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| NKE > SEC Filings for NKE > Form 10-Q on 9-Apr-2009 | All Recent SEC Filings |
9-Apr-2009
Quarterly Report
Overview
In the third quarter of fiscal 2009, our revenues declined 2% to $4.4 billion, net income decreased 47% to $243.8 million and we delivered diluted earnings per share of $0.50, a 46% decrease compared to the third quarter of fiscal 2008. Net income for the third quarter of fiscal 2009 includes a $240.7 million after-tax non-cash charge related to the impairment of goodwill, intangible and other assets of Umbro, which decreased diluted earnings per share by $0.49. Excluding these impairment charges, net income would have increased 4% to $484.5 million and diluted earnings per share would have increased 8% to $0.99 compared to the third quarter of fiscal 2008.
As discussed above, in the third quarter of fiscal 2009 we recorded $401.3 million of pre-tax non-cash impairment charges to reduce the carrying value of Umbro's goodwill, intangible and other assets. Although we expect Umbro's financial performance for fiscal 2009 to be slightly better than previous guidance, projected future cash flows have fallen below the levels we expected at the time of acquisition. This erosion is a result of both the unprecedented decline in global consumer markets, particularly in the United Kingdom, and our decision to adjust the level of investment in the Umbro business.
Excluding the impairment charges, income before income taxes decreased 5% for the third quarter as a result of declines in revenues and gross margins, partially offset by a decrease in selling and administrative expenses driven primarily by our actions to reduce and refocus both demand creation and operating overhead spending.
Excluding the impairment charges, net income and diluted earnings per share for the third quarter of fiscal 2009 were positively affected by a year-over-year decrease in our effective tax rate from 30.6% to 23.9%. The effective tax rate for the third quarter of fiscal 2009 reflects a reduction in the ongoing effective tax rate on operations outside of the U.S. and the impact of the resolution of audit items during the third quarter of fiscal 2009.
The deteriorating macroeconomic environment has caused significant volatility in global financial markets and has continued to put significant pressure on discretionary consumer spending worldwide. While we believe that the Company is well positioned from a business and financial perspective, we are not immune to global economic conditions. In the future, 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. Steps taken to date 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, and an increased focus on monitoring the financial health of suppliers and customers. We are also in the process of executing a restructuring plan which is intended to streamline our management structure to enhance consumer focus, drive innovation more quickly to market and establish a more scalable cost structure. As a result of these actions, we expect to incur gross restructuring charges of between $175 million and $225 million, consisting primarily of cash charges related to severance costs. We anticipate the majority of these charges will be incurred in the fourth quarter of this fiscal year and the first quarter of fiscal 2010. We are also taking proactive measures to consolidate production with our strongest, most efficient and most innovative manufacturing contractors to ensure we are maintaining a healthy manufacturing base for the present and the future. These capacity consolidation actions could result in additional costs associated with production and logistics as well as supply chain disruptions as we transition production between manufacturing contractors. 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
Three Months Ended Nine Months Ended
February 28 and 29, February 28 and 29,
% %
2009 2008 Change 2009 2008 Change
(dollars in millions, except per share data)
Revenues $ 4,440.8 $ 4,544.4 -2 % $ 14,463.1 $ 13,539.0 7 %
Cost of sales 2,492.3 2,496.5 0 % 7,902.5 7,483.0 6 %
Gross margin 1,948.5 2,047.9 -5 % 6,560.6 6,056.0 8 %
