over 17.8% of our Class B Common Stock. These shares are available for resale, subject to the requirements of the U.S. securities laws. The sale or prospect of the sale of a substantial number of these shares could have an adverse effect on the market price of our common stock.
Anti-takeover provisions may impair an acquisition of the Company or reduce the price of our common stock.
There are provisions of our articles of incorporation and Oregon law that are intended to protect shareholder interests by providing the Board of Directors a means to attempt to deny coercive takeover attempts or to negotiate with a potential acquirer in order to obtain more favorable terms. Such provisions include a control share acquisition statute, a freezeout statute, two classes of stock that vote separately on certain issues, and the fact that holders of Class A Common Stock elect three-fourths of the Board of Directors rounded down to the next whole number. However, such provisions could discourage, delay or prevent an unsolicited merger, acquisition or other change in control of our company that some shareholders might believe to be in their best interests or in which shareholders might receive a premium for their common stock over the prevailing market price. These provisions could also discourage proxy contests for control of the Company.
We may fail to meet analyst expectations, which could cause the price of our stock to decline.
Our Class B Common Stock is traded publicly, and at any given time various securities analysts follow our financial results and issue reports on us. These reports include information about our historical financial results as well as the analysts’ estimates of our future performance. The analysts’ estimates are based upon their own opinions and are often different from our estimates or expectations. If our operating results are below the estimates or expectations of public market analysts and investors, our stock price could decline. In the past, securities class action litigation has been brought against NIKE and other companies following a decline in the market price of their securities. If our stock price is volatile, we may become involved in this type of litigation in the future. Any litigation could result in substantial costs and a diversion of management’s attention and resources that are needed to successfully run our business.
| Item 1B. | Unresolved Staff Comments |
Not applicable.
| Item 2. | Properties |
The following is a summary of principal properties owned or leased by NIKE.
The NIKE World Campus, owned by NIKE and located in Beaverton, Oregon, USA, is a 176 acre facility of 18 buildings which functions as our world headquarters and is occupied by approximately 6,000 employees engaged in management, research, design, development, marketing, finance, and other administrative functions from nearly all of our divisions. We also lease various office facilities in the surrounding metropolitan area. We
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lease a similar, but smaller, administrative facility in Hilversum, the Netherlands, which serves as the headquarters for the Western Europe and Central & Eastern Europe geographies. There are three significant distribution and customer service facilities for NIKE Brand products, including NIKE Golf, in the United States. All three of them are located in Memphis, Tennessee, two of which are owned and one of which is leased. NIKE also operates and leases one facility in Memphis, Tennessee for NIKE Brand product returns. NIKE Brand apparel and equipment are also shipped from our Foothill Ranch, California distribution center, which we lease. Cole Haan also operates a distribution facility in Greenland, New Hampshire, which we lease. Smaller leased distribution facilities for other brands and non-NIKE Brand businesses are located in various parts of the United States. We also own or lease distribution and customer service facilities in many parts of the world, the most significant of which are the distribution facilities located in Tomisatomachi, Japan, Laakdal, Belgium, and Taicang, China, all of which we own.
We manufacture Air-Sole cushioning materials and components at NIKE IHM, Inc. manufacturing facilities located in Beaverton, Oregon and St. Charles, Missouri, which we own. We also manufacture and sell small amounts of various plastic products to other manufacturers through NIKE IHM, Inc.
Aside from the principal properties described above, we lease three production offices outside the United States, over 100 sales offices and showrooms worldwide, and approximately 65 administrative offices worldwide. We lease more than 700 retail stores worldwide, which consist primarily of factory outlet stores. See “United States Market” and “International Markets” starting on pages 2 and 3 of this Report, respectively. Our leases expire at various dates through the year 2035.
| Item 3. | Legal Proceedings |
There are no material pending legal proceedings, other than ordinary routine litigation incidental to our business, to which we are a party or of which any of our property is the subject.
| Item 4. | Reserved |
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PART II
| Item 5. | Market for Registrant’s Common Equity, Related Stockholder Matters and Issuer Purchases of Equity Securities |
NIKE’s Class B Common Stock is listed on the New York Stock Exchange and trades under the symbol NKE. At July 18, 2011, there were 16,400 holders of record of our Class B Common Stock and 19 holders of record of our Class A Common Stock. These figures do not include beneficial owners who hold shares in nominee name. The Class A Common Stock is not publicly traded but each share is convertible upon request of the holder into one share of Class B Common Stock. The following tables set forth, for each of the quarterly periods indicated, the high and low sales prices for the Class B Common Stock as reported on the New York Stock Exchange Composite Tape and dividends declared on the Class A and Class B Common Stock.
| Fiscal 2011 (June 1, 2010 — May 31, 2011) |
High | Low | Dividends Declared |
|||||||||
| First Quarter |
$ | 74.94 | $ | 67.21 | $ | 0.27 | ||||||
| Second Quarter |
86.53 | 72.13 | 0.31 | |||||||||
| Third Quarter |
92.30 | 81.46 | 0.31 | |||||||||
| Fourth Quarter |
89.88 | 75.45 | 0.31 | |||||||||
| Fiscal 2010 (June 1, 2009 — May 31, 2010) |
High | Low | Dividends Declared |
|||||||||
| First Quarter |
$ | 59.95 | $ | 50.16 | $ | 0.25 | ||||||
| Second Quarter |
66.35 | 53.22 | 0.27 | |||||||||
| Third Quarter |
67.85 | 60.89 | 0.27 | |||||||||
| Fourth Quarter |
78.55 | 66.99 | 0.27 | |||||||||
The following table presents a summary of share repurchases made by NIKE during the quarter ended May 31, 2011 under the four-year, $5 billion share repurchase program approved by our Board of Directors in September 2008.
| Period |
Total Number of Shares Purchased |
Average Price Paid per Share |
Total Number of Shares Purchased as Part of Publicly Announced Plans or Programs |
Maximum Dollar Value of Shares that May Yet Be Purchased Under the Plans or Programs |
||||||||||||
| (In millions) | ||||||||||||||||
| March 1 — March 31, 2011 |
2,800,000 | $ | 81.76 | 2,800,000 | $ | 3,052 | ||||||||||
| April 1 — April 30, 2011 |
2,650,000 | $ | 78.92 | 2,650,000 | $ | 2,843 | ||||||||||
| May 1 — May 31, 2011 |
2,011,100 | $ | 83.77 | 2,011,100 | $ | 2,675 | ||||||||||
| 7,461,100 | $ | 81.29 | 7,461,100 | |||||||||||||
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Performance Graph
The following graph demonstrates a five-year comparison of cumulative total returns for NIKE’s Class B Common Stock, the Standard & Poor’s 500 Stock Index, the Standard & Poor’s Apparel, Accessories & Luxury Goods Index, and the Dow Jones U.S. Footwear Index. The graph assumes an investment of $100 on May 31, 2006 in each of our Class B Common Stock, and the stocks comprising the Standard & Poor’s 500 Stock Index, the Standard & Poor’s Apparel, Accessories & Luxury Goods Index, and the Dow Jones U.S. Footwear Index. Each of the indices assumes that all dividends were reinvested.
COMPARISON OF 5-YEAR CUMULATIVE TOTAL RETURN AMONG NIKE, INC.; S&P 500
INDEX; S&P APPAREL, ACCESSORIES & LUXURY GOODS INDEX;
AND THE DOW JONES U.S. FOOTWEAR INDEX
The Dow Jones U.S. Footwear Index consists of NIKE, Deckers Outdoor Corp., Timberland Co., Wolverine World Wide, Inc., Iconix Brand Group Inc., and Skechers US, Inc. Because NIKE is part of the Dow Jones U.S. Footwear Index, the price and returns of NIKE stock have a substantial effect on this index. The Standard & Poor’s Apparel, Accessories & Luxury Goods Index consists of VF Corp., Coach, Inc., and Polo Ralph Lauren Corporation. The Dow Jones U.S. Footwear Index and the Standard & Poor’s Apparel, Accessories, and Luxury Goods Index include companies in two major lines of business in which the Company competes. The indices do not encompass all of the Company’s competitors, nor all product categories and lines of business in which the Company is engaged.
The stock performance shown on the performance graph above is not necessarily indicative of future performance. The Company will not make nor endorse any predictions as to future stock performance.
The performance graph above is being furnished solely to accompany this Report pursuant to Item 201(e) of Regulation S-K, and is not being filed for purposes of Section 18 of the Securities Exchange Act of 1934, as amended, and is not to be incorporated by reference into any filing of the Company, whether made before or after the date hereof, regardless of any general incorporation language in such filing.
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| Item 6. | Selected Financial Data |
| Financial History | ||||||||||||||||||||
| 2011 | 2010 | 2009 | 2008 | 2007 | ||||||||||||||||
| (In millions, except per share data and financial ratios) | ||||||||||||||||||||
| Year Ended May 31, |
||||||||||||||||||||
| Revenues |
$ | 20,862 | $ | 19,014 | $ | 19,176 | $ | 18,627 | $ | 16,326 | ||||||||||
| Gross margin |
9,508 | 8,800 | 8,604 | 8,387 | 7,161 | |||||||||||||||
| Gross margin % |
45.6 | % | 46.3 | % | 44.9 | % | 45.0 | % | 43.9 | % | ||||||||||
| Restructuring charges |
— | — | 195 | — | — | |||||||||||||||
| Goodwill impairment |
— | — | 199 | — | — | |||||||||||||||
| Intangible and other asset impairment |
— | — | 202 | — | — | |||||||||||||||
| Net income |
2,133 | 1,907 | 1,487 | 1,883 | 1,492 | |||||||||||||||
| Basic earnings per common share |
4.48 | 3.93 | 3.07 | 3.80 | 2.96 | |||||||||||||||
| Diluted earnings per common share |
4.39 | 3.86 | 3.03 | 3.74 | 2.93 | |||||||||||||||
| Weighted average common shares outstanding |
475.5 | 485.5 | 484.9 | 495.6 | 503.8 | |||||||||||||||
| Diluted weighted average common shares outstanding |
485.7 | 493.9 | 490.7 | 504.1 | 509.9 | |||||||||||||||
| Cash dividends declared per common share |
1.20 | 1.06 | 0.98 | 0.875 | 0.71 | |||||||||||||||
| Cash flow from operations |
1,812 | 3,164 | 1,736 | 1,936 | 1,879 | |||||||||||||||
| Price range of common stock |
||||||||||||||||||||
| High |
92.30 | 78.55 | 70.28 | 70.60 | 57.12 | |||||||||||||||
| Low |
67.21 | 50.16 | 38.24 | 51.50 | 37.76 | |||||||||||||||
| At May 31, |
||||||||||||||||||||
| Cash and equivalents |
$ | 1,955 | $ | 3,079 | $ | 2,291 | $ | 2,134 | $ | 1,857 | ||||||||||
| Short-term investments |
2,583 | 2,067 | 1,164 | 642 | 990 | |||||||||||||||
| Inventories |
2,715 | 2,041 | 2,357 | 2,438 | 2,122 | |||||||||||||||
| Working capital |
7,339 | 7,595 | 6,457 | 5,518 | 5,493 | |||||||||||||||
| Total assets |
14,998 | 14,419 | 13,250 | 12,443 | 10,688 | |||||||||||||||
| Long-term debt |
276 | 446 | 437 | 441 | 410 | |||||||||||||||
| Redeemable Preferred Stock |
0.3 | 0.3 | 0.3 | 0.3 | 0.3 | |||||||||||||||
| Shareholders’ equity |
9,843 | 9,754 | 8,693 | 7,825 | 7,025 | |||||||||||||||
| Year-end stock price |
84.45 | 72.38 | 57.05 | 68.37 | 56.75 | |||||||||||||||
| Market capitalization |
39,523 | 35,032 | 27,698 | 33,577 | 28,472 | |||||||||||||||
| Financial Ratios: |
||||||||||||||||||||
| Return on equity |
21.8 | % | 20.7 | % | 18.0 | % | 25.4 | % | 22.4 | % | ||||||||||
| Return on assets |
14.5 | % | 13.8 | % | 11.6 | % | 16.3 | % | 14.5 | % | ||||||||||
| Inventory turns |
4.8 | 4.6 | 4.4 | 4.5 | 4.4 | |||||||||||||||
| Current ratio at May 31 |
2.9 | 3.3 | 3.0 | 2.7 | 3.1 | |||||||||||||||
| Price/Earnings ratio at May 31 |
19.2 | 18.8 | 18.8 | 18.3 | 19.4 | |||||||||||||||
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Selected Quarterly Financial Data
| 1st Quarter | 2nd Quarter | 3rd Quarter | 4th Quarter | |||||||||||||||||||||||||||||
| 2011 | 2010 | 2011 | 2010 | 2011 | 2010 | 2011 | 2010 | |||||||||||||||||||||||||
| (Unaudited) (In millions, except per share data) |
||||||||||||||||||||||||||||||||
| Revenues |
$ | 5,175 | $ | 4,799 | $ | 4,842 | $ | 4,405 | $ | 5,079 | $ | 4,733 | $ | 5,766 | $ | 5,077 | ||||||||||||||||
| Gross margin |
2,434 | 2,216 | 2,193 | 1,960 | 2,327 | 2,218 | 2,554 | 2,406 | ||||||||||||||||||||||||
| Gross margin % |
47.0 | % | 46.2 | % | 45.3 | % | 44.5 | % | 45.8 | % | 46.9 | % | 44.3 | % | 47.4 | % | ||||||||||||||||
| Net income |
559 | 513 | 457 | 375 | 523 | 496 | 594 | 522 | ||||||||||||||||||||||||
| Basic earnings per common share |
1.17 | 1.06 | 0.96 | 0.77 | 1.10 | 1.02 | 1.27 | 1.08 | ||||||||||||||||||||||||
| Diluted earnings per common share |
1.14 | 1.04 | 0.94 | 0.76 | 1.08 | 1.01 | 1.24 | 1.06 | ||||||||||||||||||||||||
| Weighted average common shares outstanding |
479.6 | 485.8 | 477.9 | 487.2 | 475.3 | 484.4 | 469.3 | 484.4 | ||||||||||||||||||||||||
| Diluted weighted average common shares outstanding |
488.6 | 491.6 | 487.6 | 494.5 | 485.5 | 492.3 | 478.7 | 493.9 | ||||||||||||||||||||||||
| Cash dividends declared per common share |
0.27 | 0.25 | 0.31 | 0.27 | 0.31 | 0.27 | 0.31 | 0.27 | ||||||||||||||||||||||||
| Price range of common stock |
||||||||||||||||||||||||||||||||
| High |
74.94 | 59.95 | 86.53 | 66.35 | 92.30 | 67.85 | 89.88 | 78.55 | ||||||||||||||||||||||||
| Low |
67.21 | 50.16 | 72.13 | 53.22 | 81.46 | 60.89 | 75.45 | 66.99 | ||||||||||||||||||||||||
| Item 7. | Management’s Discussion and Analysis of Financial Condition and Results of Operations |
NIKE designs, develops, markets and sells high quality footwear, apparel, equipment and accessory products worldwide. We are the largest seller of athletic footwear and apparel in the world. We sell our products to retail accounts, through NIKE-owned retail stores and internet sales, which we refer to as our “Direct to Consumer” operations, and through a mix of independent distributors and licensees, worldwide. Our goal is to deliver value to our shareholders by building a profitable global portfolio of branded footwear, apparel, equipment and accessories businesses. Our strategy is to achieve long-term revenue growth by creating innovative, “must have” products, building deep personal consumer connections with our brands, and delivering compelling retail presentation and experiences.
In addition to achieving long-term revenue growth, we continue to strive to deliver shareholder value by driving operational excellence in several key areas:
| • | Making our supply chain a competitive advantage through operational discipline, |
| • | Reducing product costs through a continued focus on lean manufacturing and product design that strives to eliminate waste, |
| • | Improving selling and administrative expense productivity by focusing on investments that drive economic returns in the form of incremental revenue and gross margin, and leveraging existing infrastructure across our portfolio of brands to eliminate duplicative costs, |
| • | Improving working capital efficiency, and |
| • | Deploying capital effectively to create value for our shareholders. |
Through execution of this strategy, our long-term financial goals continue to be:
| • | High single-digit revenue growth, |
| • | Mid-teens earnings per share growth, |
| • | Increased return on invested capital and accelerated cash flows, and |
| • | Consistent results through effective management of our diversified portfolio of businesses. |
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Over the past ten years, we have achieved or exceeded all of these financial goals. During this time, NIKE, Inc’s revenues and earnings per share have grown 8% and 15%, respectively, on an annual compounded basis. Our return on invested capital has increased from 14% to 22% and we expanded gross margins by more than 5 percentage points.
