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Nike 10-Q 2009 UNITED
STATES
SECURITIES
AND EXCHANGE COMMISSION
WASHINGTON,
D.C. 20549
FORM
10-Q
QUARTERLY
REPORT PURSUANT TO SECTION 13 OR 15(d) OF
THE
SECURITIES EXCHANGE ACT OF 1934
For the
Quarterly Period Ended November 30, 2008
Commission
file number - 001-10635
 NIKE,
Inc.
(Exact
name of registrant as specified in its charter)
One
Bowerman Drive, Beaverton, Oregon 97005-6453
(Address
of principal executive
offices) (Zip Code)
Registrant’s
telephone number, including area code(503) 671-6453
Indicate
by check mark whether the registrant (1) has filed all reports required to be
filed by Section 13 or 15 (d) of the Securities Exchange Act of 1934 during the
preceding 12 months (or for such shorter period that the registrant was required
to file such reports), and (2) has been subject to such filing requirements for
the past 90 days.
Yes ý No
¨
Indicate
by check mark whether the registrant is a large accelerated filer, an
accelerated filer, a non-accelerated filer, or a smaller reporting company. See
the definitions of "large accelerated filer," "accelerated filer" and "smaller
reporting company" in rule 12b-2 of the Exchange Act.
Large
accelerated filer ý Accelerated
filer ¨
Non-accelerated
filer ¨ Smaller
Reporting Company ¨
Indicate
by check mark whether the registrant is a shell company (as defined in Rule
12b-2 of the Exchange Act).Yes ¨No ý
Shares of
Common Stock outstanding as of November 30, 2008 were:
PART
1 - FINANCIAL INFORMATION
Item
1. FINANCIAL STATEMENTS
NIKE,
Inc.
UNAUDITED
CONDENSED CONSOLIDATED BALANCE SHEETS
The
accompanying Notes to Unaudited Condensed Consolidated Financial Statements are
an integral part of this statement.
NIKE,
Inc.
UNAUDITED
CONDENSED CONSOLIDATED STATEMENTS OF INCOME
The
accompanying Notes to Unaudited Condensed Consolidated Financial Statements are
an integral part of this statement.
NIKE, Inc.
UNAUDITED
CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS
The
accompanying Notes to Unaudited Condensed Consolidated Financial Statements are
an integral part of this statement.
NIKE,
Inc.
NOTES
TO UNAUDITED CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
NOTE
1 - Summary of
Significant Accounting Policies:
Basis
of presentation:
The
accompanying unaudited condensed consolidated financial statements reflect all
adjustments (consisting of normal recurring accruals) which are, in the opinion
of management, necessary for a fair statement of the results of operations for
the interim period. The year-end condensed consolidated balance sheet
data as of May 31, 2008 was derived from audited financial statements, but does
not include all disclosures required by accounting principles generally accepted
in the United States of America. The interim financial information
and notes thereto should be read in conjunction with the Company’s latest Annual
Report on Form 10-K. The results of operations for the three and
six months ended November 30, 2008 are not necessarily indicative of
results to be expected for the entire year.
Recently
Adopted Accounting Standards:
On June
1, 2008, the Company adopted Statement of Financial Accounting Standard ("SFAS")
No. 157, "Fair Value Measurements" ("FAS 157") for financial assets and
liabilities, which clarifies the meaning of fair value, establishes a framework
for measuring fair value and expands disclosures about fair value
measurements. Fair value is defined under FAS 157 as the exchange
price that would be received for an asset or paid to transfer a liability in the
principal or most advantageous market for the assets or liabilities in an
orderly transaction between market participants on the measurement
date. Subsequent changes in fair value of these financial assets and
liabilities are recognized in earnings or other comprehensive income when they
occur. The effective date of the provisions of FAS 157 for non-financial assets
and liabilities, except for items recognized at fair value on a recurring basis,
was deferred by Financial Accounting Standards Board ("FASB") Staff Position FAS
157-2 ("FSP FAS 157-2") and are effective for the fiscal year beginning June 1,
2009. The Company is currently evaluating the impact of the
provisions for non-financial assets and liabilities. The adoption of
FAS 157 for financial assets and liabilities did not have an impact on the
Company's consolidated financial position or results of
operations. For additional information on the fair value of financial
assets and liabilities, see Note 5 – Fair Value Measurements.
