NIKE, Inc. 10-Q Summary: Quarter Ended November 30, 1994
Business Context and Reporting Period
This Form 10-Q covers the second quarter of fiscal year 1995, ended November 30, 1994. NIKE, Inc. reported record revenues exceeding $1 billion for the quarter and a trailing twelve-month revenue total surpassing $4 billion. The company operates globally with significant growth in U.S. footwear and international markets, driven by new subsidiaries in Japan and Korea.
Key Financial Metrics
| Metric | Q2 1994 | Q2 1993 | 6 Months 1994 | 6 Months 1993 |
|---|---|---|---|---|
| Revenues | $1,053.7M | $805.8M | $2,224.1M | $1,913.7M |
| Net Income | $84.9M | $52.3M | $190.9M | $166.4M |
| Diluted EPS | $1.16 | $0.69 | $2.59 | $2.18 |
| Gross Margin | 39.3% | 38.4% | 39.8% | 39.3% |
| Cash & Equivalents | $546.1M | $376.2M | $546.1M | $376.2M |
| Working Capital | $1,294.9M | $1,208.9M | $1,294.9M | $1,208.9M |
| Debt-to-Equity | 0.4:1 | 0.3:1 | 0.4:1 | 0.3:1 |
Liquidity: Working capital increased by $86 million to $1.29 billion. The company maintains a working capital ratio of 3.2:1 and has $300 million in committed unused lines of credit.
Material Changes vs. Prior Period
- Revenue Growth: Revenues increased 31% year-over-year ($248 million increase). U.S. footwear grew 34% due to a 39% increase in pairs shipped, despite a 4% decrease in average selling price. International revenues rose 32%.
- Profitability: Net income surged 62% to $84.9 million. Earnings per share increased 68%, aided by share repurchases. Gross margins improved by 0.9% due to high volume and reduced closeout sales.
- Expenses: Selling and administrative expenses rose 20% in absolute dollars but decreased as a percentage of sales from 27.7% to 25.5%. Increases were driven by new international subsidiaries and planned marketing investments.
- Cash Flow: Cash provided by operations was $185.4 million for the six-month period, down from $314.6 million in the prior year, primarily due to a $44.5 million increase in working capital components (receivables and inventory).
Outlook, Risks, and Unusual Items
- Orders: Advance orders for the period December 1994 through April 1995 reached a record $1.95 billion, a 34% increase over the prior year. Management notes this may impact "at once" shipment availability.
- Dividends: The quarterly cash dividend was increased 25% to $0.25 per share.
- Acquisition: Subsequent to the quarter end, NIKE announced an offer to acquire Canstar Sports, Inc. for approximately $395 million.
- Trade Risk: The U.S. Trade Representative is considering retaliatory tariffs (up to 100%) on certain Chinese footwear categories due to intellectual property concerns. NIKE anticipates no material adverse effect due to diverse sourcing options.
- Tax Rate: The effective tax rate for the quarter was 39.0%, with management anticipating a rate of approximately 39.1% for fiscal 1995.
Investor Verification Checklist
- Verify the sustainability of the 34% increase in advance orders and the mix of "at once" vs. futures shipments.
- Monitor the outcome of the U.S. Trade Representative's investigation into Chinese intellectual property rights and potential tariff impacts on sourcing.
- Assess the integration and financial impact of the proposed $395 million Canstar Sports acquisition.
- Review the impact of new international subsidiaries on future selling and administrative expense ratios.
- Confirm the company's ability to maintain gross margins while average selling prices in U.S. footwear decline.