NIKE, Inc. — FY2012 Form 10-K
Reporting period: Fiscal year ended May 31, 2012. Although the request identifies “2011 Q4,” this filing reports FY2012; fourth-quarter figures are included below. Amounts are U.S. dollars unless stated otherwise.
Business context
NIKE designs, markets and sells athletic footwear, apparel, equipment and accessories worldwide through wholesale customers, owned retail stores and e-commerce. Nearly all footwear and apparel are made by independent contractors outside the United States. The company reported six NIKE Brand geographic segments and separate Other Businesses, including Converse, Cole Haan, Hurley, Umbro and NIKE Golf.
Financial performance and liquidity
| Metric | FY2012 | FY2011 | Change |
|---|---|---|---|
| Revenue | $24.128 billion | $20.862 billion | +16% reported; +14% currency-neutral |
| Gross profit / gross margin | $10.471 billion / 43.4% | $9.508 billion / 45.6% | Margin down 220 bps |
| Income before tax | $2.983 billion | $2.844 billion | +5% |
| Net income | $2.223 billion | $2.133 billion | +4% |
| Diluted EPS | $4.73 | $4.39 | +8% |
| Cash from operations | $1.899 billion | $1.812 billion | +$87 million |
| Capital expenditures | $597 million | $432 million | +$165 million |
FY2012 fourth-quarter revenue was $6.470 billion versus $5.766 billion; net income was $549 million versus $594 million; diluted EPS was $1.17 versus $1.24. Fourth-quarter gross margin was 42.8%, down from 44.3%.
At May 31, 2012, cash and equivalents were $2.317 billion and short-term investments were $1.440 billion. Working capital was $7.666 billion and the current ratio was 3.0. Inventories rose 23% to $3.350 billion; inventory units for the NIKE Brand increased 10%. Long-term debt was $277 million, including current maturities; notes payable were $108 million and amounts payable to Sojitz America were $75 million. No borrowings were outstanding under the $1 billion revolving credit facility or commercial paper program. Operating cash flow less reported capital expenditures was approximately $1.302 billion.
Material changes versus FY2011
- Revenue growth was broad-based: NIKE Brand revenue increased 16% reported, while Direct to Consumer revenue rose 23% reported (21% currency-neutral) and represented approximately 17% of NIKE Brand revenue.
- Gross margin contracted 220 basis points, primarily from higher materials and labor costs; higher customs duties, close-out discounts and digital/infrastructure investment also weighed on margin. Price increases, lower air freight costs, Direct to Consumer growth and cost-reduction efforts partly offset these effects.
- Selling and administrative expense increased 11% to $7.431 billion, slower than revenue growth; its share of revenue declined to 30.8% from 32.1%.
- Operating cash flow increased modestly, but higher inventory and prepaid expenses contributed to a $799 million working-capital cash outflow. Share repurchases totaled $1.8 billion (20.0 million shares); dividends declared per share rose to $1.39 from $1.20.
- Reported revenue increased 23% in Greater China and 25% in Emerging Markets. Western Europe revenue rose 7%, but segment EBIT fell 18%; Central & Eastern Europe EBIT declined 4% despite 15% revenue growth.
Outlook, commentary, risks and unusual items
- Management cited long-term goals of high-single-digit revenue growth, mid-teens EPS growth, improved return on invested capital and accelerated cash flows. These are long-term objectives, not specific FY2013 guidance. Management expected higher input costs and foreign-exchange volatility to remain headwinds in FY2013.
- Worldwide NIKE Brand footwear and apparel futures orders for June–November 2012 were $11.2 billion, up 7% reported and 12% excluding currency changes. The filing cautions that futures orders are not a reliable stand-alone forecast of revenue because of order mix, timing, cancellations, discounts and sales outside the program.
- On May 31, 2012, NIKE announced plans to divest Cole Haan and Umbro to focus on NIKE, Jordan, Converse and Hurley. Together, Cole Haan and Umbro generated $797 million of FY2012 revenue and $43 million of EBIT losses. Management anticipated possible future non-cash Umbro charges; no Umbro goodwill or intangible impairment was recorded at year-end. The filing identifies a $110 million cumulative translation adjustment, net of tax, and a $32 million deferred tax asset associated with Umbro.
- FY2012 included a $24 million Western Europe restructuring charge in the fourth quarter. Other expense, net was $54 million, versus net income of $33 million in FY2011, reflecting foreign-currency losses and the restructuring charge, partly offset by other gains.
- Key risks include changing consumer tastes and intense competition; higher input, freight and trade costs; foreign-exchange movements; inventory forecasting and retailer credit risk; reliance on overseas contract manufacturing and suppliers; and disruption or security risks involving information systems. NIKE reported no material pending legal proceedings beyond routine business litigation and said identified claims were not expected to have a material impact.
- Uncertain tax positions were $285 million, excluding interest and penalties; the filing says timing of any cash payments cannot be reasonably estimated. Approximately $5.5 billion of foreign earnings were indefinitely reinvested, with an associated unrecognized deferred tax liability of $1.8 billion if repatriated.
Most important facts for investors to verify
- Whether inventory growth and close-out discounting moderated after FY2012, and the resulting effects on gross margin and cash conversion.
- Whether revenue and futures-order growth translated into realized sales, particularly in Western Europe and other markets with weaker segment earnings.
- The actual sale terms, timing and net proceeds for Cole Haan and Umbro, including any impairment, translation-adjustment or other divestiture charges.
- Exposure to foreign exchange, product input costs, trade restrictions and overseas manufacturing concentration, including the effectiveness and accounting impact of hedges.
- Future tax-rate developments, including uncertain tax positions, foreign tax holidays and the potential cost of repatriating indefinitely reinvested foreign earnings.