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| NKE > SEC Filings for NKE > Form 10-K on 27-Jul-2009 | All Recent SEC Filings |
27-Jul-2009
Annual Report
Overview
NIKE designs, develops and markets high quality footwear, apparel, equipment and accessory products worldwide. We are the largest seller of athletic footwear and apparel in the world and sell our products primarily through a combination of retail accounts, NIKE-owned retail, including stores and e-commerce, independent distributors, franchisees and licensees worldwide. Our goal is to deliver value to our shareholders by building a profitable global portfolio of branded footwear, apparel, equipment and accessories businesses. Our strategy is to achieve long-term revenue growth by creating innovative, "must have" products; building deep personal consumer connections with our brands; and delivering compelling retail presentation and experiences.
We strive to convert revenue growth to shareholder value by driving operating excellence in several key areas:
• Making our supply chain a competitive advantage, through operational discipline
• Reducing product costs through a continued focus on lean manufacturing and product design that strives to eliminate waste
• Improving selling and administrative expense productivity by focusing on investments that drive economic returns in the form of incremental revenue and gross margin, and leveraging existing infrastructure across our portfolio of brands to eliminate duplicative costs
• Improving working capital efficiency
• Deploying capital effectively to create value for our shareholders
Through execution of this strategy, our long-term financial goal is to achieve:
• High single-digit revenue growth
• Mid-teens earnings per share growth
• Increased return on invested capital and accelerated cash flows, and
• Consistent results through effective management of our diversified portfolio of businesses
Since the adoption of this long-term strategy in 2001, on an annual compounded basis, NIKE, Inc.'s revenues and earnings per share have grown 9% and 14%, respectively. During the same period, our return on invested capital increased from 14% to 18%. In fiscal 2009, deteriorating macroeconomic conditions caused significant volatility in global financial markets and put significant pressure on discretionary consumer spending worldwide. NIKE's fiscal 2009 revenues grew 3% to $19.2 billion, net income decreased 21% to $1.5 billion, and we delivered diluted earnings per share of $3.03, a 19% decrease versus fiscal 2008. Our fiscal 2009 reported results also contain significant non-comparable transactions, including after-tax charges of $144.5 million for our restructuring activities, which were completed in the fourth quarter of fiscal 2009, and $240.7 million for the impairment of goodwill, intangible and other assets of Umbro, which was recorded in the third quarter of fiscal 2009. Our fiscal 2008 reported results include combined gains from the sale of our Starter Brand and NIKE Bauer Hockey businesses of $35.4 million, net of tax, and a one-time tax benefit of $105.4 million. Excluding these non-comparable items, net income would have increased 7% to $1.9 billion and diluted earnings per share would have increased 10% to $3.81 compared to fiscal 2008 (see Reconciliation of Net Income and Diluted Earnings Per Share Excluding Non-Comparable items below). The increase in our net income excluding non-comparable items was higher than our rate of revenue growth in fiscal 2009 due primarily to an increase in other (income) expense, net, which included foreign currency conversion gains of $43.4 million compared to foreign currency conversion losses of $76.6 million in fiscal 2008, and the recognition of licensing income of $24.0 million related to our fiscal 2008 sale of the NIKE Bauer Hockey business. Excluding non-comparable items, our earnings per share for the year grew at a higher rate than net income given lower outstanding shares due to repurchases made under our share repurchase program in the first half of fiscal 2009. Our cash flows from operations and return on invested capital both declined as compared to fiscal 2008.
During fiscal 2009, we took steps we believe prudent and necessary to identify and manage potential exposures and to position ourselves for sustainable, profitable long-term growth. In the fourth quarter of fiscal 2009, we executed a plan of restructuring the organization to streamline our management structure, enhance consumer focus, drive innovation more quickly to market, and establish a more scalable cost structure. As a result of these actions, we reduced our global workforce by approximately 5% and incurred pre-tax restructuring charges of $195 million, primarily consisting of cash charges related to severance costs. As part of this restructuring plan, we also initiated a reorganization of the NIKE brand business into a new operating model consisting of six geographies. As a result of the reorganization, beginning in the first quarter of fiscal 2010, our new organizational structure will consist of the following geographies: North America, Western Europe, Central/Eastern Europe, Greater China, Japan, and Emerging Markets.
