NIKE, Inc. 10-K Summary: Fiscal Year Ended May 31, 1999
Business Context and Reporting Period
This Annual Report (Form 10-K) covers the fiscal year ended May 31, 1999. NIKE, Inc. is the world's largest seller of athletic footwear and apparel, operating through independent contractors and distributors in approximately 110 countries. The company designs, develops, and markets footwear, apparel, equipment, and accessories under the NIKE brand, as well as other brands including Cole Haan, Bauer, and Sports Specialties.
Key Financial Metrics
| Metric | Fiscal 1999 | Fiscal 1998 |
|---|---|---|
| Total Revenues | $8,776.9 million | $9,553.1 million |
| Net Income | $451.4 million | $399.6 million |
| Diluted EPS | $1.57 | $1.35 |
| Gross Margin % | 37.4% | 36.5% |
| Cash Flow from Operations | $961.0 million | $517.5 million |
| Long-Term Debt | $386.1 million | $379.4 million |
| Working Capital | $1,818.0 million | $1,828.8 million |
| Current Ratio | 2.3 | 2.1 |
Material Changes vs. Prior Period
- Revenue Decline: Total revenues decreased 8.1% to $8.78 billion, marking the first revenue decline in five years. The U.S. market dropped 8.1%, and the Asia Pacific region fell significantly by 32.7% due to weak market conditions. Conversely, Europe revenues grew 7.6%.
- Profitability Increase: Despite lower revenues, net income rose 13% to $451.4 million. This was driven by a 90 basis point improvement in gross margin percentage (to 37.4%) and a reduction in selling and administrative expenses of nearly $200 million.
- Restructuring Charges: The company incurred a net pre-tax restructuring charge of $45.1 million in 1999 (down from $129.9 million in 1998). Excluding restructuring charges in both years, net income remained relatively flat.
- Inventory Reduction: Finished goods inventory decreased by $197 million (14%) as the company focused on reducing excess and slow-moving stock.
- Accounting Change: In the fourth quarter, the company changed its inventory valuation method for U.S. inventories from LIFO to FIFO, resulting in a $15.0 million credit to other income/expense.
Guidance, Outlook, and Risks
- Outlook: Management expects fiscal year 2000 revenues to be up slightly compared to fiscal 1999. Footwear futures orders are trending up in every region except the Americas, while apparel futures remain mixed.
- Capital Expenditures: Expected to be approximately $200 million higher than fiscal 1999 levels, primarily due to the purchase of a distribution facility in Japan.
- Year 2000 (Y2K) Readiness: The company estimates total Y2K costs between $110 million and $120 million, with approximately $91 million incurred as of May 31, 1999. Management believes the risk of material adverse effect is low but acknowledges risks related to third-party suppliers and customers.
- Trade and Currency Risks: The company faces risks from import quotas, anti-dumping duties (particularly in the EU), and currency fluctuations. The introduction of the Euro is expected to reduce currency exchange costs but requires system modifications estimated at $14 million.
- Significant Customers: Venator Group Inc. accounted for approximately 10% of global net sales of NIKE brand products in fiscal 1999.
Investor Verification Checklist
- Verify the sustainability of the 8% revenue decline, particularly in the U.S. and Asia Pacific markets, against the slight revenue growth forecast for fiscal 2000.
- Confirm the execution of cost-cutting measures and the realization of the projected $36 million in future cost savings from the 1999 restructuring plan.
- Monitor the impact of the LIFO-to-FIFO accounting change on future inventory valuation and tax liabilities.
- Assess the progress of Y2K remediation for significant suppliers and customers, as this remains a primary operational risk.
- Review the performance of the Europe region, which showed strong growth (7.6%) and apparel sales surpassing $1 billion, to determine if this trend can offset declines in other regions.