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NKE > SEC Filings for NKE > Form 10-Q on 4-Apr-2013All Recent SEC Filings

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Form 10-Q for NIKE INC


4-Apr-2013

Quarterly Report


ITEM 2. Management's Discussion and Analysis of Financial Condition and Results of Operations

In the third quarter of fiscal 2013, our revenues from continuing operations increased 9% to $6.2 billion. Excluding the impact of currency exchange rates, revenues from continuing operations would have grown 10%. We delivered net income from continuing operations of $662 million and diluted earnings per share from continuing operations of $0.73, 16% and 20% above the third quarter of fiscal 2012, respectively.

Income before income taxes from continuing operations increased 9% compared to the third quarter of the prior year due to an increase in revenues and higher gross margin, which more than offset an increase in other expense, net. Selling and administrative expense was flat as a percent of revenue. The NIKE Brand, which represents over 90% of NIKE, Inc. revenues, delivered constant currency revenue growth across all product types and most geographies and key categories. Brand strength, innovative products and strong category retail presentation continue to fuel the demand for NIKE Brand products. Revenue from our Other Businesses increased 9%, driven by growth at Converse and NIKE Golf.

Our third quarter net income from continuing operations was positively impacted by a year-on-year decrease in our effective tax rate of 490 basis points, largely due to the benefit of the retroactive reinstatement of the research and development tax credit in the U.S., as well as a lower effective tax rate on foreign operations. Diluted earnings per share also benefited from a decline in the weighted average diluted common shares outstanding, driven by our share repurchase program.

We continually evaluate our existing portfolio of businesses to ensure resources are invested in those businesses that are accretive to the NIKE Brand, and have the greatest potential to deliver profitable growth and high returns on capital. During the fourth quarter of fiscal 2012, we announced our intention to divest of Cole Haan and Umbro, allowing us to focus our resources on driving growth in the NIKE, Jordan, Converse and Hurley brands. On November 30, 2012, we completed the sale of certain assets of Umbro to Iconix Brand Group for $225 million, recognizing an after tax loss on sale of $107 million. On February 1, 2013, we completed the sale of Cole Haan to Apax Partners for an agreed upon purchase price of $570 million and received at closing $561 million, net of $9 million of purchase price adjustments. The transaction resulted in an after tax gain on sale of $231 million. For the third quarter ended February 28, 2013, the results of Cole Haan and Umbro operations, including the gain on sale of Cole Haan, and financial position are presented as discontinued operations.

Results of Operations





                                                    Three Months Ended                                     Nine Months Ended
                                                   February 28 and 29,                                    February 28 and 29,
(Dollars in millions, except per
share data)                               2013             2012           % Change               2013              2012           % Change
Revenues                               $     6,187      $     5,656               9 %        $     18,616      $     17,095               9 %
Cost of sales                                3,451            3,171               9 %              10,522             9,616               9 %
Gross profit                                 2,736            2,485              10 %               8,094             7,479               8 %
Gross margin %                                44.2 %           43.9 %                                43.5 %            43.7 %
Demand creation expense                        619              592               5 %               2,103             1,872              12 %
Operating overhead expense                   1,244            1,116              11 %               3,655             3,297              11 %
Total selling and administrative
expense                                      1,863            1,708               9 %               5,758             5,169              11 %
% of Revenues                                 30.1 %           30.2 %                                30.9 %            30.2 %
Income before income taxes                     858              787               9 %               2,370             2,290               3 %
Net income from continuing
operations                                     662              569              16 %               1,768             1,710               3 %
Net income (loss) from discontinued
operations                                     204               (9 )             -                    49               (36 )             -
Net income                             $       866      $       560              55 %        $      1,817      $      1,674               9 %
Diluted earnings per share -
Continuing Operations                  $      0.73      $      0.61              20 %        $       1.93      $       1.82               6 %
Diluted earnings per share -
Discontinued Operations                $      0.22      $     (0.01 )             -          $       0.05      $      (0.04 )             -

