UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM 10-Q
FOR QUARTERLY REPORTS UNDER SECTION 13 OR 15(d) OF
THE SECURITIES AND EXCHANGE ACT OF 1934
For the Quarter Ended August 31, 2006
Commission file number - 1-10635
NIKE, Inc.
(Exact name of registrant as specified in its charter)
OREGON 93-0584541
(State or other jurisdiction of (I.R.S. Employer
incorporation or organization) Identification No.)
One Bowerman Drive, Beaverton, Oregon 97005-6453
(Address of principal executive offices) (Zip Code)
Registrant's telephone number, including area code (503) 671-6453
Indicate by check mark whether the registrant (1) has filed all reports
required to be filed by Section 13 or 15 (d) of the Securities Exchange
Act of 1934 during the preceding 12 months (or for such shorter period
that the registrant was required to file such reports), and (2) has been
subject to such filing requirements for the past 90 days
Yes X No .
___ ___
Indicate by check mark whether the registrant is a large accelerated filer, or
accelerated filer, or a non-accelerated filer.
Large accelerated filer X Accelerated filer Non-accelerated filer
___ ___ ___
Indicate by check mark whether the registrant is a shell company (as defined
in Rule 12b-2 of the Exchange Act). Yes No X .
___ ___
Common Stock shares outstanding as of August 31, 2006 were:
_______________
Class A 63,906,694
Class B 186,799,591
_______________
250,706,285
===============
PART 1 - FINANCIAL INFORMATION
Item 1. FINANCIAL STATEMENTS
NIKE, Inc.
UNAUDITED CONDENSED CONSOLIDATED BALANCE SHEETS
August 31, May 31,
2006 2006
________ ________
(in millions)
ASSETS
Current assets:
Cash and equivalents $1,030.7 $ 954.2
Short-term investments 693.9 1,348.8
Accounts receivable, net 2,569.1 2,395.9
Inventories (Note 2) 2,134.3 2,076.7
Deferred income taxes 188.8 203.3
Prepaid expenses and other current assets 382.3 380.1
________ ________
Total current assets 6,999.1 7,359.0
Property, plant and equipment 3,451.1 3,408.3
Less accumulated depreciation 1,802.4 1,750.6
________ ________
Property, plant and equipment, net 1,648.7 1,657.7
Identifiable intangible assets, net (Note 3) 407.5 405.5
Goodwill (Note 3) 130.8 130.8
Deferred income taxes and other assets 384.4 316.6
________ ________
Total assets $9,570.5 $9,869.6
======== ========
LIABILITIES AND SHAREHOLDERS' EQUITY
Current liabilities:
Current portion of long-term debt $ 30.5 $ 255.3
Notes payable 61.3 43.4
Accounts payable 867.7 952.2
Accrued liabilities (Note 4) 1,297.7 1,286.9
Income taxes payable 152.5 85.5
________ ________
Total current liabilities 2,409.7 2,623.3
Long-term debt 380.4 410.7
Deferred income taxes and other liabilities 559.2 550.1
Commitments and contingencies (Note 9) -- --
Redeemable preferred stock 0.3 0.3
Shareholders' equity:
Common stock at stated value:
Class A convertible-63.9 and
63.9 million shares outstanding 0.1 0.1
Class B-186.8 and 192.1 million shares
outstanding 2.7 2.7
Capital in excess of stated value 1,538.0 1,447.3
Accumulated other comprehensive income (Note 5) 137.0 121.7
Retained earnings 4,543.1 4,713.4
________ ________
Total shareholders' equity 6,220.9 6,285.2
________ ________
Total liabilities and shareholders' equity $9,570.5 $9,869.6
======== ========
The accompanying Notes to Unaudited Condensed Consolidated Financial
Statements are an integral part of this statement.
NIKE, Inc.
UNAUDITED CONDENSED CONSOLIDATED STATEMENTS OF INCOME
Three Months Ended
August 31,
____________________
2006 2005
____ ____
(in millions, except per share data)
Revenues $4,194.1 $3,862.0
Cost of sales 2,344.9 2,113.9
_________ _________
Gross margin 1,849.2 1,748.1
Selling and administrative expense 1,289.7 1,104.4
Interest income, net (13.1) (6.4)
Other income, net (3.2) (9.9)
_________ _________
Income before income taxes 575.8 660.0
Income taxes 198.6 227.7
_________ _________
Net income $ 377.2 $ 432.3
========= =========
Basic earnings per common share (Note 7) $ 1.49 $ 1.66
========= =========
Diluted earnings per common share (Note 7) $ 1.47 $ 1.61
========= =========
Dividends declared per common share $ 0.31 $ 0.25
========= =========
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
Three Months Ended
August 31,
_____________________
2006 2005
____ ____
(in millions)
Cash provided (used) by operations:
Net income $ 377.2 $ 432.3
Income charges (credits) not affecting cash:
Depreciation 66.9 68.9
Deferred income taxes (1.9) (11.2)
Stock-based compensation (Note 6) 69.7 --
Amortization and other 7.1 0.7
Tax benefit from exercise of stock options -- 15.9
Changes in certain working capital components and other
assets and liabilities:
Increase in accounts receivable (164.3) (132.8)
Increase in inventories (73.9) (29.1)
Increase in prepaid expenses
and other assets (47.9) (39.6)
Decrease in accounts payable, accrued
liabilities and income taxes payable (1.1) (43.4)
_________ ________
Cash provided by operations 231.8 261.7
_________ ________
Cash provided (used) by investing activities:
Purchases of investments (300.0) (261.6)
Maturities of investments 961.8 395.6
Additions to property, plant and
equipment (72.3) (58.5)
Disposals of property, plant and
equipment 0.1 0.4
Increase in other assets and liabilities, net (5.5) (6.6)
_________ ________
Cash provided by investing activities 584.1 69.3
_________ ________
Cash provided (used) by financing activities:
Reductions in long-term debt,
including current portion (251.4) (1.6)
Increase in notes payable 16.5 4.2
Proceeds from exercise of options and
other stock issuances 30.1 53.6
Excess tax benefits from stock option exercises 5.1 --
Repurchase of common stock (472.9) (129.1)
Dividends on common stock (79.3) (65.3)
_________ ________
Cash used by financing activities (751.9) (138.2)
_________ ________
Effect of exchange rate changes on cash 12.5 8.0
_________ ________
Net increase in cash and equivalents 76.5 200.8
Cash and equivalents, beginning of period 954.2 1,388.1
_________ ________
Cash and equivalents, end of period $ 1,030.7 $1,588.9
========= =========
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 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 (3) months ended August 31, 2006 are not necessarily
indicative of results to be expected for the entire year.