Also
effective June 1, 2008, the Company adopted SFAS No. 159 "The Fair Value Option
for Financial Assets and Financial Liabilities" ("FAS 159") which allows an
entity the irrevocable option to elect fair value for the initial and subsequent
measurement for certain financial assets and liabilities on a
contract-by-contract basis. As of November 30, 2008, the Company has
not elected the fair value option for any additional financial assets and
liabilities beyond those already prescribed by accounting principles generally
accepted in the United States.
In
October 2008, the FASB issued Staff Position No. FAS 157-3, “Determining
the Fair Value of a Financial Asset in a Market That Is Not Active ("FSP FAS
157-3").” FSP FAS 157-3 clarifies the application of
FAS 157 in a market that is not active and defines
additional key criteria in determining the fair value of a financial asset when
the market for that financial asset is not active. FSP FAS
157-3 applies to financial assets within the scope of accounting pronouncements
that require or permit fair value measurements
in accordance with FAS 157. FSP FAS 157-3 was effective upon issuance
and the application of FSP FAS
157-3 did not have a material impact on our consolidated financial
statements. Recently
Issued Accounting Standards:
In
December 2007, the FASB issued SFAS No. 141 (revised 2007), "Business
Combinations" ("FAS 141(R)") and SFAS No. 160, "Noncontrolling Interests in
Consolidated Financial Statements" ("FAS 160"). These standards aim to improve,
simplify, and converge international standards of accounting for business
combinations and the reporting of noncontrolling interests in consolidated
financial statements. The provisions of FAS 141(R) and FAS 160 are
effective for the fiscal year beginning June 1, 2009. The Company is
currently evaluating the impact of the provisions of FAS 141(R) and FAS
160.
In March
2008, the FASB issued SFAS No. 161, "Disclosures about Derivative Instruments
and Hedging Activities” (“FAS 161”). FAS 161 is intended to improve
financial reporting about derivative instruments and hedging activities by
requiring enhanced disclosures to enable investors to better understand their
effects on an entity's financial position, financial performance, and cash
flows. The provisions of FAS 161 are effective for the quarter ending February
28, 2009. The Company does not expect that the adoption will have a
material impact on the Company’s consolidated financial position or results of
operations.
In April 2008, the FASB issued Staff Position No. FAS 142-3,
“Determination of the Useful Life of Intangible Assets. ("FSP FAS 142-3")”.
FSP FAS 142-3 amends the factors that should be considered in developing
renewal or extension assumptions used to determine the useful life of a
recognized intangible asset under SFAS No. 142, “Goodwill and Other Intangible
Assets.” The intent of the position is to improve the consistency between the
useful life of a recognized intangible asset under SFAS No. 142 and the period
of expected cash flows used to measure the fair value of the asset under
FAS 141(R), and other U.S. generally accepted accounting principles. The
provisions of FSP FAS 142-3 are effective for the fiscal year
beginning June 1, 2009. The Company is currently evaluating the impact of
the provisions of FSP FAS 142-3.
NOTE
2 - Inventories:
Inventory
balances of $2,419.1 million and $2,438.4 million at November 30, 2008 and May
31, 2008, respectively, were substantially all finished goods.
NOTE
3 - Identifiable
Intangible Assets and Goodwill:
The
following table summarizes the Company’s identifiable intangible assets and
goodwill balances as of November 30, 2008 and May 31, 2008.
The
effect of foreign exchange fluctuations for the six month period ended November
30, 2008 reduced goodwill and unamortized intangible
assets by approximately $72.0 million and $85.5 million,
respectively, resulting from the strengthening of the U.S. dollar in relation to
the British pound sterling.
