NIKE, Inc. 10-Q Summary: Quarter Ended November 30, 2000
Business Context and Reporting Period
This Form 10-Q covers the second quarter and first six months of fiscal year 2001, ended November 30, 2000. NIKE, Inc. operates globally in the design, production, marketing, and selling of sports and fitness footwear, apparel, and equipment. The company reported strong liquidity and continued revenue growth across all geographic regions, though results were impacted by foreign exchange fluctuations.
Key Financial Metrics
| Metric (in millions) | Q2 2000 | Q2 1999 | YTD 2000 | YTD 1999 |
|---|---|---|---|---|
| Revenues | $2,198.7 | $2,059.7 | $4,835.5 | $4,560.8 |
| Net Income | $119.4 | $107.5 | $329.6 | $307.8 |
| Diluted EPS | $0.44 | $0.38 | $1.21 | $1.09 |
| Gross Margin % | 39.6% | 39.9% | 40.1% | 39.2% |
| Cash from Operations (6mo) | $306.0 (vs $566.1 prior year) | |||
| Cash & Equivalents | $325.5 (Nov 30, 2000) | |||
| Total Debt (Current + Long-term) | $1,390.5 (Nov 30, 2000) |
Material Changes vs. Prior Period
- Revenue Growth: Revenues increased 7% in the quarter and 6% year-to-date. On a constant dollar basis, growth was 12% and 10% respectively, indicating a significant headwind from the strong U.S. dollar.
- Profitability: Net income rose 11% in the quarter and 7% year-to-date. Diluted EPS grew faster (16% and 11%) due to share repurchases reducing the share count.
- Margins: Gross margin percentage decreased 30 basis points in the quarter (39.6% vs 39.9%) primarily due to foreign exchange rates. However, year-to-date margins improved 90 basis points (40.1% vs 39.2%) driven by apparel mix and pricing.
- Expenses: Selling and administrative expenses increased 8% in the quarter and 10% year-to-date, driven by marketing for the 2000 Olympics and European Soccer Championships, and operational investments in retail and e-commerce.
- Cash Flow: Operating cash flow decreased significantly by $260.1 million year-to-date compared to the prior year, despite higher net income. This was caused by a $128.9 million increase in working capital components (inventory and receivables) versus a decrease in the prior year.
Guidance, Outlook, and Risks
- Outlook: Management noted that results for the six months ended November 30, 2000, are not necessarily indicative of full-year results. Worldwide futures and advance orders for the next six months were 1% lower than the prior year (3% higher in constant dollars).
- Capital Allocation: The company continues a $1 billion share repurchase program, buying 0.9 million shares in the quarter. Dividends remained at $0.12 per share.
- Liquidity: The company maintains a strong financial position with a current ratio of 1.90:1. It entered into a new $1.25 billion committed credit facility in the quarter but has not yet borrowed against it.
- Risks: Key risks include the strength of the U.S. dollar against foreign currencies (particularly the euro), intense competition, and the impact of new accounting standards (FAS 133) on derivative instruments, which will be implemented in June 2001.
- Unusual Items: Other income/expense improved significantly due to gains from hedging intercompany charges and foreign currency fluctuations on recorded assets and liabilities.
Investor Verification Checklist
- Foreign Exchange Impact: Verify the extent to which the strong U.S. dollar suppressed reported revenue growth and gross margins, particularly in the EMEA region.
- Working Capital Efficiency: Investigate the reasons for the $128.9 million increase in working capital components, which significantly reduced operating cash flow despite profit growth.
- Inventory Levels: Review inventory balances ($1,373.6 million) relative to sales trends to assess potential future markdown risks.
- Debt Structure: Confirm the maturity profile of the $1.39 billion in total debt and the utilization of the new $1.25 billion credit facility.
- Future Orders: Monitor the 1% decline in worldwide futures orders (at reported rates) as a leading indicator for future revenue performance.