Recently Issued Accounting Standards:
In June 2006, the Financial Accounting Standards Board ("FASB") issued
FASB Interpretation No. 48, "Accounting for Uncertainty in Income Taxes" ("FIN
48"). FIN 48 clarifies the accounting for uncertainty in income taxes
recognized in the Company's financial statements in accordance with FASB
Statement No. 109, "Accounting for Income Taxes." The provisions of FIN 48
are effective for the fiscal year beginning June 1, 2007. The Company is
currently evaluating the impact of the provisions of FIN 48.
In September 2006, the FASB issued Statement of Financial Accounting
Standard ("SFAS") No. 157, "Fair Value Measurements" ("FAS 157"). FAS 157
defines fair value, establishes a framework for measuring fair value in
accordance with generally accepted accounting principles, and expands
disclosures about fair value measurements. The provisions of FAS 157 are
effective for the fiscal year beginning June 1, 2008. The Company is
currently evaluating the impact of the provisions of FAS 157.
In September 2006, the FASB issued SFAS No. 158, "Employers' Accounting
for Defined Benefit Pension and Other Postretirement Plans" ("FAS 158"). FAS
158 requires employers to fully recognize the obligations associated with
single-employer defined benefit pension, retiree healthcare and other
postretirement plans in their financial statements. The provisions of FAS 158
are effective as of the end of the fiscal year ending May 31, 2007. The
Company is currently evaluating the impact of the provisions of FAS 158.
NOTE 2 - Inventories:
___________
Inventory balances of $2,134.3 million and $2,076.7 million at August 31,
2006 and May 31, 2006, 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 August 31, 2006 and May 31, 2006:
August 31, 2006 May 31, 2006
______________________ ______________________
Gross Net Gross Net
Carrying Accumulated Carrying Carrying Accumulated Carrying
Amount Amortization Amount Amount Amortization Amount
________ ____________ ________ ________ ____________ ________
(in millions)
Amortized intangible assets:
Patents $ 37.4 $ (11.2) $ 26.2 $ 34.1 $ (10.5) $ 23.6
Trademarks 47.7 (13.3) 34.4 46.4 (11.8) 34.6
Other 21.5 (16.1) 5.4 21.5 (15.7) 5.8
________ ________ ________ ________ ________ _________
Total $ 106.6 $ (40.6) $ 66.0 $ 102.0 $ (38.0) $ 64.0
======== ======== ======== ========
Unamortized intangible assets - Trademarks $ 341.5 $ 341.5
________ ________
Identifiable intangible assets, net $ 407.5 $ 405.5
======== ========
Goodwill $ 130.8 $ 130.8
======== ========
Amortization expense, which is included in selling and administrative
expense, was $2.5 million and $2.5 million for the three-month periods ended
August 31, 2006 and 2005, respectively. The estimated amortization expense
for intangible assets subject to amortization for each of the succeeding years
ending May 31, 2007 through May 31, 2011 are as follows: 2007: $10.0 million;
2008: $9.8 million; 2009: $8.7 million; 2010: $8.0 million; 2011: $7.5
million.
NOTE 4 - Accrued Liabilities:
___________________
Accrued liabilities include the following:
August 31, 2006 May 31, 2006
_______________ ____________
(in millions)
Compensation and benefits, excluding taxes $295.4 $427.2
Taxes other than income taxes 180.4 115.1
Endorser compensation 151.5 124.7
Advertising and marketing 123.0 75.4
Fair value of derivatives 82.5 111.2
Dividends payable 78.2 79.5
Converse arbitration1 36.0 51.9
Other2 350.7 301.9
_______ _______
$1,297.7 $1,286.9
========= =========
1 The Converse arbitration relates to a charge taken during the fourth
quarter ended May 31, 2006 as a result of a contract dispute between
NIKE, Inc.'s Converse subsidiary and a former South American licensee.
2 Other consists of various accrued expenses and no individual item accounted
for more than $50 million of the balance at August 31, 2006 and May 31, 2006.
NOTE 5 - Comprehensive Income:
____________________
Comprehensive income, net of taxes, is as follows:
Three Months Ended
August 31,
_____________________
2006 2005
____ ____
(in millions)
Net income $377.2 $432.3
Other comprehensive income:
Change in cumulative translation
adjustment and other (2.0) (17.3)
Changes due to cash flow hedging
instruments:
Net gain on hedge derivatives 19.0 42.0
Reclassification to net income of
previously deferred (gains) and losses
related to hedge derivative instruments (1.7) 7.7
_______ _______
Other comprehensive income 15.3 32.4
_______ _______
Total comprehensive income $392.5 $464.7
======= =======
NOTE 6 - Stock-Based Compensation
________________________
In 1990, the Board of Directors adopted, and the shareholders approved,
the NIKE, Inc. 1990 Stock Incentive Plan (the "1990 Plan"). The 1990 Plan
provides for the issuance of up to 66 million previously unissued shares of
Class B Common Stock in connection with stock options and other awards granted
under the plan. The 1990 Plan authorizes the grant of non-statutory stock
options, incentive stock options, stock appreciation rights, stock bonuses and
the issuance and sale of restricted stock. The exercise price for non-
statutory stock options, stock appreciation rights and the grant price of
restricted stock may not be less than 75% of the market price of the
underlying shares on the date of grant. The exercise price for incentive stock
options may not be less than the market price of the underlying shares on
the date of grant. A committee of the Board of Directors administers the 1990
Plan. The committee has the authority to determine the employees to whom
awards will be made, the amount of the awards, and the other terms and
conditions of the awards. The committee has granted substantially all stock
options at 100% of the market price on the date of grant. Substantially all
grants outstanding under the 1990 Plan 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").
On June 1, 2006, the Company adopted SFAS No. 123R "Share-Based Payment"
("FAS 123R") which requires the Company to record expense for stock-based
compensation to employees using a fair value method. 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 in the Unaudited Condensed Consolidated Statements of
Income over the vesting period using the straight-line method.
The following table summarizes the effects of applying FAS 123R during
the three months ended August 31, 2006. The resulting stock-based compensation
expense primarily relates to stock options.
Three Months Ended
August 31, 2006
____________________
(in millions, except per share data)
Addition to selling and administrative expense $ 61.3
Reduction to income tax expense 20.5
_______
Reduction to net income1 $ 40.8
=======
Reduction to earnings per share:
Basic $ 0.16
Diluted $ 0.16
1 In accordance with FAS 123R, included in the total $40.8 million, net of
tax, stock-based compensation expense reported during the three months ended
August 31, 2006, is $22.2 million, net of tax, or $0.09 per diluted share, of
accelerated stock-based compensation expense recorded for employees eligible
for accelerated stock option vesting upon retirement. Because the Company
usually grants the majority of stock options in a single grant in the first
three months of each fiscal year, under FAS 123R accelerated vesting will
normally result in higher expense in the first three months and lower expense
in each of the remaining quarters of the fiscal year.