Amortization
expense, which is included in selling and administrative expense, was $2.3
million and $2.4 million for the three month periods ended November 30,
2008 and 2007, respectively, and $4.5 million and $5.0 million for the six month
periods ended November 30, 2008 and 2007, respectively. The estimated
amortization expense for intangible assets subject to amortization for the
remainder of fiscal year 2009 and each of the years ending May 31, 2010 through
May 31, 2013 are as follows: 2009: $3.8 million; 2010: $8.4 million;
2011: $7.9 million; 2012: $7.3 million; 2013: $5.4 million.
NOTE
4 - Accrued
Liabilities:
Accrued
liabilities include the following:
1 Other
consists of various accrued expenses and no individual item accounted for more
than 5% of the balance at November 30, 2008 and May 31, 2008.
NOTE
5 – Fair Value
Measurements:
Effective
June 1, 2008, the Company adopted FAS 157, "Fair Value
Measurements" for financial assets and liabilities. FAS 157
establishes a hierarchy that prioritizes fair value measurements based on the
types of inputs used for the various valuation techniques (market approach,
income approach, and cost approach). FAS 157 is applied under existing
accounting pronouncements that require or permit fair value measurements and,
accordingly, does not require any new fair value measurements.
The
levels of hierarchy are described below:
The
Company's assessment of the significance of a particular input to the fair value
measurement in its entirety requires judgment, and considers factors specific to
the asset or liability. Financial assets and liabilities are
classified in their entirety based on the most stringent level of input that is
significant to the fair value measurement.
The
following table presents information about the Company's financial assets and
liabilities measured at fair value on a recurring basis as of November 30, 2008
and indicates the fair value hierarchy of the valuation techniques utilized by
the Company to determine such fair value.
Available-for-sale
securities are primarily comprised of investments in U.S. Treasury and agency
securities, corporate commercial paper and bonds. These securities
are valued using market prices on both active markets (level 1) and less active
markets (level 2). Level 1 instrument valuations are obtained from
real-time quotes for transactions in active exchange markets involving identical
assets. Level 2 instrument valuations are obtained from
readily-available pricing sources for comparable instruments.
The
Company had no material level three measurements as of November 30,
2008.
NOTE
6 – Income
Taxes:
The
effective tax rate for the six months ended November 30, 2008 was
27.0%. Reflected in the effective tax rate for the six month
period ended November 30, 2008 is a reduction attributable to a settlement
of prior year foreign taxes and the retroactive reinstatement of the research
and development tax credit. The Tax Extenders and Alternative Minimum
Tax Relief Act of 2008 which was signed into law during the current quarter
reinstated the U.S. federal research and development tax credit retroactive to
January 1, 2008. As a result, the effective tax rate includes a
retroactive tax benefit in the second quarter of fiscal 2009. Also
reflected in the effective tax rate for the six months ended November 30, 2008
is a reduction in our on-going effective tax rate resulting from our operations
outside of the United States; our tax rates on those operations are generally
lower than the U.S. statutory rate.
As of November 30, 2008, the total
gross unrecognized tax benefits, excluding related interest and penalties were
$283.1 million, $75.5 million of which would affect the Company’s effective tax
rate if recognized in future periods. Total gross unrecognized tax benefits,
excluding interest and penalties, as of May 31, 2008 was $251.1 million, $60.6
million of which would affect the Company’s effective tax rate if recognized in
future periods. The liability for payment of interest and penalties increased
$15.3 million during the six months ended November 30, 2008. As of November 30,
2008, accrued interest and penalties related to uncertain tax positions were
$88.5 million (excluding federal benefit).
The Company
is subject to taxation primarily in the U.S., China and the Netherlands as well
as various state and other foreign jurisdictions. While we believe we have
adequately provided for all tax positions, amounts asserted by tax authorities
could be greater or less than our accrued position. The Company has
concluded substantially all U.S. federal income tax matters through fiscal year
2004. The Company is currently under audit by the Internal Revenue Service for
the 2005, 2006 and 2007 tax years. The Company’s major foreign jurisdictions,
China and the Netherlands, have concluded substantially all income tax matters
through calendar year 1997 and fiscal year 2002, respectively. It is
reasonably possible that the Internal Revenue Service audit for the 2005 and
2006 tax years will be completed during the next twelve months, which could
result in a decrease in our balance of unrecognized tax benefits. We do not
anticipate that total gross unrecognized tax benefits will change significantly
as a result of full or partial settlement of audits within the next twelve
months.