Our fiscal 2011 results demonstrated our continued focus toward meeting our financial goals, while positioning ourselves for sustainable, profitable long-term growth. Despite the uncertain macroeconomic environment in fiscal 2011, we delivered record high revenues and diluted earnings per share. Our revenues grew 10% to $20.9 billion, net income increased 12% to $2.1 billion, and we delivered diluted earnings per share of $4.39, a 14% increase from fiscal 2010.
Income before income taxes increased 13% for fiscal 2011 primarily as a result of the increase in revenues and leverage on selling and administrative expense, which more than offset a decrease in gross margin percentage. The increase in revenues is reflective of increased demand for NIKE Brand footwear and apparel products across most businesses, particularly in the North America, Emerging Markets and Greater China geographies. Demand for our NIKE Brand footwear and apparel was fueled by our innovative products as well as strong category focused retail presentations. The decrease in gross margin percentage was primarily driven by higher product input costs, increased transportation expenses and a lower mix of licensee revenue as certain markets within our Other Businesses transitioned to NIKE, Inc. owned markets. These factors more than offset the positive impact from the growth and expanding profitability of our NIKE Brand Direct to Consumer business and our ongoing product cost reduction initiatives.
Net income for fiscal 2011 was negatively impacted by a year-over-year increase of 80 basis points in our effective tax rate, driven primarily by an increase in the percentage of total pre-tax income earned from operations in the United States. The United States statutory tax rate is generally higher than the tax rate on operations outside the United States.
For the year, diluted earnings per share grew at a higher rate than net income due to a 2% decrease in the weighted average number of diluted common shares outstanding driven by our share repurchases during fiscal 2011. While we increased the use of working capital in fiscal 2011 to support the growth of our businesses, we returned larger amounts of cash to our shareholders through higher dividends and increased share repurchases compared to fiscal 2010.
While we continue to believe that the Company is well positioned from a business and financial perspective, our future performance is subject to the inherent uncertainty presented by volatile macroeconomic conditions that may have an impact on our operations around the world. Our future performance is subject to our continued ability to take appropriate actions to respond to these conditions.
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Results of Operations
| Fiscal 2011 | Fiscal 2010 | FY11 vs. FY10 % Change |
Fiscal 2009 | FY10 vs. FY09 % Change |
||||||||||||||||
| (In millions, except per share data) | ||||||||||||||||||||
| Revenues |
$ | 20,862 | $ | 19,014 | 10 | % | $ | 19,176 | -1 | % | ||||||||||
| Cost of sales |
11,354 | 10,214 | 11 | % | 10,572 | -3 | % | |||||||||||||
| Gross margin |
9,508 | 8,800 | 8 | % | 8,604 | 2 | % | |||||||||||||
| Gross margin % |
45.6 | % | 46.3 | % | 44.9 | % | ||||||||||||||
| Demand creation expense |
2,448 | 2,356 | 4 | % | 2,352 | 0 | % | |||||||||||||
| Operating overhead expense |
4,245 | 3,970 | 7 | % | 3,798 | 5 | % | |||||||||||||
| Total selling and administrative expense |
6,693 | 6,326 | 6 | % | 6,150 | 3 | % | |||||||||||||
| % of Revenues |
32.1 | % | 33.3 | % | 32.1 | % | ||||||||||||||
| Restructuring charges |
— | — | — | 195 | — | |||||||||||||||
| Goodwill impairment |
— | — | — | 199 | — | |||||||||||||||
| Intangible and other asset impairment |
— | — | — | 202 | — | |||||||||||||||
| Income before income taxes |
2,844 | 2,517 | 13 | % | 1,957 | 29 | % | |||||||||||||
| Net income |
2,133 | 1,907 | 12 | % | 1,487 | 28 | % | |||||||||||||
| Diluted earnings per share |
4.39 | 3.86 | 14 | % | 3.03 | 27 | % | |||||||||||||
Consolidated Operating Results
Revenues
| Fiscal 2011 | Fiscal 2010 | FY11 vs. FY10 % Change |
FY11
vs. FY10 % Change Excluding Currency Changes(1) |
Fiscal 2009 | FY10 vs. FY09 % Change |
FY10
vs. FY09 % Change Excluding Currency Changes(1) |
||||||||||||||||||||||
| (In millions) | ||||||||||||||||||||||||||||
| Revenues |
$ | 20,862 | $ | 19,014 | 10 | % | 10 | % | $ | 19,176 | -1 | % | -2 | % | ||||||||||||||
| (1) | Results have been restated using constant exchange rates for the comparative period to enhance the visibility of the underlying business trends excluding the impact of foreign currency exchange rate fluctuations. |
Fiscal 2011 Compared to Fiscal 2010
On both a reported and currency neutral basis, revenues for NIKE, Inc. grew 10% for fiscal 2011, driven by increases in revenues for both the NIKE Brand and our Other Businesses. On a currency neutral basis, revenues for the NIKE Brand increased 10% for fiscal 2011, while revenues for our Other Businesses increased 8%. Excluding the effects of changes in currency exchange rates, every NIKE Brand geography except Japan delivered higher revenues for fiscal 2011, led by North America, which contributed approximately 5 percentage points to the NIKE Brand revenue increase. The Emerging Markets and Greater China contributed approximately 3 and 2 percentage points to the NIKE Brand revenue growth, respectively.
By product group, NIKE Brand footwear and apparel revenue increased 11% and 9%, respectively, while NIKE Brand equipment revenues declined 2% during fiscal 2011. Fueling the growth of our NIKE Brand footwear business was the increased demand in our performance products, including the NIKE Lunar and Free technologies which are used across multiple categories. The increase in NIKE Brand footwear revenue for fiscal 2011 was attributable to a high single-digit percentage increase in unit sales along with a low single-digit percentage increase in the average selling price per pair. The increase in unit sales was primarily driven by double-digit percentage growth in Running, Men’s Training, Action Sports and Women’s Training products, while the increase in average selling price per pair was primarily driven by price increases on selected products
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and fewer close-outs as a percentage of total sales. For NIKE Brand apparel, the increase in revenue for fiscal 2011 was primarily driven by a low double-digit percentage increase in unit sales attributable to strong category presentations and improved product lines, while the average selling price per unit was relatively flat. The increase in unit sales was driven by increased demand in all key categories.
While wholesale revenues remain the largest component of overall NIKE Brand revenues, we continue to see growth in revenue through our Direct to Consumer channels. Our NIKE Brand Direct to Consumer operations include NIKE owned in-line and factory stores, as well as online sales through NIKE owned websites. For fiscal 2011, Direct to Consumer channels represented approximately 16% of our total NIKE Brand revenues compared to 15% in fiscal 2010. On a currency neutral basis, Direct to Consumer revenues grew 16% for fiscal 2011 as we continue to expand our store network, increase comparable store sales and build our e-commerce business. Comparable store sales grew 11% for fiscal 2011. 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.
Revenues for our Other Businesses consist of results from our affiliate brands; Cole Haan, Converse, Hurley and Umbro; and NIKE Golf. Excluding the impact of currency changes, revenues for these businesses increased by 8% in fiscal 2011, reflecting double-digit percentage revenue growth at Converse, Cole Haan and Hurley, and a low single-digit growth at Umbro, which more than offset a mid single-digit revenue decline at NIKE Golf.
Fiscal 2010 Compared to Fiscal 2009
Excluding the effects of changes in currency exchange rates, revenues for NIKE, Inc. declined 2%, driven primarily by a 2% decline in revenues for the NIKE Brand. All of our geographies delivered lower revenues with the exception of Emerging Markets, reflecting a challenging economic environment across most markets, most notably in our Western Europe and Central & Eastern Europe geographies. By product group, revenues for our worldwide NIKE Brand footwear business were down 1% compared to the prior year. Worldwide NIKE Brand apparel and equipment revenues declined 5% and 7%, respectively. Our Direct to Consumer operations represented approximately 15% of our total NIKE Brand revenues in fiscal 2010 as compared to 13% in fiscal 2009.
Excluding the impact of currency changes, revenues for our Other Businesses increased by 4% for fiscal 2010, driven by increased revenues at Converse, Umbro and Hurley, which more than offset revenue declines at NIKE Golf and Cole Haan.
Futures Orders
Futures and advance orders for NIKE Brand footwear and apparel scheduled for delivery from June through November 2011 were 15% higher than the orders reported for the comparable prior year period. This futures and advance order amount is calculated based upon our forecast of the actual exchange rates under which our revenues will be translated during this period, which approximate current spot rates. Excluding the impact of currency changes, futures orders increased 12%, primarily driven by a high single-digit percentage increase in unit sales volume and a low single-digit percentage increase in average price per unit for both footwear and apparel products.
By geography, futures orders growth was as follows:
| Reported Futures Orders Growth |
Futures Orders Excluding Currency Changes(1) |
|||||||
| North America |
+14 | % | +14 | % | ||||
| Western Europe |
+11 | % | +1 | % | ||||
| Central & Eastern Europe |
+13 | % | +10 | % | ||||
| Greater China |
+24 | % | +17 | % | ||||
| Japan |
-13 | % | -6 | % | ||||
| Emerging Markets |
+25 | % | +23 | % | ||||
| Total NIKE Brand Futures Orders |
+15 | % | +12 | % | ||||
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| (1) | Growth rates have been restated using constant exchange rates for the comparative period to enhance the visibility of the underlying business trends excluding the impact of foreign currency exchange rate fluctuations. |
The reported futures and advance 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 and because the mix of orders can shift between advance/futures and at-once orders and the fulfillment of certain orders may fall outside of the schedule noted above. In addition, exchange rate fluctuations as well as differing levels of order cancellations and discounts can cause differences in the comparisons between advance/futures orders and actual revenues. Moreover, a significant portion of our revenue is not derived from futures and advance 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
| Fiscal 2011 | Fiscal 2010 | FY11 vs. FY10 % Change |
Fiscal 2009 | FY10 vs. FY09 % Change |
||||||||||||||||
| (In millions) | ||||||||||||||||||||
| Gross Margin |
$ | 9,508 | $ | 8,800 | 8 | % | $ | 8,604 | 2 | % | ||||||||||
| Gross Margin % |
45.6 | % | 46.3 | % | (70 | ) bps | 44.9 | % | 140 bps | |||||||||||
Fiscal 2011 Compared to Fiscal 2010
For fiscal 2011, our consolidated gross margin percentage was 70 basis points lower than the prior year. The primary factors contributing to this decrease were as follows:
| • | Higher input costs across most businesses, |
| • | Increased transportation costs, including additional air freight incurred to meet strong demand for NIKE Brand products across most businesses, most notably in North America, Western Europe, and Central & Eastern Europe geographies, and |
| • | A lower mix of licensee revenue as distribution for certain markets within our Other Businesses transitioned from licensees to operating units of NIKE, Inc. |
Together, these factors decreased consolidated gross margins by approximately 130 basis points for fiscal 2011, with the most significant erosion in the second half of the fiscal year. These decreases were partially offset by the positive impact from the growth and expanding profitability of our NIKE Brand Direct to Consumer business, a higher mix of full-price sales and favorable impacts from our ongoing product cost efficiency initiatives.
As we head into fiscal 2012, we anticipate that our gross margins will continue to face pressure from macroeconomic factors, most notably rising product input costs as well as higher transportation costs, which may more than offset the favorable impact from our planned price increases and ongoing production cost efficiency initiatives.
Fiscal 2010 Compared to Fiscal 2009
For fiscal 2010, our consolidated gross margin percentage was 140 basis points higher than the prior year. The primary factors contributing to this improvement were as follows:
| • | Improved in-line product margins across most geographies, driven by reduced raw material and freight costs as well as favorable changes in product mix, |
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| • | Improved inventory positions, most notably in North America and Western Europe, which drove a shift in mix from discounted close-out to higher margin in-line sales, and |
| • | Growth of NIKE-owned retail as a percentage of total revenue, across most NIKE Brand geographies, driven by an increase in both new store openings and comparable store sales. |
Together, these factors increased consolidated gross margins by approximately 160 basis points for fiscal 2010. These increases were partially offset by the impact of unfavorable currency exchange rates, primarily affecting our Emerging Markets and Central & Eastern Europe geographies.
Selling and Administrative Expense
| Fiscal 2011 | Fiscal 2010 | FY11 vs. FY10 % Change |
Fiscal 2009 | FY10 vs. FY09 % Change |
||||||||||||||||
| (In millions) | ||||||||||||||||||||
| Demand creation expense(1) |
$ | 2,448 | $ | 2,356 | 4 | % | $ | 2,352 | 0 | % | ||||||||||
| Operating overhead expense |
4,245 | 3,970 | 7 | % | 3,798 | 5 | % | |||||||||||||
| Selling and administrative expense |
$ | 6,693 | $ | 6,326 | 6 | % | $ | 6,150 | 3 | % | ||||||||||
| % of Revenues |
32.1 | % | 33.3 | % | (120 | ) bps | 32.1 | % | 120 bps | |||||||||||
| (1) | Demand creation consists of advertising and promotion expenses, including costs of endorsement contracts. |
Fiscal 2011 Compared to Fiscal 2010
In fiscal 2011, the effect of changes in foreign currency exchange rates did not have a significant impact on selling and administrative expense.
Demand creation expense increased 4% compared to the prior year, primarily driven by a higher level of brand event spending around the World Cup and World Basketball Festival in the first half of fiscal 2011, as well as increased spending around key product initiatives and investments in retail product presentation with wholesale customers.
Operating overhead expense increased 7% compared to the prior year. This increase was primarily attributable to increased investments in our Direct to Consumer operations as well as growth in our wholesale operations, where we incurred higher personnel costs and travel expenses as compared to the prior year.
Fiscal 2010 Compared to Fiscal 2009
In fiscal 2010, changes in currency exchange rates had a minimal impact on demand creation expense. Demand creation expense remained flat compared to the prior year, as increases in sports marketing and digital marketing expenses were offset by reductions in advertising.
Excluding changes in exchange rates, operating overhead expense increased 4% compared to the prior year due primarily to increases in performance-based compensation and investments in our Direct to Consumer operations. These increases were partially offset by reductions in compensation spending in fiscal 2010 as a result of restructuring activities that took place in the fourth quarter of fiscal 2009.
Restructuring Charges
During fiscal 2009, we restructured the organization to streamline our management structure, enhance consumer focus, drive innovation more quickly to market and establish a more scalable cost structure. As a result of these actions, we reduced our global workforce by approximately 5% and incurred pre-tax restructuring charges of $195 million in fiscal 2009, primarily consisting of cash severance costs. These charges are included in “Corporate” for segment reporting purposes.
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Goodwill, Intangibles and Other Assets Impairment
In fiscal 2009, we recognized non-cash impairment charges of $199 million and $202 million relating to Umbro’s goodwill, intangibles and other assets, respectively. Although Umbro’s financial performance for fiscal 2009 was slightly better than we had originally expected, projected future cash flows had fallen below the levels we expected at the time of acquisition. This erosion was a result of both the unprecedented decline in global consumer markets, particularly in the United Kingdom, and our decision to adjust the level of investment in the business.
For additional information about our impairment charges, see Note 4 – Acquisition, Identifiable Intangible Assets, Goodwill and Umbro Impairment in the accompanying Notes to the Consolidated Financial Statements.
Other (Income), net
| Fiscal 2011 | Fiscal 2010 | FY11 vs. FY10 % Change |
Fiscal 2009 | FY10 vs. FY09 % Change |
||||||||||||||||
| (In millions) | ||||||||||||||||||||
| Other (income), net |
$ | (33 | ) | $ | (49 | ) | -33 | % | $ | (89 | ) | -45 | % | |||||||
Fiscal 2011 Compared to Fiscal 2010
Other (income), net is comprised of foreign currency conversion gains and losses from the re-measurement of monetary assets and liabilities in non-functional currencies and the impact of certain foreign currency derivative instruments, as well as unusual or non-recurring transactions that are outside the normal course of business. For fiscal 2011, other (income), net was primarily comprised of net foreign currency gains.
