NKE

NIKE, Inc. 10-K Summary: Fiscal Year Ended May 31, 2006

Business Context and Reporting Period

This report covers the fiscal year ended May 31, 2006. NIKE, Inc. is the world's largest seller of athletic footwear and apparel, operating in over 160 countries. The company designs, develops, and markets footwear, apparel, equipment, and accessories under the NIKE brand and subsidiary brands including Converse, Cole Haan, Hurley, and Exeter Brands Group. Virtually all products are manufactured by independent contractors, primarily outside the United States.

Key Financial Metrics

Material Changes vs. Prior Period

• Revenue Growth: Consolidated revenues increased 9% to $14.95 billion. The U.S. Region contributed 4 percentage points of growth, while international regions contributed 4 percentage points excluding currency impacts. Currency exchange rates reduced reported revenue growth by 1 percentage point.
• Profitability: Net income grew 15% to $1.39 billion. Diluted EPS increased 18% to $5.28. Excluding a $51.9 million Converse arbitration charge, net income grew 17% and EPS grew 20%.
• Gross Margin: Gross margin percentage decreased 50 basis points to 44.0%. This decline was primarily due to lower in-line net pricing margins caused by higher product costs (including oil prices) and sales incentives, partially offset by improved currency hedge rates.
• Operating Expenses: Selling and administrative expenses increased 6% but decreased as a percentage of revenue by 80 basis points due to operating overhead leverage.
• Debt Reduction: Long-term debt decreased significantly from $687.3 million to $410.7 million.

Guidance, Outlook, and Risks

Outlook and Strategy: Management aims for high single-digit revenue growth and mid-teens earnings per share growth long-term. The company continues to return cash to shareholders through dividends and share repurchases. A new $3.0 billion share repurchase program was approved in June 2006 to commence after the completion of the existing $1.5 billion program.

Orders: Worldwide futures and advance orders for footwear and apparel scheduled for delivery from June through November 2006 were 5.0% higher than the comparable period in fiscal 2005.

Risks and Contingencies:

• Converse Arbitration: A $51.9 million charge was recorded in fiscal 2006 related to an unfavorable arbitration ruling involving a former South American licensee of Converse.
• Trade and Tariffs: The company faces risks from potential anti-dumping duties in the European Union on footwear from China and Vietnam. The EU agreed on provisional duties in March 2006 but excluded "Special Technology Athletic Footwear" (STAF).
• Supply Chain: Reliance on independent contractors outside the U.S. exposes the company to risks regarding raw material costs, labor standards, and transportation disruptions.
• Currency: Fluctuations in foreign exchange rates impact reported revenues and margins, though the company utilizes hedging strategies to mitigate these effects.

Investor Verification Checklist

• Verify the impact of the $51.9 million Converse arbitration charge on the "Other" business segment's pre-tax income.
• Monitor the final outcome of the EU anti-dumping investigation regarding footwear imports from China and Vietnam.
• Assess the effectiveness of cost management strategies in offsetting rising raw material costs (e.g., oil prices) on gross margins.
• Review the execution of the new $3.0 billion share repurchase program approved in June 2006.
• Track the adoption of FAS 123R (Share-Based Payment) effective June 1, 2006, which is expected to increase compensation expense by approximately $0.36 per diluted share in fiscal 2007.