NOTE
7 - Comprehensive
Income:
Comprehensive
income, net of taxes, is as follows:
NOTE
8 - Stock-Based
Compensation:
A
committee of the Board of Directors grants stock options and restricted stock
under the NIKE, Inc. 1990 Stock Incentive Plan (the “1990 Plan”). The committee
has granted substantially all stock options at 100% of the market price on the
date of grant. Substantially all stock option grants outstanding under the 1990
Plan were granted in the first quarter of each fiscal year, vest ratably over
four years, and expire 10 years from the date of grant. In addition
to the 1990 Plan, the Company gives employees the right to purchase shares at a
discount to the market price under employee stock purchase plans (“ESPPs”).
The
Company accounts for stock-based compensation in accordance with SFAS No. 123R
“Share-Based Payment” (“FAS 123R”). Under FAS 123R, the Company
estimates the fair value of options granted under the 1990 Plan and employees’
purchase rights under the ESPPs using the Black-Scholes option pricing
model. The Company recognizes this fair value as selling and
administrative expense over the vesting period using the straight-line
method.
The
following table summarizes the Company’s total stock-based compensation
expense:
1 In
accordance with FAS 123R, accelerated stock option expense is recorded for
employees eligible for accelerated stock option vesting upon
retirement. Accelerated stock option expense was $0.3 million and
$0.7 million for the three months ended November 30, 2008 and 2007,
respectively, and $55.6 million and $39.2 million for the six months ended
November 30, 2008 and 2007, respectively.
As of
November 30, 2008, the Company had $118.1 million of unrecognized compensation
costs from stock options, net of estimated forfeitures, to be recognized as
selling and administrative expense over a weighted average period of 2.4
years.
The
weighted average fair value per share of the options granted during the six
months ended November 30, 2008 and 2007 as computed using the Black-Scholes
pricing model was $17.12 and $13.86, respectively. The weighted
average assumptions used to estimate these fair values are as
follows:
Expected volatility is estimated based
on the implied volatility in market traded options on the Company’s common stock
with a term greater than one year, along with other factors. The weighted
average expected life of options is based on an analysis of historical and
expected future exercise patterns. The interest rate is based on the
U.S. Treasury (constant maturity) risk-free rate in effect at the date of grant
for periods corresponding with the expected term of the
options. NOTE
9 - Earnings Per
Common Share:
The
following represents a reconciliation from basic earnings per share to diluted
earnings per share. Options to purchase an additional 13.9 million
and 6.8 million shares of common stock were outstanding for the three
months ended November 30, 2008 and 2007, respectively, and 13.8
million and 6.8 million shares of common stock were outstanding for the six
months ended November 30, 2008 and 2007, respectively, but were not included in
the computation of diluted earnings per share because the options were
antidilutive.
NOTE
10 - Operating
Segments:
The
Company’s operating segments are evidence of the structure of the Company’s
internal organization. The major segments are defined by geographic regions for
operations participating in NIKE brand sales activity excluding NIKE Golf and
NIKE Bauer Hockey. Each NIKE brand geographic segment operates predominantly in
one industry: the design, production, marketing and selling of sports and
fitness footwear, apparel, and equipment. The “Other” category shown below
primarily consists of the activities of Cole Haan, Converse Inc., Hurley
International LLC, NIKE Golf and Umbro Ltd. in the three and six month periods
ended November 30, 2008 and Cole Haan, Converse Inc., Exeter Brands Group LLC
(whose primary business was the Starter brand business which was sold on
December 17, 2007), Hurley International LLC, NIKE Bauer Hockey (which was sold
on April 17, 2008) and NIKE Golf in the three and six month periods ended
November 30, 2007. Activities represented in the "Other" category are considered
immaterial for individual disclosure based on the aggregation criteria in SFAS
No. 131 “Disclosures about Segments of an Enterprise and Related
Information.”