For fiscal 2011, we estimate that the combination of translation of foreign currency-denominated profits from our international businesses and the year-over-year change in foreign currency related net gains included in other (income), net had an unfavorable impact of approximately $33 million on our income before income taxes.
Fiscal 2010 Compared to Fiscal 2009
For fiscal 2010 and 2009, other (income), net was primarily comprised of net foreign currency gains and the recognition of previously deferred licensing income related to our fiscal 2008 sale of NIKE Bauer Hockey.
For fiscal 2010, we estimate that the combination of translation of foreign currency-denominated profits from our international businesses and the year-over-year change in foreign currency related net gains included in other (income), net increased our income before income taxes by approximately $34 million.
Income Taxes
| Fiscal 2011 | Fiscal 2010 | FY11 vs. FY10 % Change |
Fiscal 2009 | FY10 vs. FY09 % Change |
||||||||||||||||
| Effective tax rate |
25.0 | % | 24.2 | % | 80 bps | 24.0 | % | 20 bps | ||||||||||||
Fiscal 2011 Compared to Fiscal 2010
Our effective tax rate for fiscal 2011 was 80 basis points higher than the effective rate for fiscal 2010 due primarily to the change in geographic mix of earnings. A larger percentage of our earnings in fiscal 2011 were attributable to operations in the U.S., where the statutory tax rate is generally higher than the tax rate on operations outside of the U.S. This impact was partially offset by changes to uncertain tax positions.
Fiscal 2010 Compared to Fiscal 2009
Our effective tax rate for fiscal 2010 was 20 basis points higher than the effective rate for fiscal 2009. Our effective tax rate for fiscal 2009 includes a tax benefit related to charges recorded for the impairment of Umbro’s
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goodwill, intangible and other assets. Excluding this tax benefit, our effective rate for fiscal 2009 would have been 26.5%, 230 basis points higher than our effective tax rate for fiscal 2010. The decrease in our effective tax rate for fiscal 2010 was primarily attributable to our international operations, as tax rates for these operations are generally lower than the U.S. statutory rate.
Operating Segments
The Company’s reportable operating segments are based on our internal geographic organization. Each NIKE Brand geography operates 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 rates are assigned to each NIKE Brand entity in our geographic operating segments and are used to record any non-functional currency revenues or product purchases into the entity’s functional currency. Geographic operating segment revenues and cost of sales reflect use of these standard rates. For all NIKE Brand operating segments, 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 our centrally managed foreign exchange risk management program. Prior to fiscal 2010, all foreign currency results, including hedge results and other conversion gains and losses generated by the Western Europe and Central & Eastern Europe geographies were recorded in their respective geographic results.
Certain prior year amounts have been reclassified to conform to fiscal 2011 presentation, as South Africa became part of the Emerging Markets operating segment beginning June 1, 2010. Previously, South Africa was part of the Central & Eastern Europe operating segment.
The breakdown of revenues follows:
| Fiscal 2011 | Fiscal 2010(1) | FY11 vs. FY10 % Change |
FY11
vs. FY10 % Change Excluding Currency Changes(2) |
Fiscal 2009(1) | FY10 vs. FY09 % Change |
FY10
vs. FY09 % Change Excluding Currency Changes(2) |
||||||||||||||||||||||
| (In millions) | ||||||||||||||||||||||||||||
| North America |
$ | 7,578 | $ | 6,696 | 13 | % | 13 | % | $ | 6,778 | -1 | % | -1 | % | ||||||||||||||
| Western Europe |
3,810 | 3,892 | -2 | % | 4 | % | 4,139 | -6 | % | -6 | % | |||||||||||||||||
| Central & Eastern Europe |
1,031 | 993 | 4 | % | 7 | % | 1,247 | -20 | % | -19 | % | |||||||||||||||||
| Greater China |
2,060 | 1,742 | 18 | % | 16 | % | 1,743 | 0 | % | 0 | % | |||||||||||||||||
| Japan |
766 | 882 | -13 | % | -21 | % | 926 | -5 | % | -12 | % | |||||||||||||||||
| Emerging Markets |
2,736 | 2,199 | 24 | % | 19 | % | 1,828 | 20 | % | 17 | % | |||||||||||||||||
| Global Brand Divisions |
123 | 105 | 17 | % | 21 | % | 96 | 9 | % | 12 | % | |||||||||||||||||
| Total NIKE Brand Revenues |
18,104 | 16,509 | 10 | % | 10 | % | 16,757 | -1 | % | -2 | % | |||||||||||||||||
| Other Businesses |
2,747 | 2,530 | 9 | % | 8 | % | 2,419 | 5 | % | 4 | % | |||||||||||||||||
| Corporate(3) |
11 | (25 | ) | — | — | — | — | — | ||||||||||||||||||||
| Total NIKE, Inc. Revenues |
$ | 20,862 | $ | 19,014 | 10 | % | 10 | % | $ | 19,176 | -1 | % | -2 | % | ||||||||||||||
| (1) | Certain prior year amounts have been reclassified to conform to fiscal year 2011 presentation. These changes had no impact on previously reported results of operations or shareholders’ equity. |
| (2) | Results have been restated using constant exchange rates for the comparative period to enhance the visibility of the underlying business trends excluding the impact of foreign currency exchange rate fluctuations. |
| (3) | Corporate revenues primarily consist of foreign currency hedge gains and losses generated by entities within the NIKE Brand geographic operating segments but managed through our central foreign exchange risk |
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| management program, and foreign currency gains and losses resulting from the difference between actual foreign currency rates and standard rates assigned to these entities, which are used to record any non-functional currency revenues into the entity’s functional currency. |
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 expense (income), net and income taxes in the consolidated statements of income. As discussed in Note 18 — Operating Segments and Related Information in the accompanying Notes to the Consolidated Financial Statements, certain corporate costs are not included in EBIT of our operating segments.
The breakdown of earnings before interest and taxes is as follows:
| Fiscal 2011 | Fiscal 2010(1) | FY11 vs. FY10 % Change |
Fiscal 2009(1) | FY10 vs. FY09 % Change |
||||||||||||||||
| (In millions) | ||||||||||||||||||||
| North America |
$ | 1,750 | $ | 1,538 | 14 | % | $ | 1,429 | 8 | % | ||||||||||
| Western Europe |
721 | 856 | -16 | % | 939 | -9 | % | |||||||||||||
| Central & Eastern Europe |
233 | 253 | -8 | % | 394 | -36 | % | |||||||||||||
| Greater China |
777 | 637 | 22 | % | 575 | 11 | % | |||||||||||||
| Japan |
114 | 180 | -37 | % | 205 | -12 | % | |||||||||||||
| Emerging Markets |
688 | 521 | 32 | % | 364 | 43 | % | |||||||||||||
| Global Brand Divisions |
(998 | ) | (867 | ) | -15 | % | (811 | ) | -7 | % | ||||||||||
|
|
|
|
|
|
|
|||||||||||||||
| Total NIKE Brand |
3,285 | 3,118 | 5 | % | 3,095 | 1 | % | |||||||||||||
| Other Businesses |
334 | 299 | 12 | % | (193 | ) | — | |||||||||||||
| Corporate |
(771 | ) | (894 | ) | 14 | % | (955 | ) | 6 | % | ||||||||||
|
|
|
|
|
|
|
|||||||||||||||
| Total Consolidated Earnings Before Interest and Taxes |
$ | 2,848 | $ | 2,523 | 13 | % | $ | 1,947 | 30 | % | ||||||||||
|
|
|
|
|
|
|
|||||||||||||||
| Interest expense (income), net |
4 | 6 | -33 | % | (10 | ) | — | |||||||||||||
|
|
|
|
|
|
|
|||||||||||||||
| Total Consolidated Income Before Income Taxes |
$ | 2,844 | $ | 2,517 | 13 | % | $ | 1,957 | 29 | % | ||||||||||
|
|
|
|
|
|
|
|||||||||||||||
| (1) | Certain prior year amounts have been reclassified to conform to fiscal year 2011 presentation. These changes had no impact on previously reported results of operations or shareholders’ equity. |
North America
| Fiscal 2011 | Fiscal 2010 | FY11 vs. FY10 % Change |
FY11
vs. FY10 % Change Excluding Currency Changes |
Fiscal 2009 | FY10 vs. FY09 % Change |
FY10
vs. FY09 % Change Excluding Currency Changes |
||||||||||||||||||||||
| (In millions) | ||||||||||||||||||||||||||||
| Revenues |
||||||||||||||||||||||||||||
| Footwear |
$ | 5,109 | $ | 4,610 | 11 | % | 11 | % | $ | 4,694 | -2 | % | -2 | % | ||||||||||||||
| Apparel |
2,105 | 1,740 | 21 | % | 21 | % | 1,740 | 0 | % | 0 | % | |||||||||||||||||
| Equipment |
364 | 346 | 5 | % | 5 | % | 344 | 1 | % | 0 | % | |||||||||||||||||
|
|
|
|
|
|
|
|||||||||||||||||||||||
| Total Revenues |
$ | 7,578 | $ | 6,696 | 13 | % | 13 | % | $ | 6,778 | -1 | % | -1 | % | ||||||||||||||
|
|
|
|
|
|
|
|||||||||||||||||||||||
| Earnings Before Interest and Taxes |
$ | 1,750 | $ | 1,538 | 14 | % | $ | 1,429 | 8 | % | ||||||||||||||||||
Fiscal 2011 Compared to Fiscal 2010
Revenues for North America increased 13%, driven by double-digit percentage growth in both wholesale and Direct to Consumer revenues. Contributing to the wholesale revenue growth was strong product category presentations at our wholesale customers, improved product lines and earlier shipments of summer season
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products. North America’s Direct to Consumer revenues grew 19%, which contributed approximately 4 percentage points to North America’s revenue increase. The growth in the Direct to Consumer business was fueled by 14% growth in comparable store sales.
For fiscal 2011, the increase in North America footwear revenue was primarily driven by double-digit percentage growth in Running, Men’s and Women’s Training and Football (Soccer) categories and a single-digit percentage growth in Basketball, partially offset by a low single-digit percentage decline in sales of our NIKE Brand Sportswear products.
The year-over-year increase in North America apparel revenues was primarily driven by double-digit percentage growth in most key categories, most notably Men’s Training, Running, Basketball and Women’s Training.
For fiscal 2011, the increase in North America’s EBIT was primarily the result of revenue growth and leverage on selling and administrative expense, which more than offset a lower gross margin percentage. The decline in gross margin percentage was due primarily to increased air freight and product input costs, which more than offset the favorable impact from the growth of our Direct to Consumer business and fewer close-out sales.
Fiscal 2010 Compared to Fiscal 2009
Excluding the changes in currency exchange rates, revenues for North America declined 1%, driven primarily by a decrease in revenue from our wholesale business. This decrease was partially offset by an increase in our NIKE-owned retail business, driven primarily by an increase in comparable store sales.
During fiscal 2010, the decrease in North America footwear revenue was primarily attributable to a low single-digit percentage decrease in unit sales, while average selling price per pair remained flat. The decline in unit sales was primarily driven by lower sales for our Kids’ and Running categories in the first half of fiscal 2010.
North America apparel revenue during fiscal 2010 was flat when compared to fiscal 2009, which was reflective of a high single-digit percentage increase in average selling price per unit, offset by a low double-digit percentage decrease in unit sales. Both the increase in average selling price per unit and the decrease in unit sales were primarily a result of fewer close-out sales compared to the prior year.
For fiscal 2010, the increase in North America’s EBIT was primarily the result of improved gross margins combined with a slight decrease in selling and administrative expense, driven by a reduction in demand creation expense compared to prior year. The improvement in gross margin was mainly attributable to a shift in mix from close-out to in-line sales, growth of our Direct to Consumer business as a percentage of total sales, improved in-line product margins and lower warehousing costs.
Western Europe
| Fiscal 2011 | Fiscal 2010 | FY11 vs. FY10 % Change |
FY11
vs. FY10 % Change Excluding Currency Changes |
Fiscal 2009 | FY10 vs. FY09 % Change |
FY10
vs. FY09 % Change Excluding Currency Changes |
||||||||||||||||||||||
| (In millions) | ||||||||||||||||||||||||||||
| Revenues |
||||||||||||||||||||||||||||
| Footwear |
$ | 2,327 | $ | 2,320 | 0 | % | 7 | % | $ | 2,385 | -3 | % | -3 | % | ||||||||||||||
| Apparel |
1,266 | 1,325 | -4 | % | 2 | % | 1,463 | -9 | % | -9 | % | |||||||||||||||||
| Equipment |
217 | 247 | -12 | % | -6 | % | 291 | -15 | % | -15 | % | |||||||||||||||||
| Total Revenues |
$ | 3,810 | $ | 3,892 | -2 | % | 4 | % | $ | 4,139 | -6 | % | -6 | % | ||||||||||||||
| Earnings Before Interest and Taxes |
$ | 721 | $ | 856 | -16 | % | $ | 939 | -9 | % | ||||||||||||||||||
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Table of Contents
Fiscal 2011 Compared to Fiscal 2010
On a currency neutral basis, revenues for Western Europe increased 4% for fiscal 2011, attributable to growth in most territories. Revenues for the U.K. & Ireland, the largest market in Western Europe, grew 5% for fiscal 2011. Western Europe’s Direct to Consumer revenues grew 10%, which contributed approximately 1 percentage point to Western Europe’s revenue increase. The growth in the Direct to Consumer business was fueled by 6% growth in comparable store sales.
Excluding changes in currency exchange rates, footwear revenue in Western Europe increased 7%, driven by double-digit percentage growth in our Running, Football (Soccer) and Action Sports categories, which more than offset a slight revenue decline in our NIKE Brand Sportswear category.
On a currency neutral basis, apparel revenue in Western Europe increased 2%, primarily driven by double-digit percentage growth in our Football (Soccer) and Running categories, which more than offset a mid single-digit revenue decline in our NIKE Brand Sportswear category.
For fiscal 2011, the decrease in Western Europe’s EBIT was driven by unfavorable foreign currency translation and a lower gross margin percentage, all of which more than offset the increase in revenues and improved leverage on selling and administrative expense. The decline in the gross margin percentage was significantly impacted by the unfavorable year-over-year standard currency rates. Also contributing to the decrease in the gross margin percentage was higher product input and air freight costs, higher royalty expenses related to sales of endorsed team products and higher full price discounts. These factors more than offset the favorable impact of fewer close-out sales.
Fiscal 2010 Compared to Fiscal 2009
On a currency neutral basis, most markets in Western Europe experienced lower revenues during fiscal 2010, reflecting a difficult retail environment throughout the geography. Our largest market, the U.K. & Ireland, declined 4%.
Excluding changes in currency exchange rates, the decrease in footwear revenue during fiscal 2010 was primarily the result of low single-digit decreases in both average selling price and unit sales. The decrease in average selling price was attributable to higher customer discounts provided to manage inventory levels, while the reduction in unit sales was due to lower sales for most NIKE Brand product categories.
The year-over-year decrease in apparel revenue was primarily driven by a high single-digit decline in unit sales combined with a mid single-digit decrease in average selling price. The decrease in unit sales was due to lower sales for most NIKE Brand product categories, while the decrease in average selling price was a result of higher discounts provided to retailers to manage their inventory levels.
For fiscal 2010, EBIT for Western Europe declined at a faster rate than revenues, as the increase in selling and administrative expense as a percentage of revenues more than offset the improvements in gross margin percentage. The increase in selling administrative expense was primarily driven by a higher level of both demand creation spending around the 2010 World Cup and operating overhead expense as a result of investments in our Direct to Consumer operations and higher performance-based compensation. The gross margin improvement in fiscal 2010 was primarily attributable to higher in-line product margins, a smaller proportion of close-out sales and reduced inventory obsolescence expense as a result of our leaner inventory positions.