Other steps taken in fiscal 2009 included reductions in planned selling and administrative expenses, including the implementation of a hiring freeze, reductions in planned spending for travel, meetings and demand creation, as well as tighter inventory purchasing and working capital management. We also placed increased focus on monitoring the financial health of suppliers and customers and continued to take proactive measures to consolidate production with our strongest, most efficient and innovative manufacturing contractors to ensure we maintain a healthy production 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 in the first half of fiscal year 2010 as we transition production between manufacturing contractors; however, we do not believe these potential additional costs will have a material impact on our operating results.
We continue to believe that the Company is well positioned from a business and financial perspective, but we are not immune to the current challenging global economic conditions. These conditions could continue to affect our business in a number of direct and indirect ways, including lower revenue 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 experiences by suppliers and customers. 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
FY09 vs. FY08 vs.
FY08 FY07
Fiscal 2009 Fiscal 2008 % Change Fiscal 2007 % Change
(In millions, except per share data)
Revenues $ 19,176.1 $ 18,627.0 3 % $ 16,325.9 14 %
Cost of sales 10,571.7 10,239.6 3 % 9,165.4 12 %
Gross margin 8,604.4 8,387.4 3 % 7,160.5 17 %
Gross margin % 44.9 % 45.0 % 43.9 %
Selling and
administrative expense 6,149.6 5,953.7 3 % 5,028.7 18 %
% of Revenues 32.1 % 32.0 % 30.8 %
Restructuring charges 195.0 - - - -
Goodwill impairment 199.3 - - - -
Intangible and other
asset impairment 202.0 - - - -
Income before income
taxes 1,956.5 2,502.9 -22 % 2,199.9 14 %
Net income 1,486.7 1,883.4 -21 % 1,491.5 26 %
Diluted earnings per
share 3.03 3.74 -19 % 2.93 28 %
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Reconciliation of Net Income and Diluted Earnings Per Share Excluding
Non-Comparable Items(1)
FY09 vs.
FY08
Fiscal 2009 Fiscal 2008 Change
(In millions, except per share data)
Net income, as reported $ 1,486.7 $ 1,883.4 -21 %
Add:
Restructuring charges, net of tax(2) 144.5 -
Umbro impairment of goodwill, intangible
and other assets, net of tax(3) 240.7 -
Gain recognized on sale of NIKE Bauer
Hockey, net of tax - (17.7 )
Gain recognized on sale of Starter
Business, net of tax - (17.7 )
One-time tax benefits(4) - (105.4 )
Net income, excluding non-comparable
items $ 1,871.9 $ 1,742.6 7 %
Diluted earnings per share, as reported $ 3.03 $ 3.74 -19 %
Add:
Restructuring charges, net of tax(2) 0.29 -
Umbro impairment of goodwill, intangible
and other assets, net of tax(3) 0.49 -
Gain recognized on sale of NIKE Bauer
Hockey,
net of tax - (0.04 )
Gain recognized on sale of Starter
Business, net of tax - (0.04 )
One-time tax benefits(4) - (0.21 )
Diluted earnings per share, excluding
non-comparable items $ 3.81 $ 3.45 10 %
Diluted weighted average common shares
outstanding 490.7 504.1
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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 years ended May 31, 2009 and 2008.
(3) We 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. The impairment charge is a result of both the deteriorating global consumer markets, particularly in Umbro's primary market, the United Kingdom, and management's decision to adjust planned investment in the brand. In addition, the deterioration of the financial markets has reduced both the present value of future cash flows and the market value of comparable businesses.
(4) The tax benefit realized during fiscal 2008 relates to steps taken to realize losses generated by several international entities for which we had not previously recognized the offsetting tax benefit because the realization of those benefits had been uncertain. The necessary steps to realize those tax benefits were taken during fiscal 2008 resulting in a one-time reduction of the effective tax rate.
Consolidated Operating Results
Revenues
FY09 vs. FY08 vs.
FY08 FY07
Fiscal 2009 Fiscal 2008 % Change Fiscal 2007 % Change
(In millions)
Revenues $ 19,176.1 $ 18,627.0 3 % $ 16,325.9 14 %
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Fiscal 2009 Compared to Fiscal 2008
During fiscal 2009, changes in foreign currency exchange rates decreased revenues by 1 percentage point. The U.S. Region contributed nearly 1 percentage point of the consolidated revenue growth for fiscal 2009. Excluding the effects of changes in currency exchange rates, our international regions contributed over 3 percentage points of the consolidated revenue growth for fiscal 2009, as all of our international regions posted higher revenues on a currency neutral basis. By product group, our worldwide NIKE brand footwear business reported revenue growth of 6% and contributed $575 million of incremental revenue for fiscal 2009. Worldwide NIKE branded apparel revenues were in line with the prior year, while equipment revenues declined 2% or $20 million.