Where
applicable, “Corporate” represents items necessary to reconcile to the
consolidated financial statements, which generally include corporate activity
and corporate eliminations.
Net
revenues, as shown below, represent sales to external customers for each
segment. Intercompany revenues have been eliminated and are
immaterial for separate disclosure. The Company evaluates performance
of individual operating segments based on pre-tax income. On a
consolidated basis, this amount represents income before income taxes as shown
in the Unaudited Condensed Consolidated Statements of
Income. Reconciling items for pre-tax income represent corporate
costs that are not allocated to the operating segments for management reporting
including corporate activity, stock-based compensation expense, certain currency
exchange rate gains and losses on transactions, and intercompany eliminations
for specific income statement items in the Unaudited Condensed Consolidated
Statements of Income.
Accounts
receivable, net, inventories and property, plant and equipment, net for
operating segments are regularly reviewed and therefore provided
below.
Certain
prior year amounts have been reclassified to conform to fiscal 2009
presentation.
NOTE
11 - Commitments and
Contingencies:
At
November 30, 2008, the Company had letters of credit outstanding totaling $153.5
million. These letters of credit were issued primarily for the
purchase of inventory.
There
have been no other significant subsequent developments relating to the
commitments and contingencies reported on the Company’s latest Annual Report on
Form 10-K.
NOTE
12 — Acquisition and
Divestitures:
Acquisition:
On March
3, 2008, the Company completed its acquisition of 100% of the outstanding shares
of Umbro, a leading United Kingdom-based global soccer brand, for a purchase
price of 290.5 million British pounds sterling in cash (approximately $576.4
million), inclusive of direct transaction costs. The acquisition of Umbro was
accounted for as a purchase business combination in accordance with SFAS No. 141
“Business Combinations.” The purchase price was allocated to tangible
and identifiable intangible assets acquired and liabilities assumed based on
their respective estimated fair values on the date of acquisition, with the
remaining purchase price recorded as goodwill. The valuation of these tangible
and identifiable intangible assets and liabilities may be adjusted in future
periods, subject to the availability of additional information during the
allocation period regarding a pre-acquisition legal contingency.
Divestitures:
On
December 17, 2007, the Company completed the sale of the Starter brand business
to Iconix Brand Group, Inc. for $60.0 million in cash. This
transaction resulted in a gain of $28.6 million during the year ended May 31,
2008.
On April
17, 2008, the Company completed the sale of NIKE Bauer Hockey Corp. for $189.2
million in cash to a group of private investors (“the Buyer”). The
sale resulted in a net gain of $32.0 million recorded during the year ended May
31, 2008. This gain included the recognition of a $46.3 million
cumulative foreign currency translation adjustment previously included in
accumulated other comprehensive income. As part of the terms of the sale
agreement, the Company granted the Buyer a royalty free limited license for the
use of certain NIKE trademarks for a transitional period of approximately two
years. The Company deferred $41.0 million of the sale proceeds related to this
license agreement, to be recognized over the license period.
Item
2. MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS
OF OPERATIONS
Overview
In the
second quarter of fiscal 2009, our revenues grew 6% to $4.6 billion, net income
increased 9% to $391.0 million and we delivered diluted earnings per share of
$0.80, a 13% increase compared to the second quarter of fiscal
2008.
Income
before income taxes grew 1% for the second quarter, as a result of revenue
growth and improved gross margins, offset by an increase in selling and
administrative expenses driven by investments in company owned retail, rapidly
growing emerging markets, non-NIKE branded businesses and normal wage
inflation. A decrease in interest income earned on cash and
short-term investments was also a factor in income before income taxes growing
at a slower rate than revenues.