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Table of Contents
Central & Eastern Europe
| Fiscal 2011 | Fiscal 2010 | FY11 vs. FY10 % Change |
FY11 vs. FY10 % Change Excluding Currency Changes |
Fiscal 2009 | FY10 vs. FY09 % Change |
FY10 vs. FY09 % Change Excluding Currency Changes |
||||||||||||||||||||||
| (In millions) | ||||||||||||||||||||||||||||
| Revenues |
||||||||||||||||||||||||||||
| Footwear |
$ | 600 | $ | 558 | 8 | % | 11 | % | $ | 673 | -17 | % | -16 | % | ||||||||||||||
| Apparel |
356 | 354 | 1 | % | 4 | % | 468 | -24 | % | -24 | % | |||||||||||||||||
| Equipment |
75 | 81 | -7 | % | -5 | % | 106 | -24 | % | -21 | % | |||||||||||||||||
|
|
|
|
|
|
|
|||||||||||||||||||||||
| Total Revenues |
$ | 1,031 | $ | 993 | 4 | % | 7 | % | $ | 1,247 | -20 | % | -19 | % | ||||||||||||||
|
|
|
|
|
|
|
|||||||||||||||||||||||
| Earnings Before Interest and Taxes |
$ | 233 | $ | 253 | -8 | % | $ | 394 | -36 | % | ||||||||||||||||||
Fiscal 2011 Compared to Fiscal 2010
Led by Russia and Turkey, most territories within Central & Eastern Europe reported revenue growth during fiscal 2011 as economic conditions in the geography continued to show signs of recovery.
The growth in Central & Eastern Europe’s footwear revenues was mainly driven by double-digit percentage growth in our Football (Soccer), Running and Action Sports categories, while the growth in apparel revenues was primarily driven by double-digit percentage growth in our Running category.
For fiscal 2011, the decrease in Central & Eastern Europe’s EBIT was primarily driven by unfavorable foreign currency translation and a lower gross margin percentage, which more than offset the increase in revenues and improved leverage on selling and administrative expense. The decline in the gross margin percentage was primarily due to unfavorable year-over-year standard currency rates, higher air freight costs and an increase in product input costs.
Fiscal 2010 Compared to Fiscal 2009
Economic conditions in Central & Eastern Europe remained difficult as most markets within the geography experienced lower revenues in fiscal 2010 as compared to fiscal 2009.
The decrease in footwear revenue was due to a decline in average selling price, while unit sales remained flat compared to fiscal 2009. The decline in average selling price was primarily the result of higher discounts provided to retailers to manage their inventory levels.
The year-over-year decrease in apparel revenue was primarily driven by a double-digit decrease in average selling price and a mid single-digit decline in unit sales. The decline in average selling price was primarily the result of higher discounts provided to retailers to manage their inventory levels, while the decline in unit sales was due to lower sales in most key product categories.
The year-over-year decrease in Central & Eastern Europe’s EBIT during fiscal 2010 was the result of lower revenues, a decline in gross margin percentage and higher selling and administrative expense. The decline in gross margin percentage was primarily attributable to less favorable year-over-year standard currency rates, as well as higher discounts provided to customers. The increase in selling and administrative expense was primarily due to an increase in the reserve for bad debts along with increased investments in our Direct to Consumer operations.
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Table of Contents
Greater China
| Fiscal 2011 | Fiscal 2010 | FY11 vs. FY10 % Change |
FY11 vs. FY10 % Change Excluding Currency Changes |
Fiscal 2009 | FY10 vs. FY09 % Change |
FY10 vs. FY09 % Change Excluding Currency Changes |
||||||||||||||||||||||
| (In millions) | ||||||||||||||||||||||||||||
| Revenues |
||||||||||||||||||||||||||||
| Footwear |
$ | 1,164 | $ | 953 | 22 | % | 19 | % | $ | 940 | 1 | % | 1 | % | ||||||||||||||
| Apparel |
789 | 684 | 15 | % | 13 | % | 700 | -2 | % | -3 | % | |||||||||||||||||
| Equipment |
107 | 105 | 2 | % | 0 | % | 103 | 2 | % | 0 | % | |||||||||||||||||
| Total Revenues |
$ | 2,060 | $ | 1,742 | 18 | % | 16 | % | $ | 1,743 | 0 | % | 0 | % | ||||||||||||||
| Earnings Before Interest and Taxes |
$ | 777 | $ | 637 | 22 | % | $ | 575 | 11 | % | ||||||||||||||||||
Fiscal 2011 Compared to Fiscal 2010
Excluding changes in currency exchange rates, Greater China revenues increased 16% for fiscal 2011, driven by expansion in the number of partner-owned stores selling NIKE products, as well as improvement in comparable store sales for partner-owned stores.
For fiscal 2011, the increase in Greater China’s footwear revenue was primarily driven by double-digit percentage growth in our Running and NIKE Brand Sportswear categories, while the growth in apparel revenue was mainly driven by double-digit percentage increases in our NIKE Brand Sportswear, Basketball and Men’s Training categories.
For fiscal 2011, EBIT for Greater China grew at a faster rate than revenue as a result of a higher gross margin percentage, improved leverage on selling and administrative expense and favorable foreign currency translation. The improvement in the gross margin percentage was primarily attributable to higher product prices, favorable product mix and lower inventory obsolescence expense, which more than offset higher product input costs and warehousing costs from our new China distribution center.
Fiscal 2010 Compared to Fiscal 2009
For fiscal 2010, revenues for Greater China were flat, primarily attributable to comparisons against strong revenue growth in the first half of fiscal 2009 driven by the Beijing Olympics. Greater China began to gain momentum in the second half of fiscal 2010, as revenues increased 11% as compared to the second half of fiscal 2009.
The increase in footwear revenue was primarily driven by a mid single-digit increase in average selling price, partially offset by a mid single-digit decrease in unit sales. The increase in average selling price was primarily due to strategic price increases, while the decrease in unit sales was primarily driven by lower discounts on in-line products compared to the prior year.
The decrease in apparel revenue for fiscal 2010 was primarily due to a mid single-digit decrease in unit sales across most major categories, which more than offset a low single-digit increase in average selling price primarily driven by strategic price increases.
EBIT for Greater China increased at a faster rate than revenue as a result of higher gross margins and reductions in demand creation spending attributable to comparisons against higher prior year spending around the Beijing Olympics.
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Table of Contents
Japan
| Fiscal 2011 | Fiscal 2010 | FY11 vs. FY10 % Change |
FY11 vs. FY10 % Change Excluding Currency Changes |
Fiscal 2009 | FY10 vs. FY09 % Change |
FY10 vs. FY09 % Change Excluding Currency Changes |
||||||||||||||||||||||
| (In millions) | ||||||||||||||||||||||||||||
| Revenues |
||||||||||||||||||||||||||||
| Footwear |
$ | 396 | $ | 433 | -9 | % | -16 | % | $ | 430 | 1 | % | -7 | % | ||||||||||||||
| Apparel |
302 | 357 | -15 | % | -23 | % | 397 | -10 | % | -17 | % | |||||||||||||||||
| Equipment |
68 | 92 | -26 | % | -32 | % | 99 | -7 | % | -13 | % | |||||||||||||||||
|
|
|
|
|
|
|
|||||||||||||||||||||||
| Total Revenues |
$ | 766 | $ | 882 | -13 | % | -21 | % | $ | 926 | -5 | % | -12 | % | ||||||||||||||
|
|
|
|
|
|
|
|||||||||||||||||||||||
| Earnings Before Interest and Taxes |
$ | 114 | $ | 180 | -37 | % | $ | 205 | -12 | % | ||||||||||||||||||
Fiscal 2011 Compared to Fiscal 2010
Macroeconomic conditions in Japan remain difficult. On March 11, 2011, Japan experienced a major earthquake and resulting tsunami. While the Company’s organization and assets in Japan were not materially damaged, business results for the month of March 2011 were significantly eroded by the natural disaster. As we enter fiscal 2012, we anticipate macroeconomic conditions in Japan to remain difficult as consumer confidence continues to recover.
Excluding changes in currency exchange rates, both footwear and apparel revenues in Japan declined, driven by decreases across most key categories. Partially offsetting the decreases was a double-digit percentage growth in revenues from Running apparel.
The decrease in Japan’s EBIT for fiscal 2011 was primarily due to lower revenues and higher selling and administrative expense as a percentage of revenue, partially offset by an improvement in the gross margin percentage. The improvement in the gross margin percentage was primarily driven by favorable year-over-year standard currency rates and positive impacts from fewer discounts on close-out sales, which more than offset higher product input costs and inventory obsolescence expense.
Fiscal 2010 Compared to Fiscal 2009
Excluding changes in currency exchange rates, both footwear and apparel revenues in Japan declined during fiscal 2010 due to decreases in unit sales across most major categories. The decline in revenues was reflective of a difficult and highly promotional marketplace in Japan.
For fiscal 2010, the decrease in Japan’s EBIT was primarily due to lower revenues and higher selling and administrative expense, driven by increased investments in our Direct to Consumer operations, which more than offset improved gross margins.
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Table of Contents
Emerging Markets
| Fiscal 2011 | Fiscal 2010 | FY11 vs. FY10 % Change |
FY11 vs. FY10 % Change Excluding Currency Changes |
Fiscal 2009 | FY10 vs. FY09 % Change |
FY10 vs. FY09 % Change Excluding Currency Changes |
||||||||||||||||||||||
| (In millions) | ||||||||||||||||||||||||||||
| Revenues |
||||||||||||||||||||||||||||
| Footwear |
$ | 1,897 | $ | 1,458 | 30 | % | 24 | % | $ | 1,185 | 23 | % | 20 | % | ||||||||||||||
| Apparel |
657 | 577 | 14 | % | 9 | % | 477 | 21 | % | 17 | % | |||||||||||||||||
| Equipment |
182 | 164 | 11 | % | 6 | % | 166 | -1 | % | -3 | % | |||||||||||||||||
| Total Revenues |
$ | 2,736 | $ | 2,199 | 24 | % | 19 | % | $ | 1,828 | 20 | % | 17 | % | ||||||||||||||
| Earnings Before Interest and Taxes |
$ | 688 | $ | 521 | 32 | % | $ | 364 | 43 | % | ||||||||||||||||||
Fiscal 2011 Compared to Fiscal 2010
Excluding the changes in currency exchange rates, revenues for Emerging Markets increased 19% for fiscal 2011. Most territories in the geography reported double-digit revenue growth for the fiscal year, led by Brazil, Argentina, Mexico, and Korea.
For fiscal 2011, both footwear and apparel revenue growth in the Emerging Markets was primarily driven by strong demand in nearly all key categories, most notably NIKE Brand Sportswear and Running.
For fiscal 2011, EBIT for Emerging Markets grew at a faster rate than revenue as a result of higher gross margin percentage, improved leverage on selling and administrative expense and favorable foreign currency translation. The increase in the gross margin percentage was primarily due to a higher mix of in-line product sales, lower warehousing costs and favorable year-over-year standard currency rates, which more than offset the increase in product input costs and higher full-price discounts.
Fiscal 2010 Compared to Fiscal 2009
Excluding changes in currency exchange rates, fiscal 2010 revenue growth for the Emerging Markets geography was driven by growth in all product categories and all territories, most notably Brazil, Mexico and Korea.
Footwear revenue growth was primarily driven by a double-digit growth in unit sales and a mid single-digit increase in average selling price per pair during fiscal 2010, reflective of strong demand for most NIKE Brand product categories in all markets within the geography.
For fiscal 2010, the increase in Emerging Markets’ EBIT was primarily the result of revenue growth combined with lower selling and administrative expense, which more than offset a decrease in gross margin percentage. The decrease in selling and administrative expense was primarily due to lower operating overhead expense resulting from fiscal 2009 restructuring activities. The decline in gross margin was primarily due to less favorable year-over-year standard currency rates compared to the prior year, which more than offset improved in-line product margins.
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Global Brand Divisions
| Fiscal 2011 | Fiscal 2010 | FY11 vs. FY10 % Change |
FY11 vs. FY10 % Change Excluding Currency Changes |
Fiscal 2009 | FY10 vs. FY09 % Change |
FY10 vs. FY09 % Change Excluding Currency Changes |
||||||||||||||||||||||
| (In millions) | ||||||||||||||||||||||||||||
| Revenues |
$ | 123 | $ | 105 | 17 | % | 21 | % | $ | 96 | 9 | % | 12 | % | ||||||||||||||
| (Loss) Before Interest and Taxes |
(998 | ) | (867 | ) | -15 | % | (811 | ) | -7 | % | ||||||||||||||||||
Global Brand Divisions primarily represent demand creation and operating overhead expenses that are centrally managed for the NIKE Brand. Revenues for the Global Brand Divisions are attributable to NIKE Brand licensing businesses that are not part of a geographic operating segment.
Fiscal 2011 Compared to Fiscal 2010
For fiscal 2011, the increase in Global Brand Division expense was primarily due to an increase in both operating overhead and centrally managed demand creation expense. The increase in operating overhead expense was mainly driven by increased investments in our Direct to Consumer infrastructure along with higher wages and travel expense. The increase in demand creation expense was primarily driven by a higher level of brand event spending around the World Cup and World Basketball Festival in the first half of fiscal 2011, as well as increased investments in sports marketing.
Fiscal 2010 Compared to Fiscal 2009
For fiscal 2010, the increase in Global Brand Division expense was largely due to increases in centrally managed demand creation expense and performance-based compensation, which more than offset an increase in licensing revenues. The increase in demand creation expense was primarily driven by the centralization of certain marketing production costs.
Other Businesses
| Fiscal 2011 | Fiscal 2010 | FY11 vs. FY10 % Change |
FY11 vs. FY10 % Change Excluding Currency Changes |
Fiscal 2009 | FY10 vs. FY09 % Change |
FY10 vs. FY09 % Change Excluding Currency Changes |
||||||||||||||||||||||
| (In millions) | ||||||||||||||||||||||||||||
| Revenues |
||||||||||||||||||||||||||||
| Converse |
$ | 1,130 | $ | 983 | 15 | % | 15 | % | $ | 915 | 7 | % | 7 | % | ||||||||||||||
| NIKE Golf |
623 | 638 | -2 | % | -4 | % | 648 | -2 | % | -4 | % | |||||||||||||||||
| Cole Haan |
518 | 463 | 12 | % | 12 | % | 472 | -2 | % | -2 | % | |||||||||||||||||
| Hurley |
252 | 221 | 14 | % | 14 | % | 203 | 9 | % | 9 | % | |||||||||||||||||
| Umbro |
224 | 225 | 0 | % | 2 | % | 174 | 29 | % | 30 | % | |||||||||||||||||
| Other |
— | — | — | — | 7 | — | — | |||||||||||||||||||||
| Total Revenues |
$ | 2,747 | $ | 2,530 | 9 | % | 8 | % | $ | 2,419 | 5 | % | 4 | % | ||||||||||||||
| Earnings Before Interest and Taxes |
$ | 334 | $ | 299 | 12 | % | $ | (193 | ) | — | ||||||||||||||||||
Fiscal 2011 Compared to Fiscal 2010
Our Other Businesses are comprised of our affiliate brands; Cole Haan, Converse, Hurley and Umbro; and NIKE Golf. The revenue growth at Converse was primarily driven by increased licensing revenue in China, as
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well as increased sales in the U.K. as we transitioned that market to a Converse owned distribution model. Revenues for Cole Haan increased 12%, driven by double-digit percentage growth in our wholesale operations as well as high single-digit percentage growth in our Direct to Consumer operations. Revenues declined at NIKE Golf, where we experienced significant erosion in our Japan business following the earthquake and tsunami in March 2011.
For fiscal 2011, EBIT for our Other Businesses grew at a faster rate than revenues, primarily as a result of more favorable foreign currency exchange impacts. The gross margin percentage remained relatively flat for fiscal 2011, as the favorable impact from improved product mix was offset by a lower mix of licensee revenues. Selling and administrative expense as a percentage of revenues remained relatively flat for fiscal 2011.
Fiscal 2010 Compared to Fiscal 2009
For fiscal 2010, the increase in Other Businesses’ revenue was primarily driven by revenue growth at Converse, Umbro and Hurley, which more than offset the declines at NIKE Golf and Cole Haan due to reductions in consumer discretionary spending in their respective markets.
In fiscal 2009, EBIT for our Other Businesses included a $401 million pre-tax non-cash charge relating to the impairment of goodwill, intangible and other assets of Umbro. Excluding this impairment charge, EBIT for our Other Businesses would have increased 43%, as a result of higher revenues, improved gross margins across most businesses, and lower demand creation spending.
For additional information about our impairment charges, see Note 4 — Identifiable Intangible Assets, Goodwill and Umbro Impairment in the Notes to the Consolidated Financial Statements.
