NIKE, Inc. — Form 10-Q Summary
Business context and reporting period
Unaudited results cover the three months ended August 31, 2009, NIKE’s first quarter of fiscal 2010, compared with the three months ended August 31, 2008. Amounts are in U.S. dollars; financial statement figures are in millions except per-share data.
Financial performance and liquidity
| Metric | Q1 FY2010 | Q1 FY2009 | Change |
|---|---|---|---|
| Revenue | $4,798.5 | $5,432.2 | -12% |
| Gross margin | $2,215.5; 46.2% | $2,562.1; 47.2% | -14%; -100 bps |
| Selling and administrative expense | $1,546.1 | $1,856.4 | -17% |
| Income before income taxes | $681.2 | $714.2 | -5% |
| Net income | $513.0 | $510.5 | Slight increase |
| Diluted EPS | $1.04 | $1.03 | +1% |
| Cash provided by operations | $709.0 | $357.6 | +$351.4 |
- Gross margin was pressured by increased discounting to manage inventory and less favorable foreign exchange, partly offset by a higher proportion of NIKE-owned retail sales. S&A fell largely because prior-year demand-creation spending was elevated around the Beijing Olympics and European Football Championships, and because of lower overhead.
- Cash and equivalents were $2,260.6 and short-term investments were $1,369.2 at August 31, 2009. Current assets were $9,606.9 versus current liabilities of $2,852.8.
- Long-term debt was $443.2, current debt $7.1, and notes payable $94.7; total reported debt was $545.0. No amounts were outstanding under the $1.0 billion revolving credit facility or $1.0 billion commercial paper program. The company said available cash, investments, operating cash flow, and funding access should meet foreseeable operating and capital needs.
- Cash used in investing activities was $331.9 and cash used in financing activities was $358.4. Financing included $121.4 of dividends and $15.0 of share repurchases. Dividends declared per share were $0.25, up from $0.23.
Material changes versus the prior comparable period
- Revenue declined 7% excluding currency effects. NIKE Brand revenue fell 7% on that basis; every product group and geography declined except Emerging Markets. Footwear revenue fell 10%; apparel and equipment together fell 16%.
- Revenue was down 12% at reported rates, reflecting weaker global consumer spending and comparisons with record prior-year sales tied to major sporting events. International revenue declines were particularly pronounced in Central and Eastern Europe and Western Europe.
- Segment EBIT was mixed: North America rose 10%, Greater China 7%, and Emerging Markets 39%; Western Europe declined 11%, Central and Eastern Europe 35%, and Japan 7%. Consolidated EBIT was $682.5, down 3%.
- The effective tax rate declined to 24.7% from 28.5%, supporting slightly higher net income despite lower revenue and pre-tax income.
- Operating cash flow increased substantially, reflecting net income and more favorable working-capital movements, including lower receivables and inventories than in the prior-year quarter.
Outlook, commentary, risks and unusual items
- Management estimated a fiscal 2010 effective tax rate of approximately 25.5%.
- Worldwide footwear and apparel futures and advance orders for September 2009 through January 2010 were down 6% year over year, or approximately 4% excluding currency effects. NIKE cautioned that these orders do not necessarily predict revenue because of shipment timing, order mix, cancellations, discounts, and sales not represented by futures orders.
- Management cited challenging consumer and retail conditions, discounting, currency movements, and event-driven prior-year comparisons. It estimated currency effects reduced year-over-year consolidated pre-tax income by approximately $28 million.
- Fiscal 2009 restructuring reduced the global workforce by approximately 5% and resulted in gross charges of $195 million. The remaining restructuring accrual was $61.3 million; the company expected payments through fiscal 2010 and early 2011 and no significant additional charges from those actions.
- Gross unrecognized tax benefits were $305.6 million, excluding interest and penalties; $117.4 million could affect the effective tax rate if recognized. The IRS was auditing tax years 2007–2009; the company could not estimate a settlement range and did not anticipate a significant change in unrecognized tax benefits over the next 12 months.
- Outstanding letters of credit totaled $120.7 million, primarily for inventory purchases. The filing reported no significant changes to previously disclosed commitments, contingencies, market risks, or risk factors, and no material developments in legal proceedings.
- Forward-looking risks include economic and consumer demand conditions, competition, inventory and forecasting challenges, foreign exchange, supply and transportation costs, information systems, and access to capital markets. The filing states that futures orders are not necessarily indicative of future revenue.
Important facts for investors to verify
- Whether sales trends, discounting, and futures orders stabilize, particularly in Europe and Greater China, and whether Emerging Markets growth continues.
- Whether margins recover as discounting and currency pressures change, and whether lower demand-creation spending is sustainable.
- How operating cash flow, inventory, and receivables develop; confirm liquidity and debt levels against upcoming capital needs.
- Progress and cash payments on restructuring accruals, and any developments in the IRS audits or uncertain tax positions.
- How foreign exchange movements affect reported sales, earnings, and the company’s hedge positions.