SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM 10-Q
FOR QUARTERLY REPORTS UNDER SECTION 13 OR 15 (d) OF
THE SECURITIES AND EXCHANGE ACT OF 1934
For the Quarter Ended November 30, 1998 Commission file number - 1-10635
NIKE, Inc.
(Exact name of registrant as specified in its charter)
OREGON 93-0584541
(State or other jurisdiction of (I.R.S. Employer
incorporation or organization) Identification No.)
One Bowerman Drive, Beaverton, Oregon 97005-6453
(Address of principal executive offices) (Zip Code)
Registrant's telephone number, including area code (503) 671-6453
Indicate by check mark whether the registrant (1) has filed all reports
required to be filed by Section 13 or 15 (d) of the Securities Exchange
Act of 1934 during the preceding 12 months (or for such shorter period
that the registrant was required to file such reports), and (2) has been
subject to such filing requirements for the past 90 days
Yes X No .
___ ___
Common Stock shares outstanding as of November 30, 1998 were:
_________________
Class A 101,317,408
Class B 181,258,964
-----------
282,576,372
===========
PART 1 - FINANCIAL INFORMATION
Item 1. Financial Statements
NIKE, Inc.
CONDENSED CONSOLIDATED BALANCE SHEET
Nov. 30, May 31,
1998 1998
________ _______
(in millions)
ASSETS
Current assets:
Cash and equivalents $ 254.6 $ 108.6
Accounts receivable 1,511.2 1,674.4
Inventories (Note 4) 1,197.7 1,396.6
Deferred income taxes 175.0 156.8
Prepaid expenses 161.0 196.2
________ ________
Total current assets 3,299.5 3,532.6
Property, plant and equipment 1,967.6 1,819.6
Less accumulated depreciation 736.8 666.5
________ ________
1,230.8 1,153.1
Identifiable intangible assets and goodwill 435.5 435.8
Deferred income taxes and other assets 284.1 275.9
________ ________
$5,249.9 $5,397.4
======== ========
LIABILITIES AND SHAREHOLDERS' EQUITY
Current liabilities:
Current portion of long-term debt $ 1.3 $ 1.6
Notes payable 431.6 480.2
Accounts payable 429.9 584.6
Accrued liabilities 678.5 608.5
Income taxes payable 31.4 28.9
________ ________
Total current liabilities 1,572.7 1,703.8
Long-term debt 389.1 379.4
Deferred income taxes and other liabilities 52.3 52.3
Commitments and contingencies (Note 6) -- --
Redeemable Preferred Stock 0.3 0.3
Shareholders' equity:
Common Stock at stated value:
Class A convertible-101.3 and
101.5 shares outstanding 0.2 0.2
Class B-181.2 and 185.5 shares
outstanding 2.6 2.7
Capital in excess of stated value 272.3 262.5
Accumulated other comprehensive income (55.9) (47.2)
Retained earnings 3,016.3 3,043.4
________ ________
3,235.5 3,261.6
________ ________
$5,249.9 $5,397.4
======== ========
The accompanying Notes to Condensed Consolidated Financial Statements are
an integral part of this statement.
NIKE, Inc.
<TABLE>
<CAPTION>
CONDENSED CONSOLIDATED STATEMENT OF INCOME
<S> <C> <C> <C> <C>
Three Months Ended Six Months Ended
November 30, November 30,
__________________ __________________
1998 1997 1998 1997
____ ____ ____ ____
(in millions, except per share data)
Revenues $1,913.0 $2,255.3 $4,417.9 $5,021 4
_________ _________ _________ _________
Costs and expenses:
Cost of sales 1,229.6 1,409.5 2,792.3 3,075.0
Selling and administrative 531.9 593.1 1,184.5 1,252.0
Interest 10.1 17.1 24.3 34.0
Other expense 27.6 6.3 32.1 19.5
________ ________ _________ _________
1,799.2 2,026.0 4,033.2 4,380.5
________ ________ _________ _________
Income before income taxes 113.8 229.3 384.7 640.9
Income taxes 44.9 88.2 151.9 246.7
________ ________ _________ _________
Net income $ 68.9 $ 141.1 $ 232.8 $ 394.2
========= ========= ========== ==========
Basic earnings per common share $ 0.24 $ 0.49 $ 0.82 $ 1.36
(Note 3) ========= ========= ========== ==========
Diluted earnings per common share $ 0.24 $ 0.48 $ 0.80 $ 1.33
(Note 3) ========= ========= ========== ==========
Dividends declared per common share $ 0.12 $ 0.12 $ 0.24 $ 0.22
========= ========= ========== ==========
</TABLE>
The accompanying Notes to Condensed Consolidated Financial Statements are
an integral part of this statement.
NIKE, Inc.