Corporate
| Fiscal 2011 | Fiscal 2010 | FY11 vs. FY10 % Change |
Fiscal 2009 | FY10 vs. FY09 % Change |
||||||||||||||||
| (In millions) | ||||||||||||||||||||
| Revenues |
$ | 11 | $ | (25 | ) | — | $ | — | — | |||||||||||
| (Loss) Before Interest and Taxes |
(771 | ) | (894 | ) | 14 | % | (955 | ) | 6 | % | ||||||||||
Corporate consists largely of unallocated general and administrative expenses, which includes expenses associated with centrally managed departments, depreciation and amortization related to our corporate 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.
Corporate revenues primarily consist of (1) foreign currency hedge gains and losses related to revenues generated by entities within the NIKE Brand geographic operating segments but managed through our central foreign exchange risk management program and (2) foreign currency gains and losses resulting from the difference between actual foreign currency rates and standard rates assigned to these entities, which are used to record any non-functional currency revenues into the entity’s functional currency.
In addition to the foreign currency gains and losses recognized in Corporate revenues, foreign currency results include all other foreign currency hedge results generated through our centrally managed foreign exchange risk management program, other conversion gains and losses arising from re-measurement of monetary assets and liabilities in non-functional currencies, and gains and losses resulting from the difference between actual foreign currency rates and standard rates assigned to each entity in NIKE Brand geographic operating segments, which are used to record any non-functional currency product purchases into the entity’s functional currency. Prior to fiscal 2010, all foreign currency results, including hedge results and other conversion gains and losses, generated by the Western Europe and Central & Eastern Europe geographies were recorded in their respective geographic results.
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Fiscal 2011 Compared to Fiscal 2010
For fiscal 2011, the decrease in Corporate expense was primarily driven by year-over-year net foreign currency gains generated by our centrally managed foreign exchange risk management program. Also contributing to the decrease in Corporate expense for fiscal 2011 was a $54 million year-over-year reduction in stock options expense primarily due to a change in accelerated vesting provisions that took effect in the first quarter of fiscal 2011 and a lower estimated fair value for stock options granted in the current year. These benefits more than offset an increase in corporate operating overhead expenses, primarily driven by higher wage-related expense.
Fiscal 2010 Compared to Fiscal 2009
In fiscal 2009, results for Corporate included a pre-tax restructuring charge of $195 million. Excluding this restructuring charge, loss before interest and taxes for Corporate would have increased by 18% for fiscal 2010, primarily driven by an increase in performance-based compensation.
Foreign Currency Exposures and Hedging Practices
Overview
As a global company with significant operations outside the U.S., in the normal course of business we are exposed to risk arising from changes in currency exchange rates. Foreign currency fluctuations affect the recording of transactions, such as sales, purchases and intercompany transactions denominated in non-functional currencies, and the translation into U.S. dollars of foreign currency denominated results of operations, financial position and cash flows. Our foreign currency exposures are due primarily to U.S. dollar transactions at wholly-owned foreign subsidiaries, as well as transactions and translation of results denominated in Euros, British Pounds, Chinese Renminbi and Japanese Yen.
Our foreign exchange risk management program is intended to minimize both the positive and negative effects of currency fluctuations on our reported consolidated results of operations, financial position and cash flows. This also has the effect of delaying the majority of the impact of current market rates on our consolidated financial statements, the length of the delay is dependent upon hedge horizons. We manage global foreign exchange risk centrally on a portfolio basis, to address those risks that are material to NIKE, Inc. on a consolidated basis. We manage these exposures by taking advantage of natural offsets and currency correlations that exist within the portfolio and where practical, by hedging a portion of certain remaining material exposures, using derivative instruments such as forward contracts and options. Our hedging policy is designed to partially or entirely offset changes in the underlying exposures being hedged. We do not hold or issue derivative instruments for trading purposes.
Transactional exposures
We transact business in various currencies and have significant revenues and costs denominated in currencies other than the functional currency of the relevant subsidiary, both of which subject us to foreign currency risk. Our most significant transactional foreign currency exposures are:
| 1. | Inventory Purchases — Most of our inventory purchases around the world are denominated in U.S. dollars. This generates foreign currency exposures for all subsidiaries with a functional currency other than the U.S. dollar. A weaker U.S. dollar reduces the inventory cost in the purchasing subsidiary’s functional currency whereas a stronger U.S. dollar increases the inventory cost. |
| 2. | Non-Functional Currency Revenues — A portion of our Western Europe geography revenues are earned in currencies other than the Euro (e.g. British Pound), but are recognized at a subsidiary that uses the Euro as its functional currency, generating foreign currency exposure. |
| 3. | Other Revenues and Costs — Non-functional currency revenues and costs, such as endorsement contracts, intercompany royalties and other payments, generate foreign currency risk to a lesser extent. |
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| 4. | Non-Functional Currency Monetary Assets and Liabilities — Our global subsidiaries have various assets and liabilities, primarily receivables and payables denominated in currencies other than their functional currency. These balance sheet items are subject to re-measurement, which may create fluctuations in other (income), net within our consolidated results of operations. |
Managing transactional exposures
Transactional exposures are managed on a portfolio basis within our foreign currency risk management program. As of May 31, 2011, we use currency forward contracts and options with maturities up to 15 months to hedge the effect of exchange rate fluctuations on probable forecasted future cash flows, including non-functional currency revenues and expenses. These are accounted for as cash flow hedges in accordance with the accounting standards for derivatives and hedging. The fair value of these instruments at May 31, 2011 and 2010 was $28 million and $206 million in assets and $136 million and $25 million in liabilities, respectively. The effective portion of the changes in fair value of these instruments is reported in other comprehensive income (“OCI”), a component of shareholders’ equity, and reclassified into earnings in the same financial statement line item and in the same period or periods during which the related hedged transactions affect earnings. The ineffective portion is immediately recognized in earnings as a component of other (income), net. Ineffectiveness was not material for the years ended May 31, 2011, 2010, and 2009.
Certain currency forward contracts used to manage foreign exchange exposure of non-functional currency monetary assets and liabilities subject to re-measurement are not designated as hedges under the accounting standards for derivatives and hedging. In these cases, the change in value of the instruments is immediately recognized in other (income), net and is intended to offset the foreign currency impact of the re-measurement of the related non-functional currency asset or liability being hedged. The fair value of these instruments at May 31, 2011 and 2010 was $9 million and $104 million in assets and $17 million and $140 million in liabilities, respectively.
Refer to Note 17 — Risk Management and Derivatives in the accompanying Notes to the Consolidated Financial Statements for additional quantitative detail.
Translational exposures
Substantially all of our foreign subsidiaries operate in functional currencies other than the U.S. dollar. Fluctuations in currency exchange rates create volatility in our reported results as we are required to translate the balance sheets and operational results of these foreign currency denominated subsidiaries into U.S. dollars for consolidated reporting. The translation of foreign subsidiaries non-U.S. dollar balance sheets into U.S. dollars for consolidated reporting results in a cumulative translation adjustment to OCI within shareholders’ equity. In preparing our consolidated statements of income, foreign exchange rate fluctuations impact our operating results as the revenues and expenses of our foreign operations are translated into U.S. dollars. In translation, a weaker U.S. dollar in relation to foreign functional currencies benefits our consolidated earnings whereas a stronger U.S. dollar reduces our consolidated earnings. The impact of foreign exchange rate fluctuations on the translation of our consolidated revenues and income before income taxes was a net translation benefit (detriment) of approximately ($28) million and ($16) million, respectively, for the year ended May 31, 2011 and approximately $147 million and $33 million, respectively, for the year ended May 31, 2010.
Managing translational exposures
To minimize the impact of translating foreign currency denominated revenues and expenses into U.S. dollars for consolidated reporting, certain foreign subsidiaries use excess cash to purchase U.S. dollar denominated available-for-sale investments. The variable future cash flows associated with the purchase and subsequent sale of these U.S. dollar denominated securities at non-U.S. dollar functional currency subsidiaries creates a foreign currency exposure that qualifies for hedge accounting under the accounting standards for derivatives and hedging. We utilize forward contracts and options to partially, or entirely, hedge the variability of
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the forecasted future purchases and sales of these U.S. dollar investments. This has the effect of partially offsetting the year-over-year foreign currency translation impact on net earnings in the period the investments are sold. Hedges of available-for-sale investments are accounted for as cash flow hedges. The fair value of instruments used in this manner at May 31, 2011 was $1 million in assets and $21 million in liabilities. At May 31, 2010, the fair value was $78 million in assets. The effective portion of the changes in fair value of these instruments is reported in OCI and reclassified into earnings in other (income), net in the period during which the hedged available-for-sale investment is sold and affects earnings. Any ineffective portion, which was not material for any period presented, is immediately recognized in earnings as a component of other (income), net.
We estimate that the combination of translation of foreign currency-denominated profits from our international businesses and the year-over-year change in foreign currency related net gains included in other (income), net had net (detriment) benefit on our income before income taxes of approximately $(33) million and $34 million for the years ended May 31, 2011 and 2010.
Refer to Note 17 — Risk Management and Derivatives in the accompanying Notes to the Consolidated Financial Statements for additional quantitative detail.
Net investments in foreign subsidiaries
We are also exposed to the impact of foreign exchange fluctuations on our investments in wholly-owned foreign subsidiaries denominated in a currency other than the U.S. dollar, which could adversely impact the U.S. dollar value of these investments and therefore the value of future repatriated earnings. We hedge certain net investment positions in Euro-functional currency foreign subsidiaries to mitigate the effects of foreign exchange fluctuations on net investments with the effect of preserving the value of future repatriated earnings. In accordance with the accounting standards for derivatives and hedging, the effective portion of the change in fair value of the forward contracts designated as net investment hedges is recorded in the cumulative translation adjustment component of accumulated other comprehensive income. Any ineffective portion, which was not material for any period presented, is immediately recognized in earnings as a component of other (income), net. To minimize credit risk, we have structured these net investment hedges to be generally less than six months in duration. Upon maturity, the hedges are settled based on the current fair value of the forward contracts with the realized gain or loss remaining in OCI; concurrent with settlement, we enter into new forward contracts at the current market rate. The fair value of outstanding net investment hedges at May 31, 2011 was $23 million in liabilities. At May 31, 2010, the fair value was $32 million in assets. Cash flows from net investment hedge settlements totaled ($23) million and $5 million in the years ended May 31, 2011 and 2010, respectively.
Liquidity and Capital Resources
Cash Flow Activity
Cash provided by operations was $1.8 billion for fiscal 2011 compared to $3.2 billion for fiscal 2010. Our primary source of operating cash flow for fiscal 2011 was net income of $2.1 billion. Our working capital was a net cash outflow of $708 million for fiscal 2011 as compared to a positive net cash inflow of $694 million for fiscal 2010. Our investments in working capital increased primarily due to an increase in inventory and higher accounts receivable. Inventory at the end of fiscal 2011 increased 33% compared to fiscal 2010, primarily driven by a 15% increase in futures orders, growth in replenishment programs for high-turnover styles, early purchases of key seasonal items with longer production lead times as well as the growth of Direct to Consumer operations. Changes in currency exchange rates and higher product costs also contributed to the increase in dollar inventory. The increase in accounts receivable was mainly attributable to the increase in revenues during fiscal 2011.
Cash used by investing activities was $1.0 billion during fiscal 2011, compared to $1.3 billion for fiscal 2010. The year-over-year decrease was primarily due to lower net purchases of short-term investments. Net purchases of short-term investments were $537 million (net of sales and maturities) in fiscal 2011 compared to $937 million during fiscal 2010.
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Cash used by financing activities was $2.0 billion for fiscal 2011 compared to $1.1 billion used in fiscal 2010. The increase in cash used by financing activities was primarily due to an increase in share repurchases and dividends paid, partially offset by an increase in notes payable.
In fiscal 2011, we purchased 23.8 million shares of NIKE’s class B common stock for $1.9 billion. These repurchases were made under the four-year, $5 billion program approved by our Board of Directors which commenced in December 2009 and as of the end of fiscal 2011, we have repurchased 30.4 million shares for $2.3 billion under this program. We continue to expect funding of share repurchases will come from operating cash flow, excess cash, and/or debt. The timing and the amount of shares purchased will be dictated by our capital needs and stock market conditions.
Off-Balance Sheet Arrangements
In connection with various contracts and agreements, we provide routine indemnifications relating to the enforceability of intellectual property rights, coverage for legal issues that arise and other items where we are acting as the guarantor. Currently, we have several such agreements in place. However, based on our historical experience and the estimated probability of future loss, we have determined that the fair value of such indemnifications is not material to our financial position or results of operations.
Contractual Obligations
Our significant long-term contractual obligations as of May 31, 2011, and significant endorsement contracts entered into through the date of this report are as follows:
| Description of Commitment |
Cash Payments Due During the Year Ending May 31, | |||||||||||||||||||||||||||
| 2012 | 2013 | 2014 | 2015 | 2016 | Thereafter | Total | ||||||||||||||||||||||
| (In millions) | ||||||||||||||||||||||||||||
| Operating Leases |
$ | 374 | $ | 310 | $ | 253 | $ | 198 | $ | 174 | $ | 535 | $ | 1,844 | ||||||||||||||
| Long-term Debt |
200 | 48 | 58 | 8 | 109 | 37 | 460 | |||||||||||||||||||||
| Endorsement Contracts(1) |
800 | 806 | 742 | 615 | 463 | 1,018 | 4,444 | |||||||||||||||||||||
| Product Purchase Obligations(2) |
3,175 | — | — | — | — | — | 3,175 | |||||||||||||||||||||
|
Other(3) |
277 | 137 | 22 | 4 | 1 | — | 441 | |||||||||||||||||||||
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| Total |
$ | 4,826 | $ | 1,301 | $ | 1,075 | $ | 825 | $ | 747 | $ | 1,590 | $ | 10,364 | ||||||||||||||
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| (1) | The amounts listed for endorsement contracts represent approximate amounts of base compensation and minimum guaranteed royalty fees we are obligated to pay athlete and sport team endorsers of our products. Actual payments under some contracts may be higher than the amounts listed as these contracts provide for bonuses to be paid to the endorsers based upon athletic achievements and/or royalties on product sales in future periods. Actual payments under some contracts may also be lower as these contracts include provisions for reduced payments if athletic performance declines in future periods. |
In addition to the cash payments, we are obligated to furnish our endorsers with NIKE product for their use. It is not possible to determine how much we will spend on this product on an annual basis as the contracts generally do not stipulate a specific amount of cash to be spent on the product. The amount of product provided to the endorsers will depend on many factors including general playing conditions, the number of sporting events in which they participate, and our own decisions regarding product and marketing initiatives. In addition, the costs to design, develop, source, and purchase the products furnished to the endorsers are incurred over a period of time and are not necessarily tracked separately from similar costs incurred for products sold to customers.
| (2) | We generally order product at least 4 to 5 months in advance of sale based primarily on advanced futures orders received from customers. The amounts listed for product purchase obligations represent agreements (including open purchase orders) to purchase products in the ordinary course of business, that are |
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| enforceable and legally binding and that specify all significant terms. In some cases, prices are subject to change throughout the production process. The reported amounts exclude product purchase liabilities included in accounts payable on the consolidated balance sheet as of May 31, 2011. |
| (3) | Other amounts primarily include service and marketing commitments made in the ordinary course of business. The amounts represent the minimum payments required by legally binding contracts and agreements that specify all significant terms, including open purchase orders for non-product purchases. The reported amounts exclude those liabilities included in accounts payable or accrued liabilities on the consolidated balance sheet as of May 31, 2011. |
The total liability for uncertain tax positions was $212 million, excluding related interest and penalties, at May 31, 2011. We are not able to reasonably estimate when or if cash payments of the long-term liability for uncertain tax positions will occur.
We also have the following outstanding short-term debt obligations as of May 31, 2011. Please refer to the accompanying Notes to the Consolidated Financial Statements (Note 7 — Short-Term Borrowings and Credit Lines) for further description and interest rates related to the short-term debt obligations listed below.
| Outstanding as of May 31, 2011 |
||||
| (In millions) | ||||
| Notes payable, due at mutually agreed-upon dates within one year of issuance or on demand |
$ | 187 | ||
| Payable to Sojitz America for the purchase of inventories, generally due 60 days after shipment of goods from a foreign port |
$ | 111 | ||
As of May 31, 2011, letters of credit of $99 million were outstanding, generally for the purchase of inventory.