Gross margin % 43.9 % 45.1 % 45.4 % 44.7 %
Selling and administrative 1,352.1 1,403.2 -4 % 4,755.3 4,267.4 11 %
% of revenue 30.4 % 30.9 % 32.9 % 31.5 %
Goodwill impairment 199.3 - - 199.3 - -
Intangible and other asset impairment 202.0 - - 202.0 - -
Income before income taxes 235.4 668.7 -65 % 1,470.2 1,854.6 -21 %
Net income 243.8 463.8 -47 % 1,145.3 1,392.9 -18 %
Diluted earnings per share 0.50 0.92 -46 % 2.33 2.76 -16 %
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Reconciliation of Net Income and Diluted Earnings Per Share Excluding Non Comparable Items1
Three Months Ended Nine Months Ended
February 28 and 29, February 28 and 29,
% %
2009 2008 Change 2009 2008 Change
(dollars in millions, except per share data)
Net income, as reported $ 243.8 $ 463.8 -47% $ 1,145.3 $ 1,392.9 -18%
Add/(Subtract):
Umbro impairment of goodwill, intangible
and other assets, net of tax2 240.7 - 240.7 -
Net income, excluding non comparable items $ 484.5 $ 463.8 4% $ 1,386.0 $ 1,392.9 0%
Diluted earnings per share, as reported $ 0.50 $ 0.92 -46% $ 2.33 $ 2.76 -16%
Add/(Subtract):
Umbro impairment of goodwill, intangible
and other assets, net of tax2 0.49 - 0.49 -
Diluted earnings per share, excluding non
comparable items $ 0.99 $ 0.92 8% $ 2.82 $ 2.76 2%
Diluted weighted average common shares
outstanding 488.1 502.5 491.2 505.4
Effective tax rate, as reported -3.6 % 30.6 % -3,420 bps 22.1 % 24.9 % -280 bps
Add:
Tax rate benefit from Umbro impairment of
goodwill, intangible and other assets2 27.5 % - 3.8 % -
Effective tax rate, excluding non
comparable items 23.9 % 30.6 % -670 bps 25.9 % 24.9 % 100 bps
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1 This schedule is intended to satisfy the quantitative reconciliation for non-GAAP financial measures in accordance with Regulation G and Item 10(e) of Regulation S-K of the Securities and Exchange Commission. In addition, this schedule is provided to enhance the visibility of the underlying business trends excluding these non comparable items for the three and nine-month periods ended February 28, 2009 and February 29, 2008.
2 The Company recorded a non-cash impairment charge during the third quarter of fiscal 2009 to reduce the carrying value of Umbro's goodwill, indefinite-lived trademark and other assets.
Consolidated Operating Results
Revenues
Three Months Ended Nine Months Ended
February 28 and 29, February 28 and 29,
% %
2009 2008 Change 2009 2008 Change
(dollars in millions)
Revenues $ 4,440.8 $ 4,544.4 -2 % $ 14,463.1 $ 13,539.0 7 %
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Changes in foreign currency exchange rates decreased revenues by 4 percentage points for the third quarter and increased revenues by 1 percentage point for the first nine months of fiscal 2009. Excluding the effects of changes in currency exchange rates, nearly all of our NIKE Brand regions and, in total, our businesses classified as "Other" delivered revenue growth in the third quarter with the exception of our Europe, Middle East and Africa ("EMEA") Region. The NIKE Brand footwear business grew for the quarter, while revenues for the NIKE Brand apparel and equipment businesses declined. On a constant-currency basis, all three product groups and all four geographic regions for the NIKE Brand delivered revenue growth in the year-to-date period. Our international regions contributed 1 and 4 percentage points of the consolidated revenue growth in the third quarter and year-to-date periods, respectively. Revenue in the U.S. Region increased consolidated revenue growth by 1 percentage point in both the third quarter and 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 1% and contributed $28 million of incremental revenue for the third quarter of fiscal 2009. Our NIKE Brand apparel and equipment businesses declined 9% and 12%, respectively, during the third quarter of fiscal 2009, and decreased revenues by $136 million. For the first nine months of fiscal 2009, our NIKE Brand footwear business grew 9% and contributed $655 million of incremental revenue, while our NIKE Brand apparel and equipment businesses grew 6% and 2%, respectively, and combined added $247 million of incremental revenue.