As of August 31, 2006, the Company had $209.3 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 1.9 years.
The Company has adopted the modified prospective transition method
prescribed by FAS 123R, which does not require the restatement of financial
results for previous periods. In accordance with this transition method,
beginning with the three months ended August 31, 2006, the Company's
Unaudited Condensed Consolidated Statement of Income includes (1) amortization
of outstanding stock-based compensation granted prior to, but not vested, as
of June 1, 2006, based on the fair value estimated in accordance with the
original provisions of SFAS No. 123, "Accounting for Stock-Based Compensation"
("FAS 123") and (2) amortization of all stock-based awards granted subsequent
to June 1, 2006, based on the fair value estimated in accordance with the
provisions of FAS 123R.
Prior to the adoption of FAS 123R, the Company used the intrinsic value
method to account for stock options and ESPP shares in accordance with
Accounting Principles Board Opinion No. 25, "Accounting for Stock
Issued to Employees" as permitted by FAS 123. If the Company had instead
accounted for stock options and ESPP shares to employees using the fair value
method prescribed by FAS 123 during the three months ended August 31, 2005,
the Company's pro forma net income and pro forma earnings per share would have
been reported as follows:
Three Months Ended
August 31, 2005
____________________
(in millions, except per share data)
Net income as reported $ 432.3
Add: Stock option expense included
in reported net income, net of tax 0.1
Deduct: Total stock option and ESPP
expense under fair value based method for all
awards, net of tax1 (18.9)
_______
Pro forma net income $ 413.5
=======
Earnings per share:
Basic - as reported $ 1.66
Basic - pro forma $ 1.58
Diluted - as reported $ 1.61
Diluted - pro forma $ 1.55
1 Accelerated stock-based compensation expense for options subject to
accelerated vesting due to employee retirement is not included in the pro
forma figures shown above for the three months ended August 31, 2005. This
disclosure reflects the expense of such options ratably over the stated
vesting period or upon actual employee retirement. Had the Company recognized
the fair value for such stock options on an accelerated basis in this pro
forma disclosure, an additional $18.7 million, net of tax, or $0.07 per
diluted share would be recognized in the disclosure.
The weighted average fair value per share of the options granted during
the three months ended August 31, 2006 and 2005 as computed using the Black-
Scholes pricing model was $17.54 and $19.36, respectively. The weighted
average assumptions used to estimate these fair values are as follows:
Three Months Ended
August 31,
_____________________
2006 2005
____ ____
Dividend yield 1.6% 1.0%
Expected volatility 18.7% 20.7%
Weighted-average expected life (in years) 5.0 4.5
Risk-free interest rate 5.0% 4.0%
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. 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.
The following summarizes the Company's stock option transactions during
the three months ended August 31, 2006:
Weighted
Weighted Average
Average Contractual Aggregate
Exercise Life Intrinsic
Shares Price Remaining Value
__________ __________ __________ _________
(in millions) (in years) (in millions)
Options outstanding May 31, 2006 20.2 $ 64.62
Exercised (0.6) 51.86
Forfeited (0.3) 67.11
Granted 5.6 78.76
__________
Options outstanding August 31, 2006 24.9 $ 68.08 7.5 $ 353.7
========== ========= ========== =========
Options exercisable August 31, 2006 12.1 $ 57.12 6.0 $ 296.2
========== ========= ========== =========
The aggregate intrinsic value in the table above was the amount by which
the market value of the underlying stock exceeded the exercise price of the
options. The total intrinsic value of the options exercised during the
three months ended August 31, 2006 and 2005 was $16.8 million and $42.4
million, respectively.
The following table summarizes the Company's total stock-based
compensation expense for the three months ended August 31, 2006 (in millions):
Stock options $59.5
ESPPs 1.8
Other1 8.4
_______
Total stock-based compensation expense $69.7
=======
1 Other includes certain bonuses, settled in cash or Company shares at
the election of the employee and restricted stock grants not significant
individually or in the aggregate. The expense related to these awards was
included in selling and administrative expense in prior years and was not
affected by the adoption of FAS 123R.
NOTE 7 - Earnings Per Common Share:
_________________________
The following represents a reconciliation from basic earnings per share
to diluted earnings per share. Options to purchase 15.4 million and 5.7
million shares of common stock were outstanding at August 31, 2006 and
August 31, 2005, respectively, but were not included in the computation of
diluted earnings per share because the options were antidilutive.
Three Months Ended
August 31,
_____________________
2006 2005
____ ____
(in millions, except per share data)
Determination of shares:
Weighted average common shares
outstanding 252.7 260.9
Assumed conversion of
dilutive stock options
and awards 3.3 7.7
_______ _______
Diluted weighted average common
shares outstanding 256.0 268.6
======= =======
Basic earnings per common share $ 1.49 $ 1.66
======= =======
Diluted earnings per common share $ 1.47 $ 1.61
======= =======
NOTE 8 - 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 represents activities of Cole Haan Holdings Incorporated, Converse
Inc., Exeter Brands Group LLC, Hurley International LLC, NIKE Bauer Hockey
Inc., and NIKE Golf, which 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.
Three Months Ended
August 31,
_____________________
2006 2005
____ ____
(in millions)
Revenues
U.S. $1,601.9 $1,508.9
EUROPE, MIDDLE EAST, AFRICA 1,270.9 1,217.5
ASIA PACIFIC 518.4 459.6
AMERICAS 242.5 213.7
OTHER 560.4 462.3
_________ _________
$4,194.1 $3,862.0
========= =========
Pre-tax income
U.S. $ 338.9 $ 345.2
EUROPE, MIDDLE EAST, AFRICA 302.5 330.2
ASIA PACIFIC 98.9 91.4
AMERICAS 48.4 44.6
OTHER 87.9 40.0
CORPORATE (300.8) (191.4)
_________ _________
$ 575.8 $ 660.0
========= =========
Aug. 31, May 31,
2006 2006
_________ _________
(in millions)
Accounts receivable, net
U.S. $ 755.6 $ 717.2
EUROPE, MIDDLE EAST, AFRICA 838.1 716.3
ASIA PACIFIC 290.6 319.7
AMERICAS 206.6 174.5
OTHER 393.8 410.0
CORPORATE 84.4 58.2
_________ _________
$2,569.1 $2,395.9
========= =========
Inventories
U.S. $ 761.0 $ 725.9
EUROPE, MIDDLE EAST, AFRICA 573.3 590.1
ASIA PACIFIC 242.9 238.3
AMERICAS 160.4 147.6
OTHER 342.6 330.5
CORPORATE 54.1 44.3
_________ _________
$2,134.3 $2,076.7
========= =========
Property, plant and equipment, net
U.S. $ 220.8 $ 219.3
EUROPE, MIDDLE EAST, AFRICA 271.6 266.6
ASIA PACIFIC 337.7 354.8
AMERICAS 16.9 17.0
OTHER 99.4 98.2
CORPORATE 702.3 701.8
_________ _________
$1,648.7 $1,657.7
========= =========
NOTE 9 - Commitments and Contingencies:
_____________________________
At August 31, 2006, the Company had letters of credit outstanding
totaling $177.3 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.