Capital Resources
In December 2008, we filed a shelf registration statement with the Securities and Exchange Commission under which $760 million in debt securities may be issued. As of May 31, 2011, no debt securities had been issued under this shelf registration.
As of and for the year ended May 31, 2011, we had no amounts outstanding under our multi-year, $1 billion revolving credit facility in place with a group of banks. The facility matures in December 2012. Based on our current long-term senior unsecured debt ratings of A+ and A1 from Standard and Poor’s Corporation and Moody’s Investor Services, respectively, the interest rate charged on any outstanding borrowings would be the prevailing London Interbank Offer Rate (“LIBOR”) plus 0.15%. The facility fee is 0.05% of the total commitment.
If our long-term debt rating were to decline, the facility fee and interest rate under our committed credit facility would increase. Conversely, if our long-term debt rating were to improve, the facility fee and interest rate would decrease. Changes in our long-term debt rating would not trigger acceleration of maturity of any then outstanding borrowings or any future borrowings under the committed credit facility. Under this committed credit facility, we have agreed to various covenants. These covenants include limits on our disposal of fixed assets and the amount of debt secured by liens we may incur as well as a minimum capitalization ratio. In the event we were to have any borrowings outstanding under this facility, failed to meet any covenant, and were unable to obtain a waiver from a majority of the banks, any borrowings would become immediately due and payable. As of May 31, 2011, we were in full compliance with each of these covenants and believe it is unlikely we will fail to meet any of these covenants in the foreseeable future.
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Liquidity is also provided by our $1 billion commercial paper program. As of and for the year ended May 31, 2011, no amounts were outstanding under this program. We currently have short-term debt ratings of A1 and P1 from Standard and Poor’s Corporation and Moody’s Investor Services, respectively.
As of May 31, 2011, we had cash, cash equivalents and short term investments totaling $4.5 billion, including amounts held in the U.S. and foreign jurisdictions. Cash equivalents and short term investments consist primarily of deposits held at major banks, money market funds, Tier-1 commercial paper, corporate notes, U.S. Treasury obligations, U.S. government agency obligations and government sponsored enterprise obligations, and other investment grade fixed income securities. Our fixed income investments are exposed to both credit and interest rate risk. All of our investments are investment grade to minimize our credit risk. While individual securities have varying durations, the average duration of our entire cash equivalents and short term investment portfolio is less than 120 days as of May 31, 2011.
Despite recent uncertainties in the financial markets, to date we have not experienced difficulty accessing the credit markets or incurred higher interest costs. Future volatility in the capital markets, however, may increase costs associated with issuing commercial paper or other debt instruments or affect our ability to access those markets. We utilize a variety of tax planning and financing strategies in an effort to manage our worldwide cash and deploy funds to locations where it is needed. We believe that existing cash, cash equivalents, short-term investments and cash generated by operations, together with access to external sources of funds as described above, will be sufficient to meet our domestic and foreign capital needs in the foreseeable future.
Recently Adopted Accounting Standards
In January 2010, the Financial Accounting Standards Board (“FASB”) issued guidance to amend the disclosure requirements related to recurring and nonrecurring fair value measurements. The guidance requires additional disclosures about the different classes of assets and liabilities measured at fair value, the valuation techniques and inputs used, the activity in Level 3 fair value measurements, and the transfers between Levels 1, 2, and 3 of the fair value measurement hierarchy. This guidance became effective for us beginning March 1, 2010, except for disclosures relating to purchases, sales, issuances and settlements of Level 3 assets and liabilities, which will be effective for us beginning June 1, 2011. As this guidance only requires expanded disclosures, the adoption did not and will not impact our consolidated financial position or results of operations.
In June 2009, the FASB issued a new accounting standard that revised the guidance for the consolidation of variable interest entities (“VIE”). This new guidance requires a qualitative approach to identifying a controlling financial interest in a VIE, and requires an ongoing assessment of whether an entity is a VIE and whether an interest in a VIE makes the holder the primary beneficiary of the VIE. This guidance became effective for us beginning June 1, 2010. The adoption of this guidance did not have an impact on our consolidated financial position or results of operations.
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Recently Issued Accounting Standards
In June 2011, the FASB issued new guidance on the presentation of comprehensive income. This new guidance requires the components of net income and other comprehensive income to be either presented in one continuous statement, referred to as the statement of comprehensive income, or in two separate, but consecutive statements. This new guidance eliminates the current option to report other comprehensive income and its components in the statement of shareholders’ equity. While the new guidance changes the presentation of comprehensive income, there are no changes to the components that are recognized in net income or other comprehensive income under current accounting guidance. This new guidance is effective for us beginning June 1, 2012. As this guidance only amends the presentation of the components of comprehensive income, the adoption will not have an impact on our consolidated financial positions or results of operations.
In April 2011, the FASB issued new guidance to achieve common fair value measurement and disclosure requirements between U.S. GAAP and International Financial Reporting Standards. This new guidance, which is effective for us beginning June 1, 2012, amends current U.S. GAAP fair value measurement and disclosure guidance to include increased transparency around valuation inputs and investment categorization. We do not expect the adoption will have a material impact on our consolidated financial position or results of operations.
In October 2009, the FASB issued new standards that revised the guidance for revenue recognition with multiple deliverables. These new standards impact the determination of when the individual deliverables included in a multiple-element arrangement may be treated as separate units of accounting. Additionally, these new standards modify the manner in which the transaction consideration is allocated across the separately identified deliverables by no longer permitting the residual method of allocating arrangement consideration. These new standards are effective for us beginning June 1, 2011. We do not expect the adoption will have a material impact on our consolidated financial position or results of operations.
Critical Accounting Policies
Our previous discussion and analysis of our financial condition and results of operations are based upon our consolidated financial statements, which have been prepared in accordance with accounting principles generally accepted in the United States of America. The preparation of these financial statements requires us to make estimates and judgments that affect the reported amounts of assets, liabilities, revenues and expenses, and related disclosure of contingent assets and liabilities.
We believe that the estimates, assumptions and judgments involved in the accounting policies described below have the greatest potential impact on our financial statements, so we consider these to be our critical accounting policies. Because of the uncertainty inherent in these matters, actual results could differ from the estimates we use in applying the critical accounting policies. Certain of these critical accounting policies affect working capital account balances, including the policies for revenue recognition, the allowance for uncollectible accounts receivable, inventory reserves, and contingent payments under endorsement contracts. These policies require that we make estimates in the preparation of our financial statements as of a given date. However, since our business cycle is relatively short, actual results related to these estimates are generally known within the six-month period following the financial statement date. Thus, these policies generally affect only the timing of reported amounts across two to three fiscal quarters.
Within the context of these critical accounting policies, we are not currently aware of any reasonably likely events or circumstances that would result in materially different amounts being reported.
Revenue Recognition
We record wholesale revenues when title passes and the risks and rewards of ownership have passed to the customer, based on the terms of sale. Title passes generally upon shipment or upon receipt by the customer depending on the country of the sale and the agreement with the customer. Retail store revenues are recorded at the time of sale.
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In some instances, we ship product directly from our supplier to the customer and recognize revenue when the product is delivered to and accepted by the customer. Our revenues may fluctuate in cases when our customers delay accepting shipment of product for periods up to several weeks.
In certain countries outside of the U.S., precise information regarding the date of receipt by the customer is not readily available. In these cases, we estimate the date of receipt by the customer based upon historical delivery times by geographic location. On the basis of our tests of actual transactions, we have no indication that these estimates have been materially inaccurate historically.
As part of our revenue recognition policy, we record estimated sales returns, discounts and miscellaneous claims from customers as reductions to revenues at the time revenues are recorded. We base our estimates on historical rates of product returns, discounts and claims, and specific identification of outstanding claims and outstanding returns not yet received from customers. Actual returns, discounts and claims in any future period are inherently uncertain and thus may differ from our estimates. If actual or expected future returns, discounts and claims were significantly greater or lower than the reserves we had established, we would record a reduction or increase to net revenues in the period in which we made such determination.
Allowance for Uncollectible Accounts Receivable
We make ongoing estimates relating to the ability to collect our accounts receivable and maintain an allowance for estimated losses resulting from the inability of our customers to make required payments. In determining the amount of the allowance, we consider our historical level of credit losses and make judgments about the creditworthiness of significant customers based on ongoing credit evaluations. Since we cannot predict future changes in the financial stability of our customers, actual future losses from uncollectible accounts may differ from our estimates. If the financial condition of our customers were to deteriorate, resulting in their inability to make payments, a larger allowance might be required. In the event we determine that a smaller or larger allowance is appropriate, we would record a credit or a charge to selling and administrative expense in the period in which such a determination is made.
Inventory Reserves
We also make ongoing estimates relating to the net realizable value of inventories, based upon our assumptions about future demand and market conditions. If we estimate that the net realizable value of our inventory is less than the cost of the inventory recorded on our books, we record a reserve equal to the difference between the cost of the inventory and the estimated net realizable value. This reserve is recorded as a charge to cost of sales. If changes in market conditions result in reductions in the estimated net realizable value of our inventory below our previous estimate, we would increase our reserve in the period in which we made such a determination and record a charge to cost of sales.
Contingent Payments under Endorsement Contracts
A significant portion of our demand creation expense relates to payments under endorsement contracts. In general, endorsement payments are expensed uniformly over the term of the contract. However, certain contract elements may be accounted for differently, based upon the facts and circumstances of each individual contract.
Some of the contracts provide for contingent payments to endorsers based upon specific achievements in their sports (e.g., winning a championship). We record selling and administrative expense for these amounts when the endorser achieves the specific goal.
Some of the contracts provide for payments based upon endorsers maintaining a level of performance in their sport over an extended period of time (e.g., maintaining a top ranking in a sport for a year). These amounts are reported in selling and administrative expense when we determine that it is probable that the specified level
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of performance will be maintained throughout the period. In these instances, to the extent that actual payments to the endorser differ from our estimate due to changes in the endorser’s athletic performance, increased or decreased selling and administrative expense may be reported in a future period.
Some of the contracts provide for royalty payments to endorsers based upon a predetermined percentage of sales of particular products. We expense these payments in cost of sales as the related sales occur. In certain contracts, we offer minimum guaranteed royalty payments. For contractual obligations for which we estimate we will not meet the minimum guaranteed amount of royalty fees through sales of product, we record the amount of the guaranteed payment in excess of that earned through sales of product in selling and administrative expense uniformly over the remaining guarantee period.
Property, Plant and Equipment and Definite-Lived Assets
Property, plant and equipment, including buildings, equipment, and computer hardware and software are recorded at cost (including, in some cases, the cost of internal labor) and are depreciated over the estimated useful life. Changes in circumstances (such as technological advances or changes to our business operations) can result in differences between the actual and estimated useful lives. In those cases where we determine that the useful life of a long-lived asset should be shortened, we increase depreciation expense over the remaining useful life to depreciate the asset’s net book value to its salvage value.
We review the carrying value of long-lived assets or asset groups to be used in operations whenever events or changes in circumstances indicate that the carrying amount of the assets might not be recoverable. Factors that would necessitate an impairment assessment include a significant adverse change in the extent or manner in which an asset is used, a significant adverse change in legal factors or the business climate that could affect the value of the asset, or a significant decline in the observable market value of an asset, among others. If such facts indicate a potential impairment, we would assess the recoverability of an asset group by determining if the carrying value of the asset group exceeds the sum of the projected undiscounted cash flows expected to result from the use and eventual disposition of the assets over the remaining economic life of the primary asset in the asset group. If the recoverability test indicates that the carrying value of the asset group is not recoverable, we will estimate the fair value of the asset group using appropriate valuation methodologies which would typically include an estimate of discounted cash flows. Any impairment would be measured as the difference between the asset groups carrying amount and its estimated fair value.
Goodwill and Indefinite-Lived Intangible Assets
We perform annual impairment tests on goodwill and intangible assets with indefinite lives in the fourth quarter of each fiscal year, or when events occur or circumstances change that would, more likely than not, reduce the fair value of a reporting unit or an intangible asset with an indefinite life below its carrying value. Events or changes in circumstances that may trigger interim impairment reviews include significant changes in business climate, operating results, planned investments in the reporting unit, or an expectation that the carrying amount may not be recoverable, among other factors. The impairment test requires us to estimate the fair value of our reporting units. If the carrying value of a reporting unit exceeds its fair value, the goodwill of that reporting unit is potentially impaired and we proceed to step two of the impairment analysis. In step two of the analysis, we measure and record an impairment loss equal to the excess of the carrying value of the reporting unit’s goodwill over its implied fair value should such a circumstance arise.
We generally base our measurement of the fair value of a reporting unit on a blended analysis of the present value of future discounted cash flows and the market valuation approach. The discounted cash flows model indicates the fair value of the reporting unit based on the present value of the cash flows we expect the reporting unit to generate in the future. Our significant estimates in the discounted cash flows model include: our weighted average cost of capital; long-term rate of growth and profitability of the reporting unit’s business; and working capital effects. The market valuation approach indicates the fair value of the business based on a comparison of
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the reporting unit to comparable publicly traded firms in similar lines of business. Significant estimates in the market valuation approach model include identifying similar companies with comparable business factors such as size, growth, profitability, risk and return on investment and assessing comparable revenue and operating income multiples in estimating the fair value of the reporting unit.
We believe the weighted use of discounted cash flows and the market valuation approach is the best method for determining the fair value of our reporting units because these are the most common valuation methodologies used within our industry, and the blended use of both models compensates for the inherent risks associated with either model if used on a stand-alone basis.
Indefinite-lived intangible assets primarily consist of acquired trade names and trademarks. In measuring the fair value for these intangible assets, we utilize the relief-from-royalty method. This method assumes that trade names and trademarks have value to the extent that their owner is relieved of the obligation to pay royalties for the benefits received from them. This method requires us to estimate the future revenue for the related brands, the appropriate royalty rate and the weighted average cost of capital.
Hedge Accounting for Derivatives
We use forward and option contracts to hedge certain anticipated foreign currency exchange transactions as well as certain non-functional monetary assets and liabilities. When the specific criteria to qualify for hedge accounting has been met, changes in the fair value of contracts hedge probable forecasted future cash flows are recorded in other comprehensive income, rather than net income, until the underlying hedged transaction affects net income. In most cases, this results in gains and losses on hedge derivatives being released from other comprehensive income into net income some time after the maturity of the derivative. One of the criteria for this accounting treatment is that the forward and option contracts amount should not be in excess of specifically identified anticipated transactions. By their very nature, our estimates of anticipated transactions may fluctuate over time and may ultimately vary from actual transactions. When anticipated transaction estimates or actual transaction amounts decline below hedged levels, or if it is no longer probable that a forecasted transaction will occur by the end of the originally specified time period or within an additional two-month period of time thereafter, we are required to reclassify the ineffective portion of the cumulative changes in fair values of the related hedge contracts from other comprehensive income to other (income), net during the quarter in which such changes occur.
We use forward contracts to hedge our investment in the net assets of certain international subsidiaries to offset foreign currency translation related to our net investment in those subsidiaries. The change in fair value of the forward contracts hedging our net investments is reported in the cumulative translation adjustment component of accumulated other comprehensive income within stockholders’ equity, to the extent effective, to offset the foreign currency translation adjustments on those investments. As the value of our underlying net investments in wholly-owned international subsidiaries is known at the time a hedge is placed, the designated hedge is matched to the portion of our net investment at risk. Accordingly, the variability involved in net investment hedges is substantially less than that of other types of hedge transactions and we do not expect any material ineffectiveness. We consider, on a quarterly basis, the need to redesignate existing hedge relationships based on changes in the underlying net investment. Should the level of our net investment decrease below hedged levels, any resulting ineffectiveness would be reported directly to earnings in the period incurred.
Stock-based Compensation
We account for stock-based compensation by estimating the fair value of stock-based compensation on the date of grant using the Black-Scholes option pricing model. The Black-Scholes option pricing model requires the input of highly subjective assumptions including volatility. Expected volatility is estimated based on implied volatility in market traded options on our common stock with a term greater than one year, along with other factors. Our decision to use implied volatility was based on the availability of actively traded options on our
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common stock and our assessment that implied volatility is more representative of future stock price trends than historical volatility. If factors change and we use different assumptions for estimating stock-based compensation expense in future periods, stock-based compensation expense may differ materially in the future from that recorded in the current period.