CONDENSED CONSOLIDATED STATEMENT OF CASH FLOWS
Six Months Ended
November 30,
_________________
1998 1997
____ ____
(in millions)
Cash provided (used) by operations:
Net income $232.8 $394.2
Income charges (credits) not
affecting cash:
Depreciation 102.0 88.1
Deferred income taxes (18.4) (8.8)
Amortization and other 16.8 15.2
Changes in other working capital
components 337.9 (199.6)
_______ _______
Cash provided by operations 671.1 289.1
_______ _______
Cash provided (used) by investing activities:
Additions to property, plant and
equipment (173.6) (242.0)
Disposals of property, plant and
equipment 11.7 5.4
Increase in other assets (26.7) (50.8)
Decrease in other liabilities (6.4) (10.7)
_______ _______
Cash used by investing activities (195.0) (298.1)
_______ _______
Cash provided (used) by financing activities:
Additions to long-term debt - 101.3
Reductions in long-term debt
including current portion (.9) (1.1)
Decrease in notes payable (48.6) (311.5)
Proceeds from exercise of options 9.3 17.8
Repurchase of stock (194.0) (33.2)
Dividends - common and preferred (68.6) (58.0)
_______ ______
Cash used by financing activities (302.8) (284.7)
_______ _______
Effect of exchange rate changes on cash (27.3) (12.0)
Net increase (decrease) in cash and equivalents 146.0 (305.7)
Cash and equivalents, May 31, 1998 and 1997 108.6 445.4
_______ _______
Cash and equivalents, November 30, 1998
and 1997 $254.6 $139.7
======= =======
The accompanying Notes to Condensed Consolidated Financial Statements are
an integral part of this statement.
NIKE, Inc.
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
NOTE 1 - Summary of significant accounting policies:
___________________________________________
Basis of presentation:
The accompanying unaudited condensed consolidated financial statements
reflect all adjustments (consisting of normal recurring accruals) which
are, in the opinion of management, necessary for a fair presentation of
the results of operations for the interim period(s). The interim financial
information and notes thereto should be read in conjunction with the
Company's latest annual report to shareholders. The results of operations
for the six (6) months ended November 30, 1998 are not necessarily
indicative of results to be expected for the entire year.
Year 2000 costs:
Costs associated with the Company's efforts around Year 2000 issues are
expensed as incurred, unless they relate to the purchase of hardware and
software, and software development, in which case they are capitalized.
Capitalized software and hardware costs are depreciated from three to five
years.
NOTE 2 - Comprehensive Income:
__________________
In the first quarter of fiscal 1999, the Company adopted Statement of
Financial Accounting Standards No. 130, "Reporting Comprehensive Income".
This statement establishes standards for reporting and display of
comprehensive income and its components in a full set of general purpose
financial statements. Comprehensive income is generally defined as all changes
in shareholders' equity except those resulting from investments by and
distributions to shareholders. Comprehensive income, net of taxes, is as
follows:
Three Months Ended Six Months Ended
November 30, November 30,
__________________ _________________
1998 1997 1998 1997
____ ____ ____ ____
(in millions)
Net Income $ 68.9 $141.1 $232.8 $394.2
Change in Cumulative
Translation Adjustment (3.6) (18.2) (8.7) (26.9)
_______ _______ _______ _______
Total Comprehensive Income $ 65.3 $122.9 224.1 367.3
======= ======= ======= =======
NOTE 3 - Net income per common share:
___________________________
SFAS 128, "Earnings per Share," replaces primary and fully diluted
earnings per share with basic and diluted earnings per share. Under the new
requirements, the dilutive effect of stock options is excluded from the
calculation of basic earnings per share. Diluted earnings per share is
calculated similarly to fully diluted earnings per share as required under
APB 15. SFAS 128 became effective for the Company's fiscal 1998 financial
statements. All prior period earnings per share data presented have been
restated to conform to the provisions of this statement. The following
represents a reconciliation from basic earnings per share to diluted earnings
per share:
Three Months Ended Six Months Ended
November 30, November 30,
__________________ _________________
1998 1997 1998 1997
____ ____ ____ ____
(in millions, except per share data)
Determination of shares:
Average common shares
outstanding 283.0 290.3 284.9 290.1
Assumed conversion of
stock options 4.7 6.4 4.9 7.0
______ ______ ______ ______
Diluted average common
shares outstanding 287.7 296.7 289.8 297.1
====== ====== ====== ======
Basic earnings per
common share $ 0.24 $ 0.49 $ 0.82 $ 1.36
====== ====== ====== ======
Diluted earnings per
common share $ 0.24 $ 0.48 $ 0.80 $ 1.33
====== ====== ====== ======
NOTE 4 - Inventories:
___________
Inventories by major classification are as follows:
Nov. 30, May 31,
1998 1998
________ ________
(in millions)
Finished goods $1,127.5 $1,303.8
Work-in-progress 38.7 34.7
Raw materials 31.5 58.1
________ ________
$1,197.7 $1,396.6
======== ========
NOTE 5 - Restructuring charges:
______________________
1998 Charge
During the fourth quarter of fiscal 1998 the Company recorded a
restructuring charge of $129.9 million as a result of certain of the Company's
actions to better align its cost structure with expected revenue growth rates.