Gross Margin
Three Months Ended February 28 Nine Months Ended
and 29, February 28 and 29,
% %
2009 2008 Change 2009 2008 Change
(dollars in millions)
Gross margin $ 1,948.5 $ 2,047.9 -5% $ 6,560.6 $ 6,056.0 8%
Gross margin % 43.9 % 45.1 % -120 bps 45.4 % 44.7 % 70 bps
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For the third quarter of fiscal 2009, the primary factors contributing to the decrease in gross margins versus the prior year period were higher product costs; increased discounts, primarily on apparel, increased inventory obsolescence reserves, and higher warehousing costs, primarily in the U.S. and EMEA Region, partially offset by improved year-on-year hedge rates, most notably in the EMEA Region. 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, partially offset by higher warehousing costs in the U.S., increased discounts and higher inventory obsolescence reserves.
Selling and Administrative Expense
Three Months Ended February 28 Nine Months Ended
and 29, February 28 and 29,
% %
2009 2008 Change 2009 2008 Change
(dollars in millions)
Operating overhead expense $ 868.8 $ 894.9 -3% $ 2,871.0 $ 2,648.8 8%
Demand creation expense1 483.3 508.3 -5% 1,884.3 1,618.6 16%
Selling and administrative expense $ 1,352.1 $ 1,403.2 -4% $ 4,755.3 $ 4,267.4 11%
% of revenues 30.4 % 30.9 % -50 bps 32.9 % 31.5 % 140 bps
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1 Demand creation consists of advertising and promotion expenses, including costs of endorsement contracts.
Changes in foreign currency exchange rates decreased selling and administrative expenses 5 percentage points in the third quarter and had a minimal effect on selling and administrative expenses for the first nine months of fiscal 2009.
Excluding changes in exchange rates, operating overhead increased 1% and 8% during the third quarter and first nine months of fiscal 2009, respectively, versus the comparable prior year periods. Operating overhead increased at a slower rate than revenue in the third quarter of fiscal 2009 as the result of the steps taken to reduce spending for travel and meetings across all regions and the implementation of a hiring freeze. The increase in operating overhead for the first nine months of fiscal 2009 was primarily attributable to investments in growth drivers such as NIKE-owned retail 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, as well as normal wage inflation, which more than offset the steps taken to reduce operating overhead spending.
On a constant-currency basis, demand creation expense increased 1% and 15% during the third quarter and first nine months of fiscal 2009, respectively, compared to the same periods in the prior year. Demand creation spending grew at a slower rate than revenue in the third quarter of fiscal 2009 as a result of actions taken to reduce spending across nearly all demand creation related activities, most notably traditional media and print advertising. The increase in the first nine 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 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 decline by a double digit percentage in the fourth quarter of 2009 as compared to the same period in the prior year, reflecting both lower demand creation and operating overhead spending and comparison to a high level of demand creation investment around the 2008 Olympics in Beijing and the European Football Championships in the fourth quarter of fiscal 2008. 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.
Goodwill Intangible and Other Asset Impairment
Three Months Ended Nine Months Ended
February 28 and 29, February 28 and 29,
% %
2009 2008 Change 2009 2008 Change
(dollars in millions)
Goodwill impairment $ 199.3 $ - - $ 199.3 $ - -
Intangible and other asset impairment $ 202.0 $ - - $ 202.0 $ - -
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In the third quarter of fiscal 2009, we recorded a $401.3 million pre-tax non-cash impairment charge to reduce the carrying value of Umbro's goodwill, intangible and other assets. Although we expect Umbro's financial performance for fiscal 2009 to be slightly better than previous guidance, projected future cash flows have fallen below the levels we expected at the time of acquisition. This erosion is a result of both the unprecedented decline in global consumer markets, particularly in the United Kingdom, and our decision to adjust the level of investment in the business.