Consolidated Operating Results



Revenues



                                                                Three Months Ended                                                                  Nine Months Ended
                                                                February 28 and 29,                                                                February 28 and 29,
                                                                                                 % Change                                                                            % Change
                                                                                                 Excluding                                                                           Excluding
                                                                                                 Currency                                                                            Currency
(Dollars in millions)                     2013               2012             % Change         Changes  (1)                   2013               2012             % Change         Changes  (1)
NIKE Brand Revenues by:
Footwear                               $     3,658        $     3,347                 9 %                  9 %            $     10,647        $     9,777                 9 %                 12 %
Apparel                                      1,570              1,461                 7 %                  8 %                   5,132              4,743                 8 %                 11 %
Equipment                                      325                267                22 %                 23 %                   1,043                877                19 %                 22 %
Global Brand Divisions                          30                 27                11 %                 11 %                      84                 84                 0 %                  5 %
Total NIKE Brand                             5,583              5,102                 9 %                 10 %                  16,906             15,481                 9 %                 12 %
Other Businesses                               615                563                 9 %                  9 %                   1,768              1,636                 8 %                  8 %
Corporate(2)                                   (11 )               (9 )               -                    -                       (58 )              (22 )               -                    -
TOTAL NIKE, INC. REVENUES FROM
CONTINUING OPERATIONS                  $     6,187        $     5,656                 9 %                 10 %            $     18,616        $    17,095                 9 %                 12 %
Supplemental NIKE Brand Revenues
Details by:
Sales to Wholesale Customers           $     4,452        $     4,176                 7 %                  5 %            $     13,659        $    12,814                 7 %                 10 %
Sales Direct to Consumer                     1,101                899                22 %                 23 %                   3,163              2,583                22 %                 24 %
Global Brand Divisions                          30                 27                11 %                 11 %                      84                 84                 0 %                  5 %
TOTAL NIKE BRAND REVENUES              $     5,583        $     5,102                 9 %                 10 %            $     16,906        $    15,481                 9 %                 12 %

(1) Results have been restated using actual currency exchange rates in use during the comparative period to enhance the visibility of the underlying business trends by excluding the impact of translation arising from foreign currency exchange rate fluctuations.

(2) Corporate revenues primarily consist of intercompany revenue eliminations and foreign currency revenue-related hedge gains and losses generated by entities within the NIKE Brand geographic operating segments and certain Other Businesses through our centrally managed foreign exchange risk management program.

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Excluding the effects of changes in currency exchange rates, revenues for NIKE, Inc.'s continuing operations increased 10% for the third quarter and 12% for the first nine months of fiscal 2013, driven by increases in both the NIKE Brand and our Other Businesses. On a currency neutral basis, revenues for the NIKE Brand increased 10% and 12% for the third quarter and year to date period, respectively, while revenues for our Other Businesses increased 9% and 8% for the same respective periods. For both the third quarter and first nine months of fiscal 2013, every NIKE Brand geography except Greater China and Japan delivered higher revenues. North America contributed approximately 8 percentage points to the NIKE Brand revenue increase for the third quarter while Western Europe, Central & Eastern Europe, and Emerging Markets each contributed approximately 1 percentage point for the period. For the year to date period, North America contributed approximately 8 percentage points to the NIKE Brand revenue growth while the Emerging Markets contributed approximately 3 percentage points and Western Europe and Central & Eastern Europe each contributed approximately 1 percentage point. China's results negatively impacted NIKE Brand revenue growth by approximately 1 percentage point for both the third quarter and year to date periods.

Excluding the effects of changes in currency exchange rates, NIKE Brand footwear and apparel revenues increased 9% and 8% for the third quarter, respectively, while NIKE Brand equipment revenues increased 23%. For the first nine months of fiscal 2013, NIKE Brand footwear and apparel revenues increased 12% and 11%, respectively, while NIKE Brand equipment revenues increased 22%. The increase in footwear revenue for the third quarter was attributable to growth across our Basketball, Running, and Football (Soccer) categories. The year to date growth was driven by our Running, Basketball, Football (Soccer), and Sportswear categories. The growth was primarily reflective of increased demand for our performance products for both periods, most notably those utilizing NIKE Free and Air technologies for the third quarter and NIKE Free and Lunar technologies for the year to date period. For the third quarter of fiscal 2013, unit sales of footwear increased approximately 5% and average selling price per pair increased approximately 4%. For the first nine months of fiscal 2013, unit sales increased approximately 7% and the average selling price per pair increased approximately 5%. The growth in average selling price per pair for the third quarter and year to date period was driven in relatively equal measure by price increases and a shift in mix to higher priced products.

