NIKE, Inc. — Form 10-Q Summary
Reporting period: Second quarter and six months ended November 30, 2012 (fiscal 2013). Unaudited results; dollar amounts below are in millions except per-share data. Comparisons are with the periods ended November 30, 2011.
Financial performance
| Metric | Q2 FY2013 | Q2 FY2012 | Six months FY2013 | Six months FY2012 |
|---|---|---|---|---|
| Continuing-operations revenue | $5,955 (+7%; +10% constant currency) | $5,546 | $12,429 (+9%; +13% constant currency) | $11,439 |
| Gross profit / gross margin | $2,530 / 42.5% | $2,376 / 42.8% | $5,358 / 43.1% | $4,994 / 43.7% |
| Income before tax | $712 (+13%) | $632 | $1,512 (+1%) | $1,503 |
| Net income from continuing operations | $521 (+9%) | $480 | $1,106 (-3%) | $1,141 |
| Net income (including discontinued operations) | $384 (-18%) | $469 | $951 (-15%) | $1,114 |
| Diluted EPS, continuing operations | $0.57 (+12%) | $0.51 | $1.20 (-1%) | $1.21 |
Quarterly gross margin fell 30 basis points; six-month margin fell 60 basis points. Higher product costs, unfavorable currency effects and royalties weighed on margins, partly offset by higher selling prices. Selling and administrative expense was $1,836, or 30.8% of revenue, in Q2 versus $1,731, or 31.2%; for six months it was $3,895, or 31.3% of revenue, versus $3,461, or 30.3%. The effective tax rate was 26.8% for Q2 and 26.9% year to date, compared with 24.1% in both prior-year periods.
By geography, North America revenue rose 17% in Q2 and Greater China fell 11%; Greater China EBIT declined 16%. Emerging Markets revenue increased 11% and EBIT 23%. NIKE Brand Direct to Consumer revenue grew 25% in Q2 (27% excluding currency) and represented about 18% of NIKE Brand revenue, compared with 15% a year earlier.
Cash flow, balance sheet and capital allocation
- Six-month cash from operations was $1,245, up from $597. Working-capital cash outflow was $113 versus $775 in the prior-year period, principally reflecting inventory management.
- Investing cash flow was $160, including $225 of Umbro sale proceeds; capital expenditures were $250. Financing used $1,431, including $1,179 of share repurchases and $327 of dividends.
- At November 30, cash and equivalents were $2,291 and short-term investments $1,234. Total cash, equivalents and short-term investments were approximately $3.5 billion; $3.0 billion was held by foreign subsidiaries.
- Debt comprised $58 of current long-term debt, $170 of long-term debt and $100 of notes payable. No borrowings were outstanding under the $1 billion committed credit facility or $1 billion commercial paper program.
- NIKE repurchased 24.4 million shares for $1,162 in the first six months and completed its prior $5 billion repurchase program. A new four-year, $8 billion program began in September 2012. A two-for-one stock split was announced; reported share and per-share data reflect the split.
Material changes, outlook and risks
- Umbro was sold on November 30 for $225; NIKE recorded a $107 after-tax loss on sale. Management expected about $30 of additional exit and disposal costs and to wind down remaining operations during fiscal 2013.
- NIKE agreed to sell Cole Haan to Apax Partners for $570, with closing expected in fiscal Q3 2013. Management expected to recognize a gain at closing.
- Management expected full-year gross margin to be essentially flat, with currency headwinds and China inventory-clearance actions offsetting expansion; selling and administrative expense was expected to grow at a high-single- to low-double-digit rate; the full-year effective tax rate was expected to be about 26.5%.
- Futures orders for NIKE Brand footwear and apparel scheduled for December 2012 through April 2013 were up 6% reported and 7% excluding currency. Management cautioned that futures orders are not a reliable one-for-one indicator of future revenue. Greater China futures orders were down 6% reported and 7% constant currency.
- Management anticipated lower Greater China revenue and EBIT over the next few quarters while addressing excess marketplace inventory. Risks include product-cost inflation, foreign-exchange movements, changing consumer demand, inventory and order cancellations/returns, competition, and execution of the divestitures. The filing reported no material change in previously disclosed risk factors and no material new legal-proceeding developments.
- Gross unrecognized tax benefits were $374, excluding interest and penalties; up to $78 could decrease within 12 months as tax matters are resolved or statutes expire. Accrued interest and penalties were $134. The company was in compliance with its credit-facility covenants and stated existing liquidity and operating cash flow should meet foreseeable capital needs.
Important facts for investors to verify
- Whether Greater China inventory, sales, EBIT and futures-order trends improve as management’s clearance actions proceed.
- Actual gross-margin and expense performance against the stated full-year outlook, including currency, product-cost and royalty pressures.
- Completion and final financial effects of the Cole Haan sale, and Umbro transition and exit costs versus the amounts anticipated.
- Cash generation, working-capital trends, share repurchases and the extent to which foreign-held cash can be used domestically without additional tax or financing costs.
- Resolution of uncertain tax positions and the effective tax rate relative to management’s estimate.