We measured the fair value of Umbro by using an equal weighting of the fair value implied by a discounted cash flow analysis and by comparisons with the market values of similar publicly traded companies. We believe the blended use of both models compensates for the inherent risk associated with either model if used on a stand-alone basis, and this combination is indicative of the factors a market participant would consider when performing a similar valuation. The fair value of Umbro's indefinite-lived trademark was estimated using the relief from royalty method, which assumes that the trademark has value to the extent that Umbro is relieved of the obligation to pay royalties for the benefits received from the trademark. Our assessments have resulted in the recognition of impairment charges of $199.3 million and $181.3 million related to Umbro's goodwill and trademark, respectively, in the three months ended February 28, 2009. In addition to the impairment analysis, we determined an equity investment held by Umbro was impaired, and recognized a charge of $20.7 million related to the impairment of this investment. These charges are included in our "Other" category for segment reporting purposes.
For additional information about our impairment charges, see Note 3 - Acquisition, Identifiable Intangible Assets, Goodwill and Umbro Impairment in the notes to the unaudited condensed consolidated financial statements.
As a result of continued adverse conditions in the markets in which Umbro operates, the Company will continue to monitor goodwill and long-lived intangible assets for possible future impairment.
Other (Income) Expense, net
Three Months Ended Nine Months Ended
February 28 and 29, February 28 and 29,
% %
2009 2008 Change 2009 2008 Change
(dollars in millions)
Other (income) expense, net $ (43.3 ) $ (5.3 ) 717 % $ (54.1 ) $ 0.4 13625 %
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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 third quarter and first nine months of fiscal 2009, other (income) expense, net was primarily comprised of foreign currency hedge gains and losses and recognition of the deferred gain on the sale of the NIKE Bauer Hockey business. For both the third quarter and first nine months of fiscal 2008, other (income) expense, net was primarily comprised of recognition of a $28.6 million gain on the sale of the Starter brand 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 Note 11- Operating Segments in the notes to the unaudited condensed consolidated financial statements.
For the third quarter of fiscal 2009, we estimate that the combination of foreign currency hedge gains and losses in other (income) expense, net and the unfavorable 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. For the year-to-date period 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 $120 million.
Income Taxes
Three Months Ended Nine Months Ended
February 28 and 29, February 28 and 29,
% %
2009 2008 Change 2009 2008 Change
(dollars in millions)
Effective tax rate -3.6 % 30.6 % -3,420 bps 22.1 % 24.9 % -280 bps
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Our effective tax rate for the third quarter was negative 3.6%, which was primarily driven by the tax benefit related to the impairment charges recorded for the impairment of Umbro's goodwill, intangible and other assets. Excluding the tax benefit related to these impairment charges, our fiscal 2009 effective tax rate would have been 23.9%, which was 6.7 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. and the impact of the resolution of audit items during the third quarter of fiscal 2009. We estimate that our effective tax rate for the fourth quarter of fiscal year 2009 will be approximately 29%.
The effective tax rate for the first nine months of fiscal 2009 was 2.8 percentage points lower than the effective tax rate for the comparable period in fiscal 2008 due primarily to the tax benefit related to the impairment of goodwill, intangible, and other assets of Umbro, the resolution of audit items and the retroactive reinstatement of the research and development tax credit. Reflected in the effective tax rate for the first nine months of fiscal 2008 was a one-time tax benefit of $105.4 million. 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.
Futures Orders
Worldwide futures and advance orders for NIKE Brand footwear and apparel, scheduled for delivery from March 2009 through July 2009, were 10% lower than such orders reported for the comparable period of fiscal 2008. The change in futures 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 8 percentage points to the futures decline versus the same period in the prior year. Excluding this currency impact, unit sales volume decreases for apparel in the U.S. and EMEA regions and footwear in the EMEA Region were the primary driver of the decrease 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:
Three Months Ended Nine Months Ended
February 28 and 29, February 28 and 29,
% %
2009 2008 Change 2009 2008 Change
(dollars in millions)
U.S. Region $ 1,610.4 $ 1,564.1 3 % $ 4,905.7 $ 4,739.1 4 %
EMEA Region 1,185.9 1,386.4 -14 % 4,270.8 4,095.3 4 %
Asia Pacific Region 806.9 749.3 8 % 2,488.9 2,058.6 21 %
Americas Region 245.4 257.2 -5 % 985.7 856.1 15 %
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