The increase in NIKE Brand apparel revenue for the third quarter and year to date period was driven by our Men's Training category, which includes our NFL licensed business, as well as strong demand for Basketball and Running products. For the year to date period, growth in our Football (Soccer) category also contributed to the growth. For the third quarter of fiscal 2013, average selling price per unit and unit sales both increased approximately 4%. For the year to date period, average selling price per unit increased approximately 8%, while units sold increased approximately 3%. The growth in average selling price per unit for the third quarter and year to date period primarily reflected a favorable mix of higher priced products, such as performance Running, Basketball, and NFL licensed apparel, and to a lesser extent, the impact of price increases.

While wholesale revenues remain the largest component of overall NIKE Brand revenues, we continue to expand Direct to Consumer revenues on-line and through a growing network of NIKE owned in-line and factory stores. For the third quarter and first nine months of fiscal 2013, Direct to Consumer revenues represented approximately 20% and 19% of our total NIKE Brand revenues, respectively, compared to 18% and 17% for the third quarter and first nine months of fiscal 2012, respectively. Excluding changes in currency exchange rates, Direct to Consumer revenues increased 23% and 24% for the third quarter and first nine months of fiscal 2013, respectively, as comparable store sales increased 12% and 14% over the respective periods. Comparable store sales include revenues from NIKE owned in-line and factory stores for which all three of the following requirements have been met: the store has been open at least one year, square footage has not changed by more than 15% within the past year, and the store has not been permanently repositioned within the past year.

Other Businesses consist of results from Converse, Hurley and NIKE Golf. Excluding the impact of currency changes, total revenues for these businesses increased by 9% and 8% in the third quarter and year to date periods, respectively, reflecting growth in Converse and NIKE Golf.

Futures Orders

Futures orders for NIKE Brand footwear and apparel scheduled for delivery from March 2013 through July 2013 were 6% higher than the orders reported for the comparable prior year period. The U.S. Dollar futures order amount is calculated based upon our internal forecast of the currency exchange rates under which our revenues will be translated during this period. Excluding the impact of currency changes, futures orders increased 7%, as unit orders increased approximately 4 percentage points and average selling price per unit contributed approximately 3 percentage points of growth.

By geography, futures orders growth was as follows:

                                           Reported Futures Orders           Futures Orders Excluding
                                                   Growth                      Currency Changes(1)
North America                                        11%                                11%
Western Europe                                       -5%                                -5%
Central & Eastern Europe                             11%                                11%
Greater China                                         4%                                 3%
Japan                                                -8%                                 5%
Emerging Markets                                     12%                                16%
TOTAL NIKE BRAND FUTURES ORDERS                       6%                                 7%

(1) Growth rates have been restated using constant currency exchange rates for the comparative period to enhance the visibility of the underlying business trends excluding changes in foreign currency exchange rates.

The reported futures orders growth is not necessarily indicative of our expectation of revenue growth during this period. This is due to year-over-year changes in shipment timing, the mix of orders which can shift between futures and at-once orders, and the fulfillment of certain orders may fall outside of the schedule noted above. In addition, currency exchange rate fluctuations as well as differing levels of order cancellations, discounts and returns can cause differences in the comparisons between futures orders and actual revenues. Moreover, a significant portion of our revenue is not derived from futures orders, including at-once and close-out sales of NIKE Brand footwear and apparel, sales of NIKE Brand equipment, sales from our Direct to Consumer operations, and sales from our Other Businesses.

