NKE

NIKE, Inc. 10-K Summary: Fiscal Year Ended May 31, 2003

Business Context and Reporting Period

This report covers the fiscal year ended May 31, 2003. NIKE, Inc. is the world's largest seller of athletic footwear and apparel, operating through a global network of independent distributors, licensees, and subsidiaries. The company designs, develops, and markets footwear, apparel, equipment, and accessories. Key subsidiaries include Cole Haan, Bauer NIKE Hockey, and Hurley International. On July 9, 2003, the company announced an agreement to acquire Converse Inc. for $305 million, subject to regulatory review.

Key Financial Metrics

Material Changes vs. Prior Period

• Revenue Growth: Consolidated revenues increased 8% to a record $10.7 billion, driven primarily by international growth (EMEA +20%, Asia Pacific +19%).
• Accounting Change Impact: Net income declined 29% to $474.0 million due to a one-time, non-cash charge of $266.1 million related to the adoption of FAS 142 (Goodwill and Other Intangible Assets). This charge reflected impairments of goodwill and trademarks associated with Bauer NIKE Hockey and Cole Haan.
• Operational Performance: Excluding the accounting change, income increased 11% and diluted EPS increased 13%. Gross margin percentage improved by 1.7 points to 41.0% due to product cost reductions and a favorable mix of classic footwear sales.
• Regional Shifts: U.S. revenues were flat (-0.2%) due to a strategic realignment of footwear distribution, specifically a reduction in sales to Foot Locker. Conversely, international regions saw significant growth, aided by currency exchange rates (primarily the Euro).
• Cash Flow: Operating cash flow decreased 15% to $917.4 million, largely due to increased inventory investment to support the U.S. "back-to-school" season.

Guidance, Outlook, and Risks

• Outlook: Management expects U.S. footwear revenues to remain below prior-year levels through the first half of fiscal 2004 due to the distribution realignment. However, they anticipate successful fulfillment of consumer demand and profitable growth as the strategy matures.
• Acquisition: The pending acquisition of Converse Inc. is expected to have a positive long-term impact on profitability, though short-term effects are uncertain.
• Risks:
  • Customer Concentration: The three largest U.S. customers accounted for 27% of U.S. NIKE brand sales. Foot Locker specifically represented 11% of consolidated revenues in 2002.
  • Legal Proceedings: A securities class action was settled for $8.9 million (funded by D&O insurance). A shareholder derivative lawsuit remains pending but is not expected to have a material financial impact. The Kasky v. NIKE case regarding labor practices returned to California Superior Court.
  • Trade and Currency: Operations are subject to import quotas, anti-dumping duties, and currency fluctuations. The company relies on Nissho Iwai American Corporation (NIAC) for financing services for products sold outside the U.S., Europe, and Japan.

Investor Verification Checklist

• Accounting Change: Verify the impact of the $266.1 million FAS 142 impairment charge on reported net income versus operating performance.
• U.S. Distribution Strategy: Monitor the success of the footwear distribution realignment and the recovery of sales to Foot Locker versus growth in other channels.
• Converse Acquisition: Track regulatory approval status and integration plans for the $305 million Converse purchase.
• Inventory Levels: Review inventory turnover and reserves, as inventory levels increased significantly in fiscal 2003, impacting operating cash flow.
• Legal Exposure: Monitor the status of the Kasky case and the pending shareholder derivative lawsuit.