Taxes
We record valuation allowances against our deferred tax assets, when necessary. Realization of deferred tax assets (such as net operating loss carry-forwards) is dependent on future taxable earnings and is therefore uncertain. At least quarterly, we assess the likelihood that our deferred tax asset balance will be recovered from future taxable income. To the extent we believe that recovery is not likely, we establish a valuation allowance against our deferred tax asset, which increases our income tax expense in the period when such determination is made.
In addition, we have not recorded U.S. income tax expense for foreign earnings that we have determined to be indefinitely reinvested offshore, thus reducing our overall income tax expense. The amount of earnings designated as indefinitely reinvested offshore is based upon the actual deployment of such earnings in our offshore assets and our expectations of the future cash needs of our U.S. and foreign entities. Income tax considerations are also a factor in determining the amount of foreign earnings to be indefinitely reinvested offshore.
We carefully review all factors that drive the ultimate disposition of foreign earnings determined to be reinvested offshore, and apply stringent standards to overcoming the presumption of repatriation. Despite this approach, because the determination involves our future plans and expectations of future events, the possibility exists that amounts declared as indefinitely reinvested offshore may ultimately be repatriated. For instance, the actual cash needs of our U.S. entities may exceed our current expectations, or the actual cash needs of our foreign entities may be less than our current expectations. This would result in additional income tax expense in the year we determined that amounts were no longer indefinitely reinvested offshore. Conversely, our approach may also result in a determination that accumulated foreign earnings (for which U.S. income taxes have been provided) will be indefinitely reinvested offshore. In this case, our income tax expense would be reduced in the year of such determination.
On an interim basis, we estimate what our effective tax rate will be for the full fiscal year. The estimated annual effective tax rate is then applied to the year-to-date pre-tax income excluding infrequently occurring or unusual items, to determine the year-to-date tax expense. The income tax effects of infrequent or unusual items are recognized in the interim period in which they occur. As the fiscal year progresses, we continually refine our estimate based upon actual events and earnings by jurisdiction during the year. This continual estimation process periodically results in a change to our expected effective tax rate for the fiscal year. When this occurs, we adjust the income tax provision during the quarter in which the change in estimate occurs.
On a quarterly basis, we reevaluate the probability that a tax position will be effectively sustained and the appropriateness of the amount recognized for uncertain tax positions based on factors including changes in facts or circumstances, changes in tax law, settled audit issues and new audit activity. Changes in our assessment may result in the recognition of a tax benefit or an additional charge to the tax provision in the period our assessment changes. We recognize interest and penalties related to income tax matters in income tax expense.
Other Contingencies
In the ordinary course of business, we are involved in legal proceedings regarding contractual and employment relationships, product liability claims, trademark rights, and a variety of other matters. We record contingent liabilities resulting from claims against us, including related legal costs, when a loss is assessed to be probable and the amount of the loss is reasonably estimable. Assessing probability of loss and estimating probable losses requires analysis of multiple factors, including in some cases judgments about the potential
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actions of third party claimants and courts. Recorded contingent liabilities are based on the best information available and actual losses in any future period are inherently uncertain. If future adjustments to estimated probable future losses or actual losses exceed our recorded liability for such claims, we would record additional charges as other (income), net during the period in which the actual loss or change in estimate occurred. In addition to contingent liabilities recorded for probable losses, we disclose contingent liabilities when there is a reasonable possibility that the ultimate loss will materially exceed the recorded liability. Currently, we do not believe that any of our pending legal proceedings or claims will have a material impact on our financial position or results of operations.
| Item 7A. | Quantitative and Qualitative Disclosures about Market Risk |
In the normal course of business and consistent with established policies and procedures, we employ a variety of financial instruments to manage exposure to fluctuations in the value of foreign currencies and interest rates. It is our policy to utilize these financial instruments only where necessary to finance our business and manage such exposures; we do not enter into these transactions for speculative purposes.
We are exposed to foreign currency fluctuations, primarily as a result of our international sales, product sourcing and funding activities. Our foreign exchange risk management program is intended to minimize both the positive or negative effects of currency fluctuations on our consolidated results of operations, financial position and cash flows. This also has the effect of delaying the impact of current market rates on our consolidated financial statements dependent upon hedge horizons. We use forward exchange contracts and options to hedge certain anticipated but not yet firmly committed transactions as well as certain firm commitments and the related receivables and payables, including third party and intercompany transactions. We also use forward contracts to hedge our investment in the net assets of certain international subsidiaries to offset foreign currency translation adjustments related to our net investment in those subsidiaries.
When we begin hedging exposures, the type and duration of each hedge depends on the nature of the exposure and market conditions. Generally, all anticipated and firmly committed transactions that are hedged are to be recognized within 12 to 18 months. The majority of the contracts expiring in more than 12 months relate to the anticipated purchase of inventory. When intercompany loans are hedged, it is typically for their expected duration. Hedged transactions are principally denominated in Euros, Japanese Yen and British Pounds. See Section “Foreign Currency Exposures and Hedging Practices” under Item 7 for additional detail.
Our earnings are also exposed to movements in short and long-term market interest rates. Our objective in managing this interest rate exposure is to limit the impact of interest rate changes on earnings and cash flows and to reduce overall borrowing costs. To achieve these objectives, we maintain a mix of commercial paper, bank loans and fixed rate debt of varying maturities and have entered into receive-fixed, pay-variable interest rate swaps.
Market Risk Measurement
We monitor foreign exchange risk, interest rate risk and related derivatives using a variety of techniques including a review of market value, sensitivity analysis, and Value-at-Risk (“VaR”). Our market-sensitive derivative and other financial instruments are foreign currency forward contracts, foreign currency option contracts, interest rate swaps, intercompany loans denominated in non-functional currencies, fixed interest rate U.S. dollar denominated debt, and fixed interest rate Japanese Yen denominated debt.
We use VaR to monitor the foreign exchange risk of our foreign currency forward and foreign currency option derivative instruments only. The VaR determines the maximum potential one-day loss in the fair value of these foreign exchange rate-sensitive financial instruments. The VaR model estimates assume normal market conditions and a 95% confidence level. There are various modeling techniques that can be used in the VaR computation. Our computations are based on interrelationships between currencies and interest rates (a “variance/co-variance” technique). These interrelationships are a function of foreign exchange currency market changes
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and interest rate changes over the preceding one year period. The value of foreign currency options does not change on a one-to-one basis with changes in the underlying currency rate. We adjusted the potential loss in option value for the estimated sensitivity (the “delta” and “gamma”) to changes in the underlying currency rate. This calculation reflects the impact of foreign currency rate fluctuations on the derivative instruments only and does not include the impact of such rate fluctuations on non-functional currency transactions (such as anticipated transactions, firm commitments, cash balances, and accounts and loans receivable and payable), including those which are hedged by these instruments.
The VaR model is a risk analysis tool and does not purport to represent actual losses in fair value that we will incur, nor does it consider the potential effect of favorable changes in market rates. It also does not represent the full extent of the possible loss that may occur. Actual future gains and losses will differ from those estimated because of changes or differences in market rates and interrelationships, hedging instruments and hedge percentages, timing and other factors.
The estimated maximum one-day loss in fair value on our foreign currency sensitive derivative financial instruments, derived using the VaR model, was $33 million and $17 million at May 31, 2011 and 2010, respectively. The VaR increased year-over-year primarily as a result of increased foreign currency volatilities at May 31, 2011. Such a hypothetical loss in fair value of our derivatives would be offset by increases in the value of the underlying transactions being hedged. The average monthly change in the fair values of foreign currency forward and foreign currency option derivative instruments was $79 million and $52 million during fiscal 2011 and fiscal 2010, respectively.
The instruments not included in the VaR are intercompany loans denominated in non-functional currencies, fixed interest rate Japanese Yen denominated debt, fixed interest rate U.S. dollar denominated debt and interest rate swaps. Intercompany loans and related interest amounts are eliminated in consolidation. Furthermore, our non-functional currency intercompany loans are substantially hedged against foreign exchange risk through the use of forward contracts, which are included in the VaR calculation above. We, therefore, consider the interest rate and foreign currency market risks associated with our non-functional currency intercompany loans to be immaterial to our consolidated financial position, results from operations and cash flows.
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Details of third party debt and interest rate swaps are provided in the table below. The table presents principal cash flows and related weighted average interest rates by expected maturity dates. Weighted average interest rates for the fixed rate swapped to floating rate debt reflect the effective interest rates as of May 31, 2011.
| Expected Maturity Date | ||||||||||||||||||||||||||||||||
| Year Ending May 31, | ||||||||||||||||||||||||||||||||
| 2012 | 2013 | 2014 | 2015 | 2016 | Thereafter | Total | Fair Value | |||||||||||||||||||||||||
| (In millions, except interest rates) | ||||||||||||||||||||||||||||||||
| Foreign Exchange Risk |
||||||||||||||||||||||||||||||||
| Japanese Yen Functional Currency |
||||||||||||||||||||||||||||||||
| Japanese Yen debt — Fixed rate |
||||||||||||||||||||||||||||||||
| Principal payments |
$ | 200 | $ | 8 | $ | 8 | $ | 8 | $ | 8 | $ | 37 | $ | 269 | $ | 275 | ||||||||||||||||
| Average interest rate |
3.4 | % | 2.4 | % | 2.4 | % | 2.4 | % | 2.4 | % | 2.4 | % | 3.0 | % | ||||||||||||||||||
| Interest Rate Risk |
||||||||||||||||||||||||||||||||
| Japanese Yen Functional Currency |
||||||||||||||||||||||||||||||||
| Long-term Japanese Yen debt — Fixed rate |
||||||||||||||||||||||||||||||||
| Principal payments |
$ | 200 | $ | 8 | $ | 8 | $ | 8 | $ | 8 | $ | 37 | $ | 269 | $ | 275 | ||||||||||||||||
| Average interest rate |
3.4 | % | 2.4 | % | 2.4 | % | 2.4 | % | 2.4 | % | 2.4 | % | 2.0 | % | ||||||||||||||||||
| U.S. Dollar Functional Currency |
||||||||||||||||||||||||||||||||
| Long-term U.S. Dollar debt — Fixed rate swapped to Floating rate |
||||||||||||||||||||||||||||||||
| Principal payments |
$ | — | $ | 40 | $ | — | $ | — | $ | 101 | $ | — | $ | 141 | $ | 153 | ||||||||||||||||
| Average interest rate |
0.0 | % | 0.9 | % | 0.0 | % | 0.0 | % | 0.4 | % | 0.0 | % | 0.5 | % | ||||||||||||||||||
| Long-term U.S. Dollar debt — Fixed rate |
||||||||||||||||||||||||||||||||
| Principal payments |
$ | — | $ | — | $ | 50 | $ | — | $ | — | $ | — | $ | 50 | $ | 54 | ||||||||||||||||
| Average interest rate |
0.0 | % | 0.0 | % | 4.7 | % | 0.0 | % | 0.0 | % | 0.0 | % | 4.7 | % | ||||||||||||||||||
The fixed interest rate Japanese Yen denominated debt instruments were issued by and are accounted for by one of our Japanese subsidiaries. Accordingly, the monthly translation of these instruments, which varies due to changes in foreign exchange rates, is recognized in accumulated other comprehensive income upon the consolidation of this subsidiary.
| Item 8. | Financial Statements and Supplemental Data |
Management of NIKE, Inc. is responsible for the information and representations contained in this report. The financial statements have been prepared in conformity with the generally accepted accounting principles we considered appropriate in the circumstances and include some amounts based on our best estimates and judgments. Other financial information in this report is consistent with these financial statements.
Our accounting systems include controls designed to reasonably assure assets are safeguarded from unauthorized use or disposition and provide for the preparation of financial statements in conformity with generally accepted accounting principles. These systems are supplemented by the selection and training of qualified financial personnel and an organizational structure providing for appropriate segregation of duties.
An Internal Audit department reviews the results of its work with the Audit Committee of the Board of Directors, presently consisting of three outside directors. The Audit Committee is responsible for the appointment of the independent registered public accounting firm and reviews with the independent registered public accounting firm, management and the internal audit staff, the scope and the results of the annual examination, the effectiveness of the accounting control system and other matters relating to the financial affairs of NIKE as they deem appropriate. The independent registered public accounting firm and the internal auditors have full access to the Committee, with and without the presence of management, to discuss any appropriate matters.
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Management’s Annual Report on Internal Control Over Financial Reporting
Management is responsible for establishing and maintaining adequate internal control over financial reporting, as such term is defined in Rule 13a-15(f) and Rule 15d-15(f) of the Securities Exchange Act of 1934, as amended. Internal control over financial reporting is a process designed to provide reasonable assurance regarding the reliability of financial reporting and the preparation of the financial statements for external purposes in accordance with generally accepted accounting principles in the United States of America. Internal control over financial reporting includes those policies and procedures that: (i) pertain to the maintenance of records that, in reasonable detail, accurately and fairly reflect the transactions and dispositions of assets of the company; (ii) provide reasonable assurance that transactions are recorded as necessary to permit preparation of financial statements in accordance with generally accepted accounting principles, and that receipts and expenditures of the company are being made only in accordance with authorizations of our management and directors; and (iii) provide reasonable assurance regarding prevention or timely detection of unauthorized acquisition, use or disposition of assets of the company that could have a material effect on the financial statements.
While “reasonable assurance” is a high level of assurance, it does not mean absolute assurance. Because of its inherent limitations, internal control over financial reporting may not prevent or detect every misstatement and instance of fraud. Controls are susceptible to manipulation, especially in instances of fraud caused by the collusion of two or more people, including our senior management. Also, projections of any evaluation of effectiveness to future periods are subject to the risk that controls may become inadequate because of changes in conditions, or that the degree of compliance with the policies or procedures may deteriorate.
Under the supervision and with the participation of our Chief Executive Officer and Chief Financial Officer, our management conducted an evaluation of the effectiveness of our internal control over financial reporting based upon the framework in Internal Control — Integrated Framework issued by the Committee of Sponsoring Organizations of the Treadway Commission (COSO). Based on the results of our evaluation, our management concluded that our internal control over financial reporting was effective as of May 31, 2011.
PricewaterhouseCoopers LLP, an independent registered public accounting firm, has audited (1) the consolidated financial statements and (2) the effectiveness of our internal control over financial reporting as of May 31, 2011, as stated in their report herein.
| Mark G. Parker |
Donald W. Blair | |
| Chief Executive Officer and President |
Chief Financial Officer |
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REPORT OF INDEPENDENT REGISTERED PUBLIC ACCOUNTING FIRM
To the Board of Directors and
Shareholders of NIKE, Inc.:
In our opinion, the consolidated financial statements listed in the index appearing under Item 15(a)(1) present fairly, in all material respects, the financial position of NIKE, Inc. and its subsidiaries at May 31, 2011 and 2010, and the results of their operations and their cash flows for each of the three years in the period ended May 31, 2011 in conformity with accounting principles generally accepted in the United States of America. In addition, in our opinion, the financial statement schedule listed in the appendix appearing under Item 15(a)(2) presents fairly, in all material respects, the information set forth therein when read in conjunction with the related consolidated financial statements. Also in our opinion, the Company maintained, in all material respects, effective internal control over financial reporting as of May 31, 2011, based on criteria established in Internal Control — Integrated Framework issued by the Committee of Sponsoring Organizations of the Treadway Commission (COSO). The Company’s management is responsible for these financial statements and financial statement schedule, for maintaining effective internal control over financial reporting and for its assessment of the effectiveness of internal control over financial reporting, included in Management’s Annual Report on Internal Control Over Financial Reporting appearing under Item 8. Our responsibility is to express opinions on these financial statements, on the financial statement schedule, and on the Company’s internal control over financial reporting based on our integrated audits. We conducted our audits in accordance with the standards of the Public Company Accounting Oversight Board (United States). Those standards require that we plan and perform the audits to obtain reasonable assurance about whether the financial statements are free of material misstatement and whether effective internal control over financial reporting was maintained in all material respects. Our audits of the financial statements included examining, on a test basis, evidence supporting the amounts and disclosures in the financial statements, assessing the accounting principles used and significant estimates made by management, and evaluating the overall financial statement presentation. Our audit of internal control over financial reporting included obtaining an understanding of internal control over financial reporting, assessing the risk that a material weakness exists, and testing and evaluating the design and operating effectiveness of internal control based on the assessed risk. Our audits also included performing such other procedures as we considered necessary in the circumstances. We believe that our audits provide a reasonable basis for our opinions.