Net
income and diluted earnings per share for the second quarter of fiscal 2009 were
positively affected by a year-over-year decrease in our effective tax rate from
30.3% to 24.9%. The effective tax rate for the second quarter of
fiscal 2009 reflects a reduction in the ongoing effective tax rate on operations
outside of the U.S., the receipt of a foreign tax settlement and
reinstatement of the U.S. research and development tax credit signed into law
during the second quarter of fiscal 2009.
The deteriorating macroeconomic environment has caused significant volatility in
global financial markets and has put significant pressure on discretionary
consumer spending worldwide. While we believe that our Company is
well positioned from a business and financial perspective, we are not immune to
global economic conditions. These conditions could affect our
business in a number of direct and indirect ways, including lower revenues from
slowing consumer/customer demand for our products, reduced profit margins and
/or increased costs, changes in interest and currency exchange rates, lack of
credit availability and business disruptions due to difficulties experienced by
suppliers and customers. We are taking steps we believe prudent and
necessary to identify and manage potential exposures over the short and long
term. These steps include reductions in planned selling and
administrative expenses, including the implementation of a hiring freeze
and reductions in planned spending for travel, meetings and demand creation, as
well as tighter inventory purchasing and working capital management. We
have also increased our focus on monitoring the financial health of suppliers
and customers. Notwithstanding these efforts, our future performance
is subject to the inherent uncertainty presented by the evolving
macroeconomic conditions and our continued actions to respond to these
conditions.
Results
of Operations
Consolidated
Operating Results
Revenues
Changes in foreign currency exchange rates increased revenues by 1 percentage point for the second quarter and 4 percentage points for the first six months of fiscal 2009. Excluding the effects of changes in currency exchange rates, all three of our international NIKE Brand regions delivered revenue growth in the second quarter, while our NIKE Brand U.S. region and our businesses classified as “Other” reported revenue declines. The NIKE Brand footwear and apparel businesses grew for the quarter while revenues for NIKE Brand equipment declined. For the NIKE Brand, all three product groups and all four geographic regions delivered revenue growth in the year-to-date-period. Our international regions contributed 5 and 6 percentage points of the consolidated revenue growth in the second quarter and year-to-date periods, respectively. Revenue in the U.S. Region decreased consolidated revenue growth by less than 1 percentage point in the second quarter, and the U.S. region contributed 1 percentage point of the consolidated revenue growth for the year-to-date period. Other businesses were comprised primarily of results from Cole Haan, Converse Inc., Hurley International LLC, NIKE Golf and Umbro Ltd. in fiscal 2009 and Cole Haan, Converse Inc., Exeter Brands Group LLC (consisting primarily of the Starter brand business which was sold on December 17, 2007), Hurley International LLC, Nike Bauer Hockey Corp. (which was sold on April 17, 2008) and NIKE Golf in fiscal 2008. By product group,
our NIKE Brand footwear business reported revenue growth of 8% and contributed
$168 million of incremental revenue for the second quarter of fiscal
2009. Our NIKE Brand apparel and equipment businesses grew
8% and 1%, respectively, during the second quarter of fiscal 2009, and combined
added $108 million of incremental revenue. For the first six months
of fiscal 2009, our NIKE Brand footwear business grew 14% and
contributed $627 million of incremental revenue, while our NIKE Brand
apparel and equipment businesses grew 13% and 8%, respectively, and combined
added $383 million of incremental revenue. Gross Margin
For the second
quarter of fiscal 2009, the primary factors contributing to the increase in
gross margins versus the prior year period were improved year-on-year hedge
rates, most notably in the Europe, Middle East and Africa (“EMEA”)
region, partially offset by higher warehousing costs, increased discounts
on in-line product, primarily apparel, and increased inventory
obsolescence reserves. For the year-to-date period, the increase in
gross margins was primarily the result of improved year-on-year hedge rates,
primarily in the EMEA region, and an improved sales mix of higher margin
footwear products, most notably in the EMEA region, partially offset by higher
warehousing costs in the U.S.
Selling
and Administrative Expense
1 Demand
creation consists of advertising and promotion expenses, including costs of
endorsement contracts.