Item 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND
RESULTS OF OPERATIONS
Overview
In the first quarter of fiscal 2007, our revenues grew 9% to $4.2
billion, net income declined 13% to $377 million and diluted earnings per
share were $1.47, a 9% decrease compared to the first quarter of fiscal 2006.
These reported results included a $61.3 million charge, before taxes, related
to stock-based compensation expense now recognized in accordance with
Statement of Financial Accounting Standard ("SFAS") No. 123R "Share-Based
Payment," ("FAS 123R") which we adopted during the first quarter of fiscal
2007. See further discussion of the adoption of FAS 123R in Note 6 - Stock-
Based Compensation in the accompanying Notes to Unaudited Condensed
Consolidated Financial Statements. Excluding this charge, our net income
declined 3 percentage points and diluted earnings per share were $1.63, a 1%
increase versus the first quarter of fiscal 2006. For the quarter, our
consolidated gross margin percentage declined 120 basis points to 44.1%,
primarily due to lower in-line net pricing margins (net revenue for current
product offerings minus landed product costs) for footwear. Increased demand
creation spending in the first quarter of fiscal 2007 compared to the first
quarter of fiscal 2006 also contributed to the pre-tax income decline in the
quarter and reflected increased spending on advertising and sports marketing
events, primarily around the global World Cup and Nike Air (registered)
campaigns.
Results of Operations
Three Months Ended
August 31,
___________________
%
2006 2005 change
______ ______ ________
(dollars in millions, except per share data)
Revenues $4,194.1 $3,862.0 9%
Cost of sales 2,344.9 2,113.9 11%
Gross margin 1,849.2 1,748.1 6%
Gross margin % 44.1% 45.3%
Selling and administrative expense 1,289.7 1,104.4 17%
% of revenues 30.8% 28.6%
Income before income taxes 575.8 660.0 -13%
Net income 377.2 432.3 -13%
Diluted earnings per share 1.47 1.61 -9%
Reconciliation of Net Income and Diluted Earnings Per Share ("EPS")
Excluding Stock-Based Compensation Expense
Three Months Ended
August 31,
___________________
%
2006 2005 change
______ ______ ________
(dollars in millions, except per share data)
Net income, as reported $377.2 $432.3 -13%
Stock-based compensation expense1,
net of tax of $20.5 40.8 -- -
________ ________
Net income, excluding stock-
based compensation expense2 $418.0 $432.3 -3%
Diluted EPS, as reported $ 1.47 $ 1.61 -9%
Diluted EPS, excluding stock-
based compensation expense $ 1.63 $ 1.61 1%
1 This charge relates to stock-based compensation associated with stock
options and Employee Stock Purchase Plan ("ESPP") shares issued to
employees and expensed in accordance with FAS 123R. We adopted FAS
123R on June 1, 2006 using the modified prospective transition method.
While this expense was not reflected in our results of operations for
the first quarter of fiscal 2006, it will continue to be reflected in
future accounting periods.
2 This schedule is intended to satisfy the quantitative reconciliation
for non-GAAP financial measures in accordance with Regulation G of the
Securities and Exchange Commission. In addition, this schedule is
provided to enhance the visibility of the underlying business trends
by presenting our results for the first quarter of fiscal 2007 using
the same accounting policy for stock-based compensation expense
applied during the first quarter of fiscal 2006.
Consolidated Operating Results
Revenues
Three Months Ended
August 31,
___________________
%
2006 2005 change
______ ______ ________
(dollars in millions)
Revenues $4,194.1 $3,862.0 9%
In the first quarter of fiscal 2007, changes in currency exchange rates,
primarily the stronger euro, increased the consolidated revenue growth by 2
percentage points. Excluding the impact of changes in foreign currency, our
international regions contributed approximately 3 percentage points of the
consolidated revenue growth for the first quarter of fiscal 2007,as all three
of our international regions posted higher revenues. The U.S. region
contributed 2 percentage points of the consolidated revenue growth for the
first quarter of fiscal 2007. Sales in our Other businesses drove the balance
of the improvement for the quarter. Revenues for our Other businesses are
comprised substantially of results from Cole Haan Holdings Incorporated,
Converse Inc., Exeter Brands Group LLC, Hurley International LLC, NIKE Bauer
Hockey, Inc., and NIKE Golf.
Gross Margin
Three Months Ended
August 31,
___________________
%
2006 2005 change
______ ______ ________
(dollars in millions)
Gross margin $1,849.2 $1,748.1 6%
Gross margin % 44.1% 45.3% -120 bps
In the first quarter of fiscal 2007, our consolidated gross margin
percentage declined 120 basis points compared to the first quarter of 2006.
The primary factors contributing to the reduced gross margin percentage for
the first quarter of 2007 were as follows:
(1) Lower footwear in-line net pricing margins due to:
- additional costs incurred to meet strong footwear demand in the
U.S. region;
- higher sales incentives, primarily in the Europe, Middle East and
Africa ("EMEA") and Asia Pacific regions;
- strategies to improve consumer value in EMEA;
- overall higher product costs, primarily the result of higher
labor costs and oil prices; and
- a shift in the mix of footwear models sold from higher margin
models toward those with lower margins, most notably in EMEA;
(2) Higher third party royalty costs driven by increased sales of team-
endorsed soccer apparel.
These factors were partially offset by improved gross margin percentages
in our Other businesses driven primarily by NIKE Bauer Hockey, NIKE Golf, and
Converse, offset by a decline at Exeter.
Selling and Administrative Expense
Three Months Ended
August 31,
___________________
%
2006 2005 change
______ ______ ________
(dollars in millions)
Operating overhead expense, excluding
stock-based compensation expense1 $ 726.4 $ 682.8 6%
Stock-based compensation expense2 61.3 -- -
________ ________
Operating overhead expense, as reported 787.7 682.8 15%
Demand creation expense3 502.0 421.6 19%
_________ _________
Selling and administrative expense $1,289.7 $1,104.4 17%
% of revenues 30.8% 28.6% 220 bps
1 This schedule is intended to satisfy the quantitative reconciliation
for non-GAAP financial measures in accordance with Regulation G of the
Securities and Exchange Commission. In addition, this schedule is
provided to enhance the visibility of the underlying business trends
excluding this identifiable expense by presenting our results for the
first quarter of fiscal 2007 using the same accounting policy for stock-
based compensation expense applied during the first quarter of fiscal
2006.