Our Other businesses, comprised primarily of results from Cole Haan, Converse Inc., Hurley International LLC, NIKE Golf, and Umbro in fiscal 2009, constituted the remaining revenue. In fiscal 2008, our Other businesses also included Exeter Brands Group (whose primary business was the Starter brand business which was sold on December 17, 2007) and NIKE Bauer Hockey (which was sold on April 17, 2008). Umbro was acquired on March 3, 2008. Revenues for these businesses declined 1% or $17 million.
Fiscal 2008 Compared to Fiscal 2007
During fiscal 2008, changes in foreign currency exchange rates contributed 5 percentage points of consolidated revenue growth. Strong demand for NIKE brand products continued to drive revenue growth, as all four of our geographic regions and, on a consolidated basis, all three of our product business units delivered revenue growth. The U.S. Region contributed nearly 2 percentage points of the consolidated revenue growth for fiscal 2008. Excluding the effects of changes in currency exchange rates, our international regions contributed nearly 7 percentage points of the consolidated revenue growth for fiscal 2008, as all of our international regions posted higher revenues. Our Other businesses contributed the remaining consolidated constant-currency revenue growth, as Cole Haan, Converse, Hurley and NIKE Golf posted higher year-over-year revenues.
By product group, worldwide NIKE brand footwear revenue grew 14% and contributed more than $1.2 billion of incremental revenue for fiscal 2008. Worldwide NIKE branded apparel and equipment businesses reported revenue growth of 14% and 6% for the year, respectively, and combined added approximately $750 million of incremental revenue in fiscal 2008. Our Other businesses reported revenue growth of 17% and combined added more than $360 million of incremental revenue.
Gross Margin
FY09 vs. FY08 vs.
FY08 FY07
Fiscal 2009 Fiscal 2008 % Change Fiscal 2007 % Change
(In millions)
Gross Margin $ 8,604.4 $ 8,387.4 3% $ 7,160.5 17%
Gross Margin % 44.9 % 45.0 % (10 bps ) 43.9 % 110 bps
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Fiscal 2009 Compared to Fiscal 2008
During fiscal 2009, the primary factors contributing to the 10 basis point decline in consolidated gross margin percentage versus the prior year were lower gross pricing margins and increased discounts which, when combined, decreased consolidated gross margins by approximately 60 basis points. This decrease was partially offset by improved hedge rates relative to the prior year, primarily in the Europe, Middle East and Africa ("EMEA") Region. Gross pricing margins were lower, primarily driven by higher product input costs, most notably for footwear products. Higher levels of discounts were provided across all businesses in fiscal 2009 to manage inventory levels.
We anticipate our gross margins in fiscal 2010 will be negatively impacted by hedge rates that are unfavorable in comparison to the prior year.
Fiscal 2008 Compared to Fiscal 2007
During fiscal 2008, the primary factors contributing to the 110 basis point increase in the consolidated gross margin percentage versus the prior year included: higher footwear in-line gross pricing margins, most notably in the U.S. Region, primarily due to strategic price increases; improved currency hedge rates relative to the prior year, primarily in the EMEA Region; and higher footwear close-out net pricing margins, most notably in the EMEA Region, primarily due to better inventory management. The factors driving an increased gross margin percentage were partially offset by lower apparel in-line gross pricing margins primarily driven by higher product costs, most notably in the U.S. and EMEA regions, and increased apparel close-out sales, primarily in the U.S. Region.
Selling and Administrative Expense
FY09 vs. FY08 vs.
FY08 FY07
Fiscal 2009 Fiscal 2008 % Change Fiscal 2007 % Change
(In millions)
Operating overhead
expense $ 3,798.2 $ 3,645.4 4% $ 3,116.3 17%
Demand creation
expense(1) 2,351.4 2,308.3 2% 1,912.4 21%
Selling and
administrative expense $ 6,149.6 $ 5,953.7 3% $ 5,028.7 18%
% of Revenues 32.1 % 32.0% 10 bps 30.8 % 120 bps
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(1) Demand creation consists of advertising and promotion expenses, including costs of endorsement contracts.
Fiscal 2009 Compared to Fiscal 2008
Changes in foreign currency exchange rates decreased selling and administrative expense by 2 percentage points in fiscal 2009. Excluding changes in exchange rates, operating overhead increased 6% during fiscal 2009. The increase in operating overhead in 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, which more than offset the steps taken to reduce operating overhead spending including implementation of a hiring freeze and reductions in spending for travel and meetings.
