NIKE, Inc. — Form 10-Q Summary
Reporting period: Third quarter and first nine months of fiscal 2013, ended February 28, 2013. The filing’s actual period is fiscal 2013 Q3, notwithstanding the request metadata’s “2012 Q3” label. Financial statements are unaudited; amounts are in U.S. dollars.
Business context and results
NIKE reported Cole Haan and Umbro as discontinued operations following their divestitures. Unless noted otherwise, continuing-operations figures exclude those businesses.
| Metric | Q3 FY2013 | Q3 FY2012 | Change |
|---|---|---|---|
| Revenue from continuing operations | $6.187 billion | $5.656 billion | +9%; +10% excluding currency |
| Gross profit / gross margin | $2.736 billion / 44.2% | $2.485 billion / 43.9% | Gross profit +10%; margin +30 bps |
| Selling and administrative expense | $1.863 billion; 30.1% of revenue | $1.708 billion; 30.2% | Expense +9%; share of revenue down 10 bps |
| Income before income taxes | $858 million | $787 million | +9% |
| Net income from continuing operations | $662 million | $569 million | +16% |
| Diluted EPS from continuing operations | $0.73 | $0.61 | +20% |
| Total net income / diluted EPS | $866 million / $0.95 | $560 million / $0.60 | Total net income includes discontinued operations |
For the first nine months, continuing-operations revenue was $18.616 billion (+9%; +12% excluding currency), continuing net income was $1.768 billion (+3%), and diluted continuing-operations EPS was $1.93 (+6%). Gross margin was 43.5%, down 20 bps year over year; S&A was 30.9% of revenue, up from 30.2%.
Cash flow, balance sheet and capital
- Operating cash flow for the first nine months was $1.668 billion, versus $925 million a year earlier. Management attributed the improvement principally to smaller working-capital cash outflows: $456 million versus $1.157 billion.
- Investing activities provided $310 million; financing activities used $1.783 billion. Capital expenditures were $401 million. Divestiture proceeds were $786 million.
- At February 28, cash and equivalents were $2.557 billion and short-term investments were $1.485 billion, or approximately $4.0 billion combined. The company reported $2.9 billion of that liquidity held by foreign subsidiaries.
- Total debt, including notes payable and current debt, was approximately $321 million. No borrowings were outstanding under the $1 billion revolving credit facility or the $1 billion commercial-paper program. NIKE reported compliance with credit-facility covenants.
- NIKE repurchased $1.432 billion of common stock and paid $515 million in dividends during the nine-month period. It had begun a new four-year, $8 billion repurchase program; $548 million had been repurchased under that program by quarter-end.
Material changes and operating trends
- Q3 revenue growth was broad, led by North America (+18% reported) and supported by Western Europe (+8%), Central & Eastern Europe (+16%) and Emerging Markets (+6%). Greater China fell 9% and Japan fell 13% reported. North America EBIT increased 24%; Greater China EBIT declined 20%.
- NIKE Brand Q3 revenue grew 9% reported and 10% currency-neutral. Footwear increased 9%, apparel 7%, and equipment 22% reported. Direct-to-Consumer revenue grew 22% reported and represented about 20% of NIKE Brand revenue.
- Q3 gross-margin expansion reflected higher selling prices and favorable product mix, partly offset by higher product costs, more off-price sales and unfavorable currency effects. For the nine-month period, higher product costs, royalties and FX more than offset the benefit of higher average selling prices.
- Q3 diluted EPS also benefited from lower weighted-average diluted shares due to share repurchases. The Q3 continuing-operations tax rate fell to 22.8% from 27.7%, primarily reflecting retroactive reinstatement of the U.S. R&D tax credit and a lower rate on foreign earnings.
Outlook, commentary and risks
- Management anticipated a full-year fiscal 2013 effective tax rate of approximately 25.5%.
- Futures orders for NIKE Brand footwear and apparel scheduled for March–July 2013 were up 6% reported and 7% currency-neutral. Management cautioned that futures orders are not necessarily indicative of revenue because of timing, order mix, cancellations, discounts, returns and sales outside the futures-order channel.
- Management expected Greater China revenue and EBIT to remain below prior-year levels for the next few quarters as NIKE and wholesale partners worked to reduce marketplace inventory; Q4 reported revenue was expected to be below what the 3% currency-neutral futures-order growth might imply. NIKE planned to tighten product shipments into China.
- Divestiture items were significant: Cole Haan’s February 1 sale generated a $231 million after-tax gain; Umbro’s sale generated a $107 million after-tax loss. Umbro wind-down costs were $18 million in Q3, with another $12 million expected in Q4. NIKE retained guarantees on certain Cole Haan lease payments, with maximum exposure of $47 million.
- Tax uncertainties included $419 million of gross unrecognized tax benefits, excluding interest and penalties; $213 million would affect the effective tax rate if recognized. Accrued interest and penalties were $142 million. NIKE said unrecognized benefits could decrease by up to $58 million within 12 months.
- Key disclosed risks include foreign-exchange movements, product costs and margins, consumer-demand and inventory forecasting, competition, supply-chain and technology disruptions, and the execution and remaining obligations associated with divestitures. NIKE stated there had been no material change in its previously disclosed risk factors.
Important facts for investors to verify
- Separate recurring continuing-operations performance from total net income, which included divestiture gains and losses.
- Track Greater China sell-through, inventory levels, shipment reductions and subsequent revenue and EBIT against management’s stated outlook.
- Assess whether gross-margin pressure from costs, discounts, royalties and foreign exchange persists, and whether S&A growth remains controlled.
- Compare actual fiscal-year tax results with the approximately 25.5% rate outlook; monitor resolution of uncertain tax positions.
- Monitor cash conversion, repurchases, liquidity held overseas, and completion costs or residual obligations from the Umbro and Cole Haan divestitures.