2 This charge relates to stock-based compensation associated with stock
options and ESPP shares issued to employees and expensed in accordance
with FAS 123R. We adopted FAS 123R on June 1, 2006 using the modified
prospective transition method. While this expense was not reflected in
our results of operations for the first quarter of fiscal 2006, it will
continue to be reflected in future accounting periods.
3 Demand creation consists of advertising and promotion expenses, including
costs of endorsement contracts.
Changes in currency exchange rates increased selling and administrative
expense by 1 percentage point in the first quarter of fiscal 2007 compared to
the prior year.
In the first quarter of fiscal 2007, demand creation expense increased 19
percentage points over the prior year due to increased spending on advertising
and sports marketing events, primarily associated with the global World Cup and
Nike Air (registered) campaigns. In addition, demand creation expense was
particularly light in the first quarter of fiscal 2006 reflecting a greater
concentration of advertising later in that year.
Excluding stock-based compensation expense, operating overhead increased
6 percentage points, a lower rate of growth than revenue. The increase in
operating overhead was mainly attributable to higher wages and benefits;
increased spending to support the growth of NIKE-owned retail, primarily
related to new stores; and increased spending to support the growth of our
Other businesses.
Other Income, net
Three Months Ended
August 31,
___________________
%
2006 2005 change
______ ______ ________
(dollars in millions)
Other income, net $ 3.2 $ 9.9 -68%
The reduction in Other income, net for the first quarter of fiscal 2007
compared to the prior year was primarily driven by foreign currency hedge
losses in the first quarter of fiscal 2007, compared to foreign currency hedge
gains in the first quarter of fiscal 2006, more than offset by a benefit from
a favorable settlement of the previously disclosed Converse arbitration. The
hedge losses and gains are reflected in the Corporate line in our segment
presentation of pre-tax income, and the Converse arbitration settlement is
reflected in the Other line in our segment presentation of pre-tax income in
the Notes to Unaudited Condensed Consolidated Financial Statements (Note 8 -
Operating Segments).
Income Taxes
Three Months Ended
August 31,
___________________
%
2006 2005 change
______ ______ ________
Effective tax rate 34.5% 34.5% -
The effective tax rate for the first quarter of fiscal 2007 is consistent
with the first quarter of fiscal 2006.
Futures Orders
Worldwide futures and advance orders for our footwear and apparel
scheduled for delivery from September 2006 through January 2007 were 6%
higher than such orders reported for the comparable period of fiscal 2006.
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 from changes in currency
exchange rates improved this reported increase by 0.5 percentage points versus
the same period last year. Unit sales volume increases for both footwear and
apparel contributed more than 4 percentage points of the growth in overall
futures and advance orders. The remaining increase was due to higher average
selling prices for footwear and apparel. The reported futures and advance
orders growth is not necessarily indicative of our expectation of revenue
growth during this period. This is because the mix of orders can shift
between advance/futures and at-once orders. In addition, exchange rate
fluctuations as well as differing levels of order cancellations 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 closeout sales
of NIKE footwear and apparel, wholesale sales of equipment, U.S. licensed team
apparel, Cole Haan, Converse, Exeter Brands Group, Hurley, NIKE Bauer Hockey,
NIKE Golf and retail sales across all brands.
Operating Segments
The breakdown of revenues follows:
Three Months Ended
August 31,
__________________
%
2006 2005 change
______ ______ ________
(dollars in millions)
U.S. Region
Footwear $1,079.1 $1,021.1 6%
Apparel 431.5 395.5 9%
Equipment 91.3 92.3 -1%
________ ________
Total U.S. 1,601.9 1,508.9 6%
EMEA Region
Footwear 679.5 685.1 -1%
Apparel 487.0 435.2 12%
Equipment 104.4 97.2 7%
________ ________
Total EMEA 1,270.9 1,217.5 4%
Asia Pacific Region
Footwear 266.0 237.4 12%
Apparel 200.9 176.5 14%
Equipment 51.5 45.7 13%
________ ________
Total Asia Pacific 518.4 459.6 13%
Americas Region
Footwear 172.3 156.9 10%
Apparel 51.2 40.7 26%
Equipment 19.0 16.1 18%
________ ________
Total Americas 242.5 213.7 13%
________ ________
3,633.7 3,399.7 7%
Other 560.4 462.3 21%
________ ________
Total revenues $4,194.1 $3,862.0 9%
======== ========
The breakdown of income before income taxes ("pre-tax income") follows:
Three Months Ended
August 31,
__________________
%
2006 2005 change
______ ______ ________
(dollars in millions)
U.S. Region $ 338.9 $ 345.2 -2%
EMEA Region 302.5 330.2 -8%
Asia Pacific Region 98.9 91.4 8%
Americas Region 48.4 44.6 9%
Other 87.9 40.0 120%
Corporate (300.8) (191.4) -57%
________ ________
Total pre-tax income $ 575.8 $ 660.0 -13%
The discussion following 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 SFAS No. 131, "Disclosures about
Segments of an Enterprise and Related Information." As discussed in Note 8 -
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
Three Months Ended
August 31,
__________________
%
2006 2005 change
______ ______ ________
(dollars in millions)
Revenues
Footwear $1,079.1 $1,021.1 6%
Apparel 431.5 395.5 9%
Equipment 91.3 92.3 -1%
________ ________
Total revenues $1,601.9 $1,508.9 6%
Pre-tax income $ 338.9 $ 345.2 -2%
The increase in U.S. footwear revenue for the first quarter of fiscal
2007 was due to increases in both unit sales and average selling price per
pair. The increase in units sold was driven by increased consumer demand for
our Brand Jordan and Nike brand sport culture products. The higher average
selling price per pair reflected increased consumer demand for higher priced
sport performance and NIKE brand sport culture products.
The increase in U.S. apparel revenues for the first quarter of fiscal
2007 was driven by increased unit sales, primarily NIKE brand sport
performance apparel, as well as an increase in average selling prices,
driven by NIKE brand sport performance and Brand Jordan apparel.
The decrease in the U.S. region pre-tax income in the first quarter of
fiscal 2007 reflected higher selling and administrative expenses and a lower
gross margin percentage. The lower gross margin percentage was primarily the
result of lower in-line pricing margins for footwear attributable to
additional costs incurred to meet strong footwear unit demand and higher
product costs. Selling and administrative costs increased as a result of
higher demand creation spending around the World Cup and Nike Air (registered)
campaigns as well as an increase in operating overhead expense, driven by
increased spending for new NIKE-owned retail stores and expected annual
increases in wages and benefits.