A company’s internal control over financial reporting is a process designed to provide reasonable assurance regarding the reliability of financial reporting and the preparation of financial statements for external purposes in accordance with generally accepted accounting principles. A company’s internal control over financial reporting includes those policies and procedures that (i) pertain to the maintenance of records that, in reasonable detail, accurately and fairly reflect the transactions and dispositions of the assets of the company; (ii) provide reasonable assurance that transactions are recorded as necessary to permit preparation of financial statements in accordance with generally accepted accounting principles, and that receipts and expenditures of the company are being made only in accordance with authorizations of management and directors of the company; and (iii) provide reasonable assurance regarding prevention or timely detection of unauthorized acquisition, use, or disposition of the company’s assets that could have a material effect on the financial statements.
Because of its inherent limitations, internal control over financial reporting may not prevent or detect misstatements. Also, projections of any evaluation of effectiveness to future periods are subject to the risk that controls may become inadequate because of changes in conditions, or that the degree of compliance with the policies or procedures may deteriorate.
/s/ PRICEWATERHOUSECOOPERS LLP
Portland, Oregon
July 22, 2011
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CONSOLIDATED STATEMENTS OF INCOME
| Year Ended May 31, | ||||||||||||
| 2011 | 2010 | 2009 | ||||||||||
| (In millions, except per share data) | ||||||||||||
| Revenues |
$ | 20,862 | $ | 19,014 | $ | 19,176 | ||||||
| Cost of sales |
11,354 | 10,214 | 10,572 | |||||||||
| Gross margin |
9,508 | 8,800 | 8,604 | |||||||||
| Demand creation expense |
2,448 | 2,356 | 2,352 | |||||||||
| Operating overhead expense |
4,245 | 3,970 | 3,798 | |||||||||
| Total selling and administrative expense |
6,693 | 6,326 | 6,150 | |||||||||
| Restructuring charges (Note 16) |
— | — | 195 | |||||||||
| Goodwill impairment (Note 4) |
— | — | 199 | |||||||||
| Intangible and other asset impairment (Note 4) |
— | — | 202 | |||||||||
| Interest expense (income), net (Notes 6, 7 and 8) |
4 | 6 | (10 | ) | ||||||||
| Other (income), net (Note 17) |
(33 | ) | (49 | ) | (89 | ) | ||||||
| Income before income taxes |
2,844 | 2,517 | 1,957 | |||||||||
| Income taxes (Note 9) |
711 | 610 | 470 | |||||||||
| Net income |
$ | 2,133 | $ | 1,907 | $ | 1,487 | ||||||
| Basic earnings per common share (Notes 1 and 12) |
$ | 4.48 | $ | 3.93 | $ | 3.07 | ||||||
| Diluted earnings per common share (Notes 1 and 12) |
$ | 4.39 | $ | 3.86 | $ | 3.03 | ||||||
| Dividends declared per common share |
$ | 1.20 | $ | 1.06 | $ | 0.98 | ||||||
The accompanying notes to consolidated financial statements are an integral part of this statement.
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CONSOLIDATED BALANCE SHEETS
| May 31, | ||||||||
| 2011 | 2010 | |||||||
| (In millions) | ||||||||
| ASSETS | ||||||||
| Current assets: |
||||||||
| Cash and equivalents |
$ | 1,955 | $ | 3,079 | ||||
| Short-term investments (Note 6) |
2,583 | 2,067 | ||||||
| Accounts receivable, net (Note 1) |
3,138 | 2,650 | ||||||
| Inventories (Notes 1 and 2) |
2,715 | 2,041 | ||||||
| Deferred income taxes (Note 9) |
312 | 249 | ||||||
| Prepaid expenses and other current assets |
594 | 873 | ||||||
| Total current assets |
11,297 | 10,959 | ||||||
| Property, plant and equipment, net (Note 3) |
2,115 | 1,932 | ||||||
| Identifiable intangible assets, net (Note 4) |
487 | 467 | ||||||
| Goodwill (Note 4) |
205 | 188 | ||||||
| Deferred income taxes and other assets (Notes 9 and 17) |
894 | 873 | ||||||
| Total assets |
$ | 14,998 | $ | 14,419 | ||||
| LIABILITIES AND SHAREHOLDERS’ EQUITY | ||||||||
| Current liabilities: |
||||||||
| Current portion of long-term debt (Note 8) |
$ | 200 | $ | 7 | ||||
| Notes payable (Note 7) |
187 | 139 | ||||||
| Accounts payable (Note 7) |
1,469 | 1,255 | ||||||
| Accrued liabilities (Notes 5 and 17) |
1,985 | 1,904 | ||||||
| Income taxes payable (Note 9) |
117 | 59 | ||||||
| Total current liabilities |
3,958 | 3,364 | ||||||
| Long-term debt (Note 8) |
276 | 446 | ||||||
| Deferred income taxes and other liabilities (Notes 9 and 17) |
921 | 855 | ||||||
| Commitments and contingencies (Note 15) |
— | — | ||||||
| Redeemable Preferred Stock (Note 10) |
— | — | ||||||
| Shareholders’ equity: |
||||||||
| Common stock at stated value (Note 11): |
||||||||
| Class A convertible — 90 and 90 shares outstanding |
— | — | ||||||
| Class B — 378 and 394 shares outstanding |
3 | 3 | ||||||
| Capital in excess of stated value |
3,944 | 3,441 | ||||||
| Accumulated other comprehensive income (Note 14) |
95 | 215 | ||||||
| Retained earnings |
5,801 | 6,095 | ||||||
| Total shareholders’ equity |
9,843 | 9,754 | ||||||
| Total liabilities and shareholders’ equity |
$ | 14,998 | $ | 14,419 | ||||
The accompanying notes to consolidated financial statements are an integral part of this statement.
57
Table of Contents
CONSOLIDATED STATEMENTS OF CASH FLOWS
| Year Ended May 31, | ||||||||||||
| 2011 | 2010 | 2009 | ||||||||||
| (In millions) | ||||||||||||
| Cash provided by operations: |
||||||||||||
| Net income |
$ | 2,133 | $ | 1,907 | $ | 1,487 | ||||||
| Income charges (credits) not affecting cash: |
||||||||||||
| Depreciation |
335 | 324 | 335 | |||||||||
| Deferred income taxes |
(76 | ) | 8 | (294 | ) | |||||||
| Stock-based compensation (Note 11) |
105 | 159 | 171 | |||||||||
| Impairment of goodwill, intangibles and other assets (Note 4) |
— | — | 401 | |||||||||
| Amortization and other |
23 | 72 | 48 | |||||||||
| Changes in certain working capital components and other assets and liabilities excluding the impact of acquisition and divestitures: |
||||||||||||
| (Increase) decrease in accounts receivable |
(273 | ) | 182 | (238 | ) | |||||||
| (Increase) decrease in inventories |
(551 | ) | 285 | 32 | ||||||||
| (Increase) decrease in prepaid expenses and other current assets |
(35 | ) | (70 | ) | 14 | |||||||
| Increase (decrease) in accounts payable, accrued liabilities and income taxes payable |
151 | 297 | (220 | ) | ||||||||
| Cash provided by operations |
1,812 | 3,164 | 1,736 | |||||||||
| Cash used by investing activities: |
||||||||||||
| Purchases of short-term investments |
(7,616 | ) | (3,724 | ) | (2,909 | ) | ||||||
| Maturities of short-term investments |
4,313 | 2,334 | 1,280 | |||||||||
| Sales of short-term investments |
|
2,766 |
|
|
453 |
|
|
1,110 |
| |||
| Additions to property, plant and equipment |
(432 | ) | (335 | ) | (456 | ) | ||||||
| Disposals of property, plant and equipment |
1 | 10 | 33 | |||||||||
| Increase in other assets, net of other liabilities |
(30 | ) | (11 | ) | (47 | ) | ||||||
| Settlement of net investment hedges |
(23 | ) | 5 | 191 | ||||||||
| Cash used by investing activities |
(1,021 | ) | (1,268 | ) | (798 | ) | ||||||
| Cash used by financing activities: |
||||||||||||
| Reductions in long-term debt, including current portion |
(8 | ) | (32 | ) | (7 | ) | ||||||
| Increase (decrease) in notes payable |
41 | (205 | ) | 177 | ||||||||
| Proceeds from exercise of stock options and other stock issuances |
345 | 364 | 187 | |||||||||
| Excess tax benefits from share-based payment arrangements |
64 | 58 | 25 | |||||||||
| Repurchase of common stock |
(1,859 | ) | (741 | ) | (649 | ) | ||||||
| Dividends — common and preferred |
(555 | ) | (505 | ) | (467 | ) | ||||||
| Cash used by financing activities |
(1,972 | ) | (1,061 | ) | (734 | ) | ||||||
| Effect of exchange rate changes |
57 | (47 | ) | (47 | ) | |||||||
| Net (decrease) increase in cash and equivalents |
(1,124 | ) | 788 | 157 | ||||||||
| Cash and equivalents, beginning of year |
3,079 | 2,291 | 2,134 | |||||||||
| Cash and equivalents, end of year |
$ | 1,955 | $ | 3,079 | $ | 2,291 | ||||||
| Supplemental disclosure of cash flow information: |
||||||||||||
| Cash paid during the year for: |
||||||||||||
| Interest, net of capitalized interest |
$ | 32 | $ | 48 | $ | 47 | ||||||
| Income taxes |
736 | 537 | 765 | |||||||||
| Dividends declared and not paid |
145 | 131 | 121 | |||||||||
The accompanying notes to consolidated financial statements are an integral part of this statement.
58
Table of Contents
CONSOLIDATED STATEMENTS OF SHAREHOLDERS’ EQUITY
| Common Stock | Capital in Excess of Stated Value |
Accumulated Other Comprehensive Income |
Retained Earnings |
Total | ||||||||||||||||||||||||||||
| Class A | Class B | |||||||||||||||||||||||||||||||
| Shares | Amount | Shares | Amount | |||||||||||||||||||||||||||||
| (In millions, except per share data) | ||||||||||||||||||||||||||||||||
| Balance at May 31, 2008 |
97 | $ | — | 394 | $ | 3 | $ | 2,498 | $ | 251 | $ | 5,073 | $ | 7,825 | ||||||||||||||||||
| Stock options exercised |
4 | 167 | 167 | |||||||||||||||||||||||||||||
| Conversion to Class B Common Stock |
(2 | ) | 2 | — | ||||||||||||||||||||||||||||
| Repurchase of Class B Common Stock |
(11 | ) | (6 | ) | (633 | ) | (639 | ) | ||||||||||||||||||||||||
| Dividends on Common stock ($0.98 per share) |
(475 | ) | (475 | ) | ||||||||||||||||||||||||||||
| Issuance of shares to employees |
1 | 45 | 45 | |||||||||||||||||||||||||||||
| Stock-based compensation (Note 11): |
171 | 171 | ||||||||||||||||||||||||||||||
| Forfeiture of shares from employees |
— | (4 | ) | (1 | ) | (5 | ) | |||||||||||||||||||||||||
| Comprehensive income: |
||||||||||||||||||||||||||||||||
| Net income |
1,487 | 1,487 | ||||||||||||||||||||||||||||||
| Other comprehensive income: |
||||||||||||||||||||||||||||||||
| Foreign currency translation and other (net of tax benefit |
(335 | ) | (335 | ) | ||||||||||||||||||||||||||||
| Net gain on cash flow hedges (net of tax expense of $168) |
454 | 454 | ||||||||||||||||||||||||||||||
| Net gain on net investment hedges (net of tax expense |
106 | 106 | ||||||||||||||||||||||||||||||
| Reclassification to net income of previously deferred net gains related to hedge derivatives (net of tax expense of $40) |
(108 | ) | (108 | ) | ||||||||||||||||||||||||||||
|
|
|
|
|
|
|
|||||||||||||||||||||||||||
| Total comprehensive income |
117 | 1,487 | 1,604 | |||||||||||||||||||||||||||||
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|||||||||||||||||
| Balance at May 31, 2009 |
95 | $ | — | 390 | $ | 3 | $ | 2,871 | $ | 368 | $ | 5,451 | $ | 8,693 | ||||||||||||||||||
| Stock options exercised |
9 | 380 | 380 | |||||||||||||||||||||||||||||
| Conversion to Class B Common Stock |
(5 | ) | 5 | — | ||||||||||||||||||||||||||||
| Repurchase of Class B Common Stock |
(11 | ) | (7 | ) | (747 | ) | (754 | ) | ||||||||||||||||||||||||
| Dividends on Common stock ($1.06 per share) |
(515 | ) | (515 | ) | ||||||||||||||||||||||||||||
| Issuance of shares to employees |
1 | 40 | 40 | |||||||||||||||||||||||||||||
| Stock-based compensation (Note 11): |
159 | 159 | ||||||||||||||||||||||||||||||
| Forfeiture of shares from employees |
— | (2 | ) | (1 | ) | (3 | ) | |||||||||||||||||||||||||
| Comprehensive income: |
||||||||||||||||||||||||||||||||
| Net income |
1,907 | 1,907 | ||||||||||||||||||||||||||||||
| Other comprehensive income (Notes 14 and 17): |
||||||||||||||||||||||||||||||||
| Foreign currency translation and other (net of tax benefit of $72) |
(159 | ) | (159 | ) | ||||||||||||||||||||||||||||
| Net gain on cash flow hedges (net of tax expense of $28) |
87 | 87 | ||||||||||||||||||||||||||||||
| Net gain on net investment hedges (net of tax expense of $21) |
45 | 45 | ||||||||||||||||||||||||||||||
| Reclassification to net income of previously deferred net gains related to hedge derivatives (net of tax expense of $42) |
(122 | ) | (122 | ) | ||||||||||||||||||||||||||||
| Reclassification of ineffective hedge gains to net income (net of tax expense of $1) |
(4 | ) | (4 | ) | ||||||||||||||||||||||||||||
|
|
|
|
|
|
|
|||||||||||||||||||||||||||
| Total comprehensive income |
(153 | ) | 1,907 | 1,754 | ||||||||||||||||||||||||||||
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|||||||||||||||||
| Balance at May 31, 2010 |
90 | $ | — | 394 | $ | 3 | $ | 3,441 | $ | 215 | $ | 6,095 | $ | 9,754 | ||||||||||||||||||
| Stock options exercised |
7 | 368 | 368 | |||||||||||||||||||||||||||||
| Repurchase of Class B Common Stock |
(24 | ) | (14 | ) | (1,857 | ) | (1,871 | ) | ||||||||||||||||||||||||
| Dividends on Common stock ($1.20 per share) |
(569 | ) | (569 | ) | ||||||||||||||||||||||||||||
| Issuance of shares to employees |
1 | 49 | 49 | |||||||||||||||||||||||||||||
| Stock-based compensation (Note 11): |
105 | 105 | ||||||||||||||||||||||||||||||
| Forfeiture of shares from employees |
— | (5 | ) | (1 | ) | (6 | ) | |||||||||||||||||||||||||
| Comprehensive income: |
||||||||||||||||||||||||||||||||
| Net income |
2,133 | 2,133 | ||||||||||||||||||||||||||||||
| Other comprehensive income (Notes 14 and 17): |
||||||||||||||||||||||||||||||||
| Foreign currency translation and other (net of tax expense of $121) |
263 | 263 | ||||||||||||||||||||||||||||||
| Net loss on cash flow hedges (net of tax benefit of $66) |
(242 | ) | (242 | ) | ||||||||||||||||||||||||||||
| Net loss on net investment hedges (net of tax benefit of $28) |
(57 | ) | (57 | ) | ||||||||||||||||||||||||||||
| Reclassification to net income of previously deferred net gains related to hedge derivatives (net of tax expense of $24) |
(84 | ) | (84 | ) | ||||||||||||||||||||||||||||
|
|
|
|
|
|
|
|||||||||||||||||||||||||||
| Total comprehensive income |
(120 | ) | 2,133 | 2,013 | ||||||||||||||||||||||||||||
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|||||||||||||||||
| Balance at May 31, 2011 |
90 | $ | — | 378 | $ | 3 | $ | 3,944 | < | |||||||||||||||||||||||