Changes
in foreign currency exchange rates had a minimal effect on selling and
administrative expenses in the second quarter and increased selling and
administrative expenses 3 percentage points for the first six months of
fiscal 2009.
Excluding
changes in exchange rates, operating overhead increased 10% and 12% during the
second quarter and first six months of fiscal 2009, respectively, versus the
comparable prior year periods. These increases were primarily attributable to
investments in growth drivers such as NIKE-owned retail primarily in the U.S.,
EMEA and Asia Pacific regions, infrastructure for emerging markets in the EMEA
and Asia Pacific regions and non-NIKE brand businesses. Normal wage
inflation also contributed to the growth across all regions.
On a
constant-currency basis, demand creation expense increased 4% and 22% during the
second quarter and first six months of fiscal 2009, respectively, compared to
the same periods in the prior year. The increase in the second quarter of fiscal
2009 was primarily attributable to an increase in investments in athlete and
team endorsements. The increase in the first six months of fiscal
2009 was primarily attributable to strategic investments in demand creation,
including first quarter spending around the 2008 Olympics in Beijing and the
European Football Championships, and increased investments in athlete and team
endorsements across all regions.
For the
third and fourth quarter of fiscal 2009, we will continue to take steps to
reduce selling and administrative spending levels while shifting resources to
fund initiatives that are critical to the achievement of our long-term growth
goals. We expect our selling and administrative expenses will grow at
a mid-single digit rate in the third quarter of fiscal 2009 as compared to the
same period in the prior year, and decline by a double digit percentage in the
fourth quarter of 2009 as compared to the same period in the prior year,
reflecting lower demand creation and operating overhead spending. Our
future selling and administrative expense levels may vary from our current
expectations due to changes in the rapidly evolving macroeconomic environment
and our reaction to those changes.
Other
income (expense), net is comprised primarily of gains and losses associated with
the conversion of non-functional currency receivables and payables, the
re-measurement of foreign currency derivative instruments, disposals of fixed
assets, as well as other unusual or non-recurring transactions that are outside
the normal course of business. For both the second quarter and first six months
of fiscal 2009, other income (expense), net was primarily comprised of
recognition of the deferred gain on the sale of the NIKE Bauer Hockey business
and foreign currency hedge gains and losses.
Foreign
currency hedge gains and losses reported in other income (expense), net are
reflected in the Corporate line in our segment presentation of pre-tax income in
the Notes to Unaudited
Condensed Consolidated Financial Statements (Note 10 — Operating
Segments).
For the
second quarter and year-to-date periods of fiscal 2009, we estimate that the
combination of foreign currency hedge gains and losses in other income
(expense), net and the favorable translation of foreign currency-denominated
profits from our international businesses resulted in a year-over-year increase
in consolidated income before income taxes of approximately $25 million and $96
million, respectively.
Income
Taxes
Our effective tax rate for the second
quarter of fiscal 2009 was 5.4 percentage points lower than the prior year
period, due primarily to a reduction in the ongoing effective tax rate on
operations outside of the U.S., the receipt of a foreign
tax settlement and reinstatement of the U.S. research and development tax
credit signed into law during the second quarter of fiscal year
2009. We estimate that our effective tax rate for fiscal
year 2009 will be approximately 28%.
The
effective tax rate for the first six months of fiscal 2009 was 5.3
percentage points higher than the effective tax rate for the comparable
period in fiscal 2008, due primarily to a one-time tax benefit realized in the
first quarter of fiscal 2008. In the years prior to fiscal 2008,
several of our international entities generated losses for which we did not
recognize the corresponding tax benefits, as the realization of those benefits
was uncertain. In the first quarter of fiscal 2008, we took the steps
necessary to realize these benefits, resulting in a one-time tax benefit of
$105.4 million.
Worldwide futures and advance
orders for NIKE Brand footwear and apparel, scheduled for delivery
from December 2008 through April 2009, were 1% lower than such orders reported
for the comparable period of fiscal 2008. This futures growth rate is
calculated based upon our forecasts of the actual exchange rates under which our
revenues will be translated during this period, which approximate current spot
rates. The net effect of changes in foreign currency exchange rates
contributed approximately 7 percentage points to the futures decline versus the
same period in the prior year. Excluding this currency impact, unit sales volume
increases for footwear were the primary growth driver in overall futures
and advance orders.