EMEA Region
Three Months Ended
August 31,
__________________
%
2006 2005 change
______ ______ ________
(dollars in millions)
Revenues
Footwear $ 679.5 $ 685.1 -1%
Apparel 487.0 435.2 12%
Equipment 104.4 97.2 7%
________ ________
Total revenues $1,270.9 $1,217.5 4%
Pre-tax income $ 302.5 $ 330.2 -8%
For the EMEA region, changes in currency exchange rates increased
revenue growth by 3 percentage points in the first quarter of fiscal 2007.
Excluding changes in currency exchange rates, sales increases in our Central
Europe, Middle East and Africa unit led the revenue growth, offset by a
decline in the U.K. The decline in footwear revenue reflected decreased
unit sales and a slight decline in the average selling price per pair. The
decreased unit sales of footwear reflected lower demand resulting from the
difficult retail environment, most notably in the U.K., offset by increased
demand for sport culture products across the rest of the region. The decline
in the average selling price per pair was due in part to changes in the mix
of in-line products sold towards products with a lower average selling
price, and higher sales incentives as a result of the difficult retail
environment mentioned above. The increase in EMEA apparel revenue was driven
by increased unit sales and average selling prices of NIKE brand apparel,
primarily sport performance products.
The decrease in EMEA pre-tax income for the first quarter of fiscal
2007 was driven by a lower gross margin percentage and higher selling and
administrative costs more than offsetting higher revenues and favorable
foreign currency translation compared to the prior year. The lower gross
margin percentage was primarily the result of lower in-line net pricing
margins in footwear as well as higher third party royalty costs driven by
increased sales of team-endorsed soccer apparel, partially offset by
improved year-over-year euro hedge rates. The lower in-line net pricing
margins in footwear were due to higher product costs, primarily the result
of increased labor costs and higher oil prices, higher sales incentives,
strategies to improve consumer value, and a shift in the mix of footwear
models sold from models with higher margins towards models with lower
margins. Excluding changes in foreign currency exchange rates, selling and
administrative expenses in the first quarter of 2007 were higher than in the
first quarter of 2006 driven primarily by higher demand creation spending
around the World Cup and NIKE Air (registered) campaigns. Operating overhead
expense increased slightly, due primarily to expected annual increases in
wages and benefits.
Asia Pacific Region
Three Months Ended
August 31,
__________________
%
2006 2005 change
______ ______ ________
(dollars in millions)
Revenues
Footwear $ 266.0 $ 237.4 12%
Apparel 200.9 176.5 14%
Equipment 51.5 45.7 13%
________ ________
Total revenues $ 518.4 $ 459.6 13%
Pre-tax income $ 98.9 $ 91.4 8%
In the Asia Pacific region, changes in currency exchange rates did not
have a significant impact on revenues for the first quarter of fiscal 2007
compared to the prior year. Footwear revenue growth reflected increased unit
sales, partially offset by lower average selling prices, due primarily to
strategies to improve consumer value in Japan. The increase in apparel
revenues was driven primarily by increased demand for sport performance
products, particularly related to the World Cup, as well as increased demand
for sport culture products. Revenues increased in almost all countries. China
was the primary growth driver for the quarter due to retail distribution
expansion coupled with strong consumer demand.
The increase in pre-tax income for the Asia Pacific region in the first
quarter of fiscal 2007 was driven by higher revenues partially offset by
increased selling and administrative expenses. Changes in currency exchange
rates increased pre-tax income by 1 percentage point. The gross margin
percentage remained relatively flat compared to the prior year. Demand
creation spending around the World Cup drove the increase in selling and
administrative expenses while operating overhead spending remained
consistent with the prior year.
Americas Region
Three Months Ended
August 31,
__________________
%
2006 2005 change
______ ______ ________
(dollars in millions)
Revenues
Footwear $ 172.3 $ 156.9 10%
Apparel 51.2 40.7 26%
Equipment 19.0 16.1 18%
________ ________
Total revenues $ 242.5 $ 213.7 13%
Pre-tax income $ 48.4 $ 44.6 9%
In the Americas region, 3 percentage points of the revenue growth for
the first quarter of fiscal 2007 were due to changes in foreign currency
exchange rates. Excluding the changes in foreign currency exchange rates,
sales in each Americas product business unit grew in the first quarter. The
revenue growth for the quarter was driven primarily by increased sales in
nearly every country in the region, with significant sales increases in
Argentina and Mexico offset by sales declines in Brazil as we respond to a
shift in consumer preferences to sport culture products.
The increase in pre-tax income for the Americas region in the first
quarter of fiscal 2007 was attributable to higher revenues, an improved
gross margin percentage, and favorable foreign currency translation
partially offset by higher selling and administrative expenses. The
increased selling and administrative expenses were due to increases in both
demand creation spending, primarily around the World Cup campaign, as well
as increased operating overhead expense driven by increased wages and
benefits and costs incurred for the implementation of new supply chain
systems in the region.
Other Businesses
Three Months Ended
August 31,
__________________
%
2006 2005 change
______ ______ ________
(dollars in millions)
Revenues $ 560.4 $ 462.3 21%
Pre-tax income 87.9 40.0 120%
The increase in Other business revenues for the first quarter of fiscal
2007 was driven by higher revenues across every business, most notably NIKE
Golf and NIKE Bauer Hockey in addition to the wholesale business expansion
at Exeter.
Pre-tax income from the Other businesses in the first quarter of fiscal
2007 increased 120 percentage points as compared to the first quarter of
fiscal 2006 and included a $14.2 million benefit resulting from the final
settlement of the previously disclosed arbitration ruling involving Converse
and a former South American licensee. Excluding the Converse arbitration
settlement benefit, the pre-tax income improvement was attributable to
higher revenues and an improved gross margin percentage, most notably at
NIKE Bauer Hockey, NIKE Golf, and Converse.
Liquidity and Capital Resources
Cash Flow Activity
Cash provided by operations was $231.8 million for the first quarter of
fiscal 2007, compared to $261.7 million for the first quarter of fiscal
2006. Our primary source of operating cash flow for the first quarter of
fiscal 2007 was net income of $377.2 million offset by an increased
investment in working capital to support growth in the business. The
increased investment in working capital over the first quarter of fiscal
2006 was largely due to an increase in inventories which reflects our
business growth driven by futures and at once order growth, early product
ordering to optimize factory capacity, a market slowdown primarily in EMEA,
and an increase in replenishment business.
Cash provided by investing activities was $584.1 million for the first
quarter of fiscal 2007, compared to $69.3 million for the first quarter of
fiscal 2006. The increase over fiscal 2006 was primarily due to higher net
maturities of short-term investments (maturities net of purchases).