Gross Margin



                                               Three Months Ended                                    Nine Months Ended
                                               February 28 and 29,                                  February 28 and 29,
(Dollars in millions)                 2013             2012          % Change              2013             2012          % Change
Gross Profit                       $     2,736      $     2,485             10 %        $     8,094      $     7,479              8 %

Gross Margin % 44.2 % 43.9 % 30 bps 43.5 % 43.7 % (20 ) bps

For the third quarter and first nine months of fiscal 2013, our consolidated gross margin was 30 basis points higher and 20 basis points lower than the respective prior year periods. For the third quarter, the increase in gross margin was largely attributable to higher average net selling prices (approximately 160 basis points), driven by higher prices and favorable sales mix, partially offset by higher discounts. The positive benefit of higher average net selling prices was partially offset by downsides including higher product costs (approximately 60 basis points), primarily due to higher factory labor costs; a higher mix of off-price sales (approximately 50 basis points); and adverse currency exchange rate movements (approximately 40 basis points).

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In addition, we have seen significant shifts in the mix of revenues from higher to lower margin segments of our business. While growth in these lower gross margin segments delivers incremental revenue and profits, it has a negative effect on our consolidated gross margin.

For the first nine months of fiscal 2013, the positive impact of higher average net selling prices (approximately 220 basis points) was more than offset by downsides including higher product costs (approximately 160 basis points); higher third party royalties, primarily resulting from NFL licensed product sales in North America (approximately 30 basis points); and unfavorable foreign currency exchange rate movements (approximately 50 basis points).

Selling and Administrative Expense



                                                    Three Months Ended                                    Nine Months Ended
                                                   February 28 and 29,                                   February 28 and 29,
(Dollars in millions)                     2013             2012           % Change              2013             2012          % Change
Demand creation expense (1)            $       619      $       592               5 %        $     2,103      $     1,872             12 %
Operating overhead expense                   1,244            1,116              11 %              3,655            3,297             11 %
Selling and administrative expense     $     1,863      $     1,708               9 %        $     5,758      $     5,169             11 %

% of Revenues 30.1 % 30.2 % (10) bps 30.9 % 30.2 % 70 bps

(1) Demand creation consists of advertising and promotion expenses, including costs of endorsement contracts.

Demand creation expense increased 5% in the third quarter and 12% during the first nine months of fiscal 2013 compared to the same periods in the prior year. Excluding the effects of changes in currency exchange rates, demand creation for the third quarter of fiscal 2013 increased 5% primarily due to higher sports marketing expense and brand events. For the nine months ended February 28, 2013, demand creation expense was 16% higher than the prior year, largely driven by higher sports marketing expense as well as spending around the Olympics and European Football Championships in the first quarter of fiscal 2013.

Operating overhead expense increased 11% for both the third quarter and first nine months of fiscal 2013. Excluding the effects of changes in currency exchange rates, the growth in operating overhead expense was 12% and 13% for the third quarter and year to date period, respectively, due primarily to investments in our expanding Direct to Consumer operations as well as higher personnel costs to support the growth of our overall business.

Other Expense (Income), net

Three Months Ended Nine Months Ended
February 28 and 29, February 28 and 29,
(Dollars in millions) 2013 2012 2013 2012 Other expense (income), net $ 17 $ (10 ) $ (28 ) $ 17

Other expense (income), net comprises foreign currency conversion gains and losses from the re-measurement of monetary assets and liabilities denominated in non-functional currencies, the impact of certain foreign currency derivative instruments, as well as unusual or non-operating transactions that are outside the normal course of business.

Other expense (income), net for the third quarter of fiscal 2013, represented a $27 million increase in expense versus the third quarter of fiscal 2012. The current year includes net foreign currency losses, while the prior year included net foreign currency gains; this change accounted for $24 million of the increase in expense. For the first nine months of fiscal 2013, other expense (income), net represented a $45 million increase in income versus the first nine months of fiscal 2012. The current year includes net foreign currency gains, while the prior year included net foreign currency losses; this change accounted for $51 million of the increase in income. These impacts were partially offset by changes in other non-operating gains and losses.