On a constant-currency basis, demand creation expense increased 3% during fiscal 2009. Demand creation spending decreased in the second half 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 demand creation the first half of fiscal 2009 was primarily attributable to strategic investments in demand creation, including first quarter spending around the Beijing Summer Olympics and the European Football Championships, and increased investments in athlete and team endorsements across all regions.
In fiscal 2010, we intend to reduce selling and administrative spending 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 to decline in the first half of fiscal 2010 compared to the same period in the prior year, reflecting both lower operating overhead and demand creation spending, with the latter driven partially by the comparison to the significant prior year demand creation investment around the Beijing Summer Olympics and European Football Championships. Future selling and administrative expense may vary from our current expectations due to changes in the rapidly evolving macroeconomic environment and our reaction to those changes.
Fiscal 2008 Compared to Fiscal 2007
In fiscal 2008, selling and administrative expenses increased as a percentage of revenues by 120 basis points, driven primarily by strategic investments in both demand creation and operating overhead. Changes in currency exchange rates increased selling and administrative expense growth by 4 percentage points.
On a constant-currency basis, demand creation expense increased 15% versus the prior year. The year-over-year increase was primarily attributable to investments in athlete and sport team endorsers of our products, spending around major sporting events including the European Football Championships and the Beijing Summer Olympics, key product initiatives such as Men's Training in the U.S. and retail presentation.
Excluding the effects of changes in exchange rates, operating overhead increased 14% versus the prior year. The increase in operating overhead was attributable to investments in growth drivers such as NIKE-owned retail, non-NIKE brand businesses, emerging markets and normal wage inflation and performance-based compensation.
Restructuring Charges
During the fourth quarter of fiscal 2009, we executed a plan to restructure the organization to streamline our management structure, enhance consumer focus, drive innovation more quickly to market and establish a more scalable cost structure. As a result of these actions, we reduced our global workforce by approximately 5% and incurred pre-tax restructuring charges of $195 million, primarily consisting of cash charges related to severance costs. These charges are included in our "Corporate" category for segment reporting purposes.
Goodwill, Intangible and Other Asset Impairment
In the third quarter of fiscal 2009, we recognized a $401.3 million pre-tax non-cash impairment charge to reduce the carrying value of Umbro's goodwill, intangible and other assets. Although Umbro's financial
performance for fiscal 2009 was slightly better than we had originally expected, projected future cash flows had fallen below the levels we expected at the time of acquisition. This erosion 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 fiscal 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 4 - Acquisition, Identifiable Intangible Assets, Goodwill and Umbro Impairment in the accompanying notes to the consolidated financial statements.
Other (Income) Expense, net
Fiscal 2009 Compared to Fiscal 2008
For fiscal 2009, other (income) expense, net was a gain of $88.5 million compared to a loss of $7.9 million in fiscal 2008. Other (income) expense, net is primarily comprised of foreign currency conversion gains and losses from the remeasurement of monetary assets and liabilities in non-functional currencies and results of foreign currency derivative instruments, as well as disposals of fixed assets and other unusual or non-recurring transactions that are outside the normal course of business. For fiscal 2009, other (income) expense, net was primarily comprised of $43.4 million of foreign currency conversion gains and the recognition of $24.0 million of licensing income related to our fiscal 2008 sale of the NIKE Bauer Hockey business. For fiscal 2008, other (income) expense, net was primarily comprised of a $32.0 million gain on the sale of NIKE Bauer Hockey and a $28.6 million gain on the sale of the Starter brand business, as well as foreign currency conversion losses of $76.6 million.
Foreign currency conversion gains and losses reported in other (income) expense, net, with the exception of gains and losses generated by the EMEA Region and Other businesses, are reflected in the Corporate line in our segment presentation of pre-tax income in the accompanying notes to the consolidated financial statements (Note 19 - Operating Segments and Related Information).
For fiscal 2009, we estimate that the combination of foreign currency conversion gains in other (income) expense, net and the modestly 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 $124 million.
Fiscal 2008 Compared to Fiscal 2007
For fiscal 2008, other (income) expense, net was a loss of $7.9 million compared to a gain of $0.9 million in fiscal 2007. In fiscal 2008, other (income) expense, net included foreign currency conversion losses that were partially offset by the $32.0 million gain on the sale of NIKE Bauer Hockey and the $28.6 million gain on the sale of the Starter brand business. Other (income) expense, net in fiscal 2007 is primarily comprised of the $14.7 million gain on the sale-leaseback of our Oregon footwear distribution center and the $14.2 million . . .
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