Cash used by financing activities was $751.9 million for the first
quarter of fiscal 2007, an increase of $613.7 million from the first quarter
of fiscal 2006. The increase over fiscal 2006 was primarily due to the $250
million repayment of corporate bonds and an increase in share
repurchases, as discussed below.
In the current quarter, we purchased 6.0 million shares of NIKE's Class
B common stock for $476.7 million. During the quarter, we completed the
previous four-year, $1.5 billion share repurchase program approved by the
Board of Directors in June 2004 and started repurchasing shares under the
Company's new four-year, $3 billion share repurchase program approved by the
Board of Directors in June 2006. As of the end of the first quarter of
fiscal 2007, the Company had purchased 4.0 million shares for $314.1 million
under the new $3 billion program. We expect to fund share repurchases 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.
Dividends declared per share of common stock for the first quarter of
fiscal 2007 were $0.31, compared to $0.25 in the first quarter of fiscal
2006.
Contractual Obligations
As a result of renewals and additions to outstanding endorsement
contracts, the cash payments due under our endorsement contracts have
changed from what was previously reported in our Annual Report on Form 10-K
as of May 31, 2006.
Endorsement contract obligations as of August 31, 2006 are as follows:
Cash Payments Due During the Fiscal Year Ending
May 31,
_______________________________________________
Remaining
Description of Commitment 2007 2008 2009 2010 2011 Thereafter Total
__________________________ ______ ______ ______ ______ ______ __________ _______
(in millions)
Endorsement Contracts $ 326.6 370.9 293.4 218.6 166.7 525.2 $1,901.4
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 the
endorsers with NIKE products for their use. It is not possible to determine
how much we will spend on this product on an annual basis as the contracts
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.
Capital Resources
No amounts are currently outstanding under our committed revolving credit
facility. The terms of our facility have not changed from those described in
our Annual Report on Form 10-K for the fiscal year ended May 31, 2006.
Our long-term senior unsecured debt ratings remain at A+ and A2 from
Standard and Poor's Corporation and Moody's Investor Services, respectively.
Liquidity is also provided by our commercial paper program, under which
there was no amount outstanding at August 31, 2006 or May 31, 2006. We
currently have short-term debt ratings of A1 and P1 from Standard and Poor's
Corporation and Moody's Investor Services, respectively.
We currently believe that cash generated by operations, together with
access to external sources of funds as described above and in our Annual
Report on Form 10-K for the fiscal year ended May 31, 2006, will be
sufficient to meet our operating and capital needs in the foreseeable
future.
Recently Issued Accounting Standards
In June 2006, the Financial Accounting Standards Board ("FASB") issued
FASB Interpretation No. 48, "Accounting for Uncertainty in Income Taxes"
("FIN 48"). FIN 48 clarifies the accounting for uncertainty in income taxes
recognized in our financial statements in accordance with FASB Statement No.
109, "Accounting for Income Taxes". The provisions of FIN 48 are effective
for our fiscal year beginning June 1, 2007. We are currently evaluating the
impact of the provisions of FIN 48.
In September 2006, the FASB issued SFAS No. 157, "Fair Value
Measurements" ("FAS 157"). FAS 157 defines fair value, establishes a
framework for measuring fair value in generally accepted accounting
principles, and expands disclosures about fair value measurements. The
provisions of FAS 157 are effective for our fiscal year beginning June 1,
2008. We are currently evaluating the impact of the provisions of FAS 157.
In September 2006, the FASB issued SFAS No. 158. "Employers' Accounting
for Defined Benefit Pension and Other Postretirement Plans" ("FAS 158").
FAS 158 requires employers to fully recognize the obligations associated
with single-employer defined benefit pension, retiree healthcare and other
postretirement plans in their financial statements. The provisions of FAS
158 are effective as of the end of the fiscal year ending May 31, 2007. We
are currently evaluating the impact of the provisions of FAS 158.
Critical Accounting Policies
Our discussion and analysis of our financial condition and results of
operations are based upon our consolidated financial statements, which have
been prepared in accordance with accounting principles generally accepted in
the United States. The preparation of these financial statements requires us
to make estimates and judgments that affect the reported amounts of assets,
liabilities, revenues and expenses, and related disclosure of contingent
assets and liabilities.
We believe that the estimates, assumptions and judgments involved in
the accounting policies described in the "Management's Discussion and
Analysis of Financial Condition and Results of Operations" section of our
most recent Annual Report on Form 10-K have the greatest potential impact on
our financial statements, so we consider these to be our critical accounting
policies. With the adoption of FAS 123R at the beginning of the first
quarter of fiscal 2007, we have added "Stock-based Compensation" as a
critical accounting policy as described below. Actual results could differ
from the estimates we use in applying the critical accounting policies.
Certain of these critical accounting policies affect working capital account
balances, including the policies for revenue recognition, the reserve for
uncollectible accounts receivable, inventory reserves, and contingent
payments under endorsement contracts. These policies require that we make
estimates in the preparation of our financial statements as of a given date.
However, since our business cycle is relatively short, actual results
related to these estimates are generally known within the six-month period
following the financial statement date. Thus, these policies generally
affect only the timing of reported amounts across two to three quarters.
Within the context of these critical accounting policies, we are not
currently aware of any reasonably likely events or circumstances that would
result in materially different amounts being reported.
Stock-based Compensation
As of the first quarter of fiscal 2007, we account for stock-based
compensation in accordance with FAS 123R. Under the provisions of FAS 123R,
the fair value of stock-based compensation is estimated on the date of grant
using the Black-Scholes fair value 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 the Company's common stock, with a term greater than
one year. Our decision to use implied volatility was based on the
availability of actively traded options on our 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.
Item 3. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK
There have been no material changes from the information previously
reported under Item 7A of the Company's Annual Report on Form 10-K for the
fiscal year ended May 31, 2006.
Item 4. CONTROLS AND PROCEDURES
The Company maintains disclosure controls and procedures that are
designed to ensure that information required to be disclosed in the Company's
Exchange Act reports is recorded, processed, summarized and reported within
the time periods specified in the Securities and Exchange Commission's rules
and forms and that such information is accumulated and communicated to the
Company's management, including its Chief Executive Officer and Chief
Financial Officer, as appropriate, to allow for timely decisions regarding
required disclosure. In designing and evaluating the disclosure controls and
procedures, management recognizes that any controls and procedures, no matter
how well designed and operated, can provide only reasonable assurance of
achieving the desired control objectives, and management is required to apply
its judgment in evaluating the cost-benefit relationship of possible controls
and procedures.
The Company carries out a variety of on-going procedures, under the
supervision and with the participation of the Company's management, including
the Company's Chief Executive Officer and the Company's Chief Financial
Officer, to evaluate the effectiveness of the design and operation of the
Company's disclosure controls and procedures. Based on the foregoing, the
Company's Chief Executive Officer and Chief Financial Officer concluded that
the Company's disclosure controls and procedures were effective at the
reasonable assurance level as of August 31, 2006.