We estimate the combination of translation of foreign currency-denominated profits from our international businesses and the year-over-year change in foreign currency related gains and losses included in other expense (income), net had an unfavorable impact on our income before income taxes of $19 million and $38 million for the third quarter and first nine months of fiscal 2013, respectively.

Income Taxes

Three Months Ended February Nine Months Ended
28 and 29, February 28 and 29,
2013 2012 % Change 2013 2012 % Change
Effective tax rate 22.8 % 27.7 % (490) bps 25.4 % 25.3 % 10 bps

Our effective tax rate on continuing operations for the third quarter of fiscal 2013 was 490 basis points lower than the prior year. The decrease in our effective tax rate was primarily driven by the benefit of the retroactive reinstatement of the U.S. research and development credit by the American Taxpayer Relief Act of 2012. The decrease was also attributable to a lower effective tax rate on foreign operations as a result of changes in the geographical mix of earnings.

The effective tax rate on continuing operations for the first nine months ended fiscal 2013 was 10 basis points higher than the effective tax rate on continuing operations for the same period in the prior fiscal year. The increase in the Company's effective tax rate was primarily driven by an increase in the effective tax rate on foreign operations as a result of changes in the geographical mix of earnings, partially offset by a benefit from the retroactive reinstatement of the U.S research and development credit.

We anticipate the effective tax rate for the full fiscal year will be approximately 25.5%, a decrease from estimates in the previous quarters of fiscal 2013 due to the retroactive reinstatement of the U.S. research and development credit in the third quarter of fiscal 2013.

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Discontinued Operations

On February 1, 2013, the Company completed the sale of Cole Haan to Apax Partners for an agreed upon purchase price of $570 million and received at closing $561 million, net of $9 million of purchase price adjustments. The transaction resulted in a gain on sale of $231 million, net of $137 million tax; this gain is included in the net income (loss) from discontinued operations line item on the condensed consolidated statements of income. Beginning November 30, 2012, we classified the Cole Haan disposal group as held-for-sale and presented the results of Cole Haan's operations in the net income (loss) from discontinued operations line item on the condensed consolidated statements of income. Prior to the sale, the assets and liabilities of Cole Haan were recorded in the assets of discontinued operations and liabilities of discontinued operations line items on the condensed consolidated balance sheets, respectively. Previously, these amounts were reported in our segment presentation as "Businesses to be Divested."

Under the sale agreement, we will provide certain transition services to Cole Haan for an expected period of 3 to 9 months from the date of sale. We will also license NIKE proprietary Air and Lunar technologies to Cole Haan for a transition period. The continuing cash flows related to these items are not expected to be significant to Cole Haan and we will have no significant continuing involvement with Cole Haan beyond the transition services. Additionally, preexisting guarantees of certain Cole Haan lease payments remain in place after the sale; the maximum exposure under the guarantees is $47 million. The fair value of these guarantees is not material.

On November 30, 2012, we completed the sale of certain assets of Umbro to Iconix Brand Group ("Iconix") for $225 million. The results of Umbro's operations and Umbro's financial position are presented as discontinued operations on the condensed consolidated statements of income and balance sheets, respectively. Previously, these amounts were reported in our segment presentation as "Businesses to be Divested." Upon meeting the held-for-sale criteria, we recorded a loss of $107 million, net of tax, on the sale of Umbro. The loss on sale was calculated as the net sales price less the Umbro assets of $248 million, including intangibles, goodwill, and fixed assets, other miscellaneous charges of $22 million, the release of the associated cumulative translation adjustment of $129 million, offset by a tax benefit on the loss of $67 million.

Under the sale agreement, we continue to provide transition services to Iconix while certain markets are converted and transitioned to Iconix-designated licensees. These transition services are expected to be completed by May 31, 2013. We also expect to complete the wind down of the remaining operations of Umbro over the remainder of fiscal 2013. The continuing operating cash flows are not expected to be significant to the Umbro business and we will have no significant continuing involvement with the Umbro business beyond the transition period. For the quarter ended February 28, 2013, we recognized $18 million in wind down costs and expect an additional $12 million to be recognized in the . . .

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