The reported futures and advance
orders growth rate 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. 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 closeout sales of NIKE Brand footwear and
apparel, wholesale sales NIKE Brand of equipment, Cole Haan, Converse, Hurley,
NIKE Golf, Umbro and retail sales across all brands.
Operating
Segments
The
breakdown of revenues is as follows:
The
breakdown of income before income taxes (“pre-tax income”) is as
follows:
The
following discussion includes disclosure of pre-tax income for our operating
segments. We have reported pre-tax income for each of our operating segments in
accordance with Statement of Financial Accounting Standards (“SFAS”) No. 131,
“Disclosures about Segments of an Enterprise and Related Information.” As
discussed in Note 10 —
Operating Segments in the accompanying Notes to Unaudited Condensed
Consolidated Financial Statements, certain corporate costs are not
included in pre-tax income of our operating segments. U.S. Region
For the
second quarter and the first six months of fiscal 2009, the increase in U.S.
footwear revenue was primarily attributable to low-single digit percentage
growth in average selling price per pair compared to the same periods in the
prior year. The increase in average selling price per pair was attributable to
strategic price increases, increased sales mix of higher priced NIKE brand
sportswear, running and Brand Jordan products, and improved pricing on close-out
products.
Average
selling price per unit for U.S. apparel declined in both the second quarter and
first six months of fiscal 2009 as compared to the same periods in the prior
year, primarily as the result of a higher mix of close-out sales. Unit
sales also decreased slightly in the second quarter of fiscal 2009 reflecting a
more challenging retail environment, resulting in a decrease in the U.S. apparel
revenues in the second quarter. For the first six months of fiscal 2009,
the increase in unit sales more than offset the decrease in average selling
price per unit, resulting in a year-over-year increase in U.S. apparel
revenues.
Pre-tax
income for the U.S. Region declined in both the second quarter and first
six months of fiscal 2009. In the second quarter of fiscal 2009, the
decline was primarily the result of lower gross margins, principally for
apparel, and higher operating overhead expenses, due largely to the
expansion of NIKE-owned retail. In addition to these factors,
profitability for the first six months of fiscal 2009 also reflected higher
demand creation spending. EMEA Region
For the
EMEA Region, changes in currency exchange rates contributed 2 and 10
percentage points of the revenue growth during the second quarter and first six
months of fiscal 2009, respectively. Excluding changes in currency exchange
rates, most markets within the region increased revenues during the quarter and
year-to-date period. The U.K. grew 2% and 4% for the second quarter
and year-to date period, respectively, while the emerging markets in the region
grew 21% and 30% for the second quarter and year-to-date period respectively,
driven by strong results in Russia. These results more than
offset lower revenues in Southern Europe.
Excluding
changes in exchange rates, footwear revenues increased 4% and 7% during the
second quarter and first six months of fiscal 2009 compared to the same periods
in the prior year. The increase in footwear revenue was attributable to high
single-digit percentage growth in unit sales, partially offset by a slight
decrease in average selling price per pair. The increase in unit
sales was primarily driven by higher demand for our NIKE brand sportswear and
kids products. The slight decrease in average selling price per pair resulted
from a shift in product mix from higher priced to lower priced models, most
notably within kids and NIKE brand sportswear products.
Excluding
changes in exchange rates, apparel revenues increased 4% and 2% for the second
quarter and first six months of fiscal 2009 compared to the same periods in the
prior year due to double-digit increases in unit sales partially offset by lower
average selling prices as a result of a higher mix of close-out
sales.
In the
second quarter and first six months of fiscal 2009, pre-tax income for EMEA grew
at a faster rate than revenue, as favorable foreign currency
translation and higher gross margins more than offset higher selling and
administrative expenses.
Asia
Pacific Region
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