There has been no change in the Company's internal controls over
financial reporting during the Company's most recent fiscal quarter that has
materially affected, or is reasonable likely to materially affect, the
Company's internal controls over financial reporting.
Special Note Regarding Forward-Looking Statements
and Analyst Reports
Certain written and oral statements, other than purely historical
information including estimates, projections, statements relating to NIKE's
business plans, objectives and expected operating results, and the assumptions
upon which those statements are based, made or incorporated by reference from
time to time by NIKE or its representatives in this report, other reports,
filings with the Securities and Exchange Commission, press releases,
conferences, or otherwise, are "forward-looking statements" within the meaning
of the Private Securities Litigation Reform Act of 1995 and Section 21E of the
Securities Exchange Act of 1934. Forward-looking statements include, without
limitation, any statement that may predict, forecast, indicate, or imply
future results, performance, or achievements, and may contain the words
"believe," "anticipate," "expect," "estimate," "project," "will be," "will
continue," "will likely result," or words or phrases of similar meaning.
Forward-looking statements involve risks and uncertainties which may cause
actual results to differ materially from the forward-looking statements. The
risks and uncertainties are detailed from time to time in reports filed by
NIKE with the S.E.C., including Forms 8-K, 10-Q, and 10-K, and include, among
others, the following: international, national and local general economic and
market conditions; the size and growth of the overall athletic footwear,
apparel, and equipment markets; intense competition among designers,
marketers, distributors and sellers of athletic footwear, apparel, and
equipment for consumers and endorsers; demographic changes; changes in
consumer preferences; popularity of particular designs, categories of
products, and sports; seasonal and geographic demand for NIKE products;
difficulties in anticipating or forecasting changes in consumer preferences,
consumer demand for NIKE products, and the various market factors described
above; difficulties in implementing, operating, and maintaining NIKE's
increasingly complex information systems and controls, including, without
limitation, the systems related to demand and supply planning, and inventory
control; fluctuations and difficulty in forecasting operating results,
including, without limitation, the fact that advance "futures" orders may not
be indicative of future revenues due to the changing mix of futures and at-
once orders; the ability of NIKE to sustain, manage or forecast its growth and
inventories; the size, timing and mix of purchases of NIKE's products; new
product development and introduction; the ability to secure and protect
trademarks, patents, and other intellectual property performance and
reliability of products; customer service; adverse publicity; the loss of
significant customers or suppliers; dependence on distributors; business
disruptions; increased costs of freight and transportation to meet delivery
deadlines; changes in business strategy or development plans; general risks
associated with doing business outside the United States, including, without
limitation, exchange rate fluctuations, import duties, tariffs, quotas and
political and economic instability; changes in government regulations;
liability and other claims asserted against NIKE; the ability to attract and
retain qualified personnel; and other factors referenced or incorporated by
reference in this report and other reports.
The risks included here are not exhaustive. Other sections of this report
may include additional factors which could adversely affect NIKE's business
and financial performance. Moreover, NIKE operates in a very competitive and
rapidly changing environment. New risk factors emerge from time to time and it
is not possible for management to predict all such risk factors, nor can it
assess the impact of all such risk factors on NIKE's business or the extent to
which any factor, or combination of factors, may cause actual results to
differ materially from those contained in any forward-looking statements.
Given these risks and uncertainties, investors should not place undue reliance
on forward-looking statements as a prediction of actual results.
Investors should also be aware that while NIKE does, from time to time,
communicate with securities analysts, it is against NIKE's policy to disclose
to them any material non-public information or other confidential commercial
information. Accordingly, shareholders should not assume that NIKE agrees with
any statement or report issued by any analyst irrespective of the content of
the statement or report. Furthermore, NIKE has a policy against issuing or
confirming financial forecasts or projections issued by others. Thus, to the
extent that reports issued by securities analysts contain any projections,
forecasts or opinions, such reports are not the responsibility of NIKE.
Part II - Other Information
Item 1. Legal Proceedings
There have been no significant developments with respect to the
information previously reported under Item 4 of the Company's Annual Report on
Form 10-K for the fiscal year ended May 31, 2006.
Item 1A. Risk Factors
There have been no material changes in our risk factors from those
disclosed in Part I, Item 1A, of our Annual Report on Form 10-K for the fiscal
year ended May 31, 2006.
Item 2. Unregistered Sales of Equity Securities and Use of Proceeds
The following table presents a summary of share repurchases made by NIKE
during the quarter ended August 31, 2006. In June 2006, our Board of
Directors approved a new four-year $3.0 billion share repurchase program.
During the quarter ended August 31, 2006, we completed the previous $1.5
billion share repurchase program authorized by the Board of Directors
in June 2004.
Total Number of Maximum Dollar Value
Shares Purchased as of Shares that May
Total Number Average Part of Publicly Yet Be Purchased
Of Shares Price Paid Announced Plans Under the Plans
Period Purchased Per Share or Programs or Programs
______ ____________ __________ ___________________ ____________________
(in millions)
June 1 - 30, 2006 1,360,000 $ 81.60 1,360,000 $3,051.6
July 1 - 31, 2006 1,930,700 $ 79.44 1,930,700 $2,898.2
August 1 - 31, 2006 2,736,600 $ 77.60 2,736,600 $2,685.9
_________ _______ _________
Total 6,027,300 $ 79.09 6,027,300
========= ======= =========
Item 6. Exhibits
(a) EXHIBITS:
3.1 Restated Articles of Incorporation, as amended (incorporated
by reference to Exhibit 3.1 to the Company's Quarterly Report
on Form 10-Q for the fiscal quarter ended August 31, 2005).
3.2 Third Restated Bylaws, as amended (incorporated by reference
from Exhibit 3.2 to the Company's Current Report on Form 8-K
filed November 18, 2004).
4.1 Restated Articles of Incorporation, as amended (see Exhibit
3.1).
4.2 Third Restated Bylaws, as amended (see Exhibit 3.2).
12.1 Computation of Ratio of Earnings to Fixed Charges.
31.1 Rule 13(a)-14(a) Certification of Chief Executive Officer.
31.2 Rule 13(a)-14(a) Certification of Chief Financial Officer.
32.1 Section 1350 Certificate of Chief Executive Officer.
32.2 Section 1350 Certificate of Chief Financial Officer.
SIGNATURES
Pursuant to the requirements of the Securities Exchange Act of 1934,
the registrant has duly caused this report to be signed on its behalf by
the undersigned thereunto duly authorized.
NIKE, Inc.
an Oregon Corporation
/s/Donald W. Blair
________________________
Donald W. Blair
Chief Financial Officer
DATED: October 3, 2006