The restructuring activities (shown below in tabular format) primarily related
to: 1) the elimination of job responsibilities company-wide, resulting in costs
to sever employees and related asset write-downs and lease abandonments related
to the affected employees; 2) the relocation of, and elimination of, certain
job responsibilities of the Asia Pacific headquarters in Hong Kong, resulting in
reduction in workforce, lease abandonments and other costs of downsizing the
Hong Kong headquarters; 3) the downsizing of the Company's Japan distribution
center, resulting in the write-down of assets no longer in use; 4) the
cancellation of certain non-strategic long-term endorsement contracts,
resulting in one-time termination fees; and 5) the decision to exit certain
manufacturing operations of the Bauer subsidiary, resulting in the reduction in
manufacturing related jobs, the write-down of assets no longer in use and the
estimated loss on divestiture of certain manufacturing plants.
No increases to the 1998 restructing charge were made during the first six
months of fiscal 1999. A total of $6.7 million of the restructing accrual was
not required due to changes in estimates related to severance payments, asset
valuation and lease commitments. This amount is included in "other expense" on
the income statement.
1999 Charge
In the second quarter of fiscal 1999, an additional $18.7 million
restructuring charge was recorded due to further cost realignment programs in
the Company's Asia Pacific region. The charge (detailed below in tabular
format) was for costs of severing employees, including severance packages,
lease abandonments and the write down of assets no longer in use. The charge
is included in other expense on the income statement.
As of November 30, 1998, there were a total of 1,208 employees terminated
in the original plan announced in the fourth quarter of fiscal 1998, with 1,168
having left the Company as of that date. An additional 237 employees were
terminated in the plan announced during the current quarter, with 138 having
left the Company as of November 30, 1998.
Detail of the 1998 restructuring charge is as follows:
<TABLE>
<CAPTION>
<S> <C> <C> <C> <C> <C> <C>
(in millions)
4th QTR FY98
DESCRIPTION CASH/NON- RESTRUCTURING ACTIVITY RESERVE ACTIVITY RESERVE
CASH CHARGE BALANCE AT BALANCE AT
5/31/98 11/30/98
___________________________________________________________________________________________________________
ELIMINATION OF JOB
RESPONSIBILITES COMPANY-
WIDE $(49.8) $18.8 $(31.0) $24.1 $(6.9)
Severance packages cash (29.1) 9.0 (20.1) 17.7 (2.4)
Lease cancellations &
commitments cash (10.8) 0.2 (10.6) 6.1 (4.5)
Write-down of assets non-cash (9.6) 9.6 - - -
Other cash (0.3) - (0.3) 0.3 -
___________________________________________________________________________________________________________
DOWNSIZING THE ASIA PACIFIC
HEADQUARTERS IN HONG KONG $(13.1) 5.4 $(7.7) $3.3 $(4.4)
Severance packages cash (4.6) 2.3 (2.3) 1.0 (1.3)
Lease cancellations &
commitments cash (5.5) 0.1 (5.4) 2.3 (3.1)
Write-down of assets non-cash (3.0) 3.0 - - -
____________________________________________________________________________________________________________
DOWNSIZING THE JAPAN
DISTRIBUTION CENTER $(31.6) $25.4 $(6.2) $4.7 $(1.5)
Write-off of assets non-cash (12.5) 12.5 - - -
Software development costs cash/non (19.1) 12.9 (6.2) 4.7 (1.5)
cash
____________________________________________________________________________________________________________
CANCELLATION OF ENDORSEMENT
CONTRACTS cash $(5.6) $0.6 $(5.0) $4.1 $(0.9)
____________________________________________________________________________________________________________
EXITING CERTAIN MANUFACTURING
OPERATIONS AT BAUER $(22.7) $19.9 $(2.8) $0.2 $(2.6)
Write-down of assets non-cash (14.7) 14.7 - - -
Divestiture of manufacturing
facilities non-cash (5.2) 5.2 - - -
Lease cancellations &
commitments cash (1.6) - (1.6) 0.1 (1.5)
Severance packages cash (1.2) - (1.2) 0.1 (1.1)
____________________________________________________________________________________________________________
OTHER $(7.1) 2.4 $(4.7) $2.7 $(2.0)
Cash cash (0.6) - (0.6) 0.1 (0.5)
Non-cash non-cash (6.5) 2.4 (4.1) 2.6 (1.5)
____________________________________________________________________________________________________________
Effect of foreign currency
translation - $1.8 $1.8 $(0.9) $0.9
____________________________________________________________________________________________________________
____________________________________________________________________________________________________________
TOTAL $(129.9) $74.3 $(55.6) $38.2 $(17.4)
____________________________________________________________________________________________________________
</TABLE>
Detail of the 1999 restructuring charge is as follows:
<TABLE>
<CAPTION>
<S> <C> <C> <C> <C>
(in millions)
2nd QTR FY99
DESCRIPTION CASH/NON- RESTRUCTURING ACTIVITY RESERVE
CASH CHARGE BALANCE AT
11/30/98
_____________________________________________________________________________________
ELIMINATION OF JOB
RESPONSIBILITES $(18.7) $ 5.9 $(12.8)
Severance packages cash (8.7) 0.6 (8.1)
Lease cancellations &
commitments cash (2.3) - (2.3)
Write-down of assets non-cash (5.5) 5.0 (0.5)
Other cash/non- (2.2) 0.3 (1.9)
cash
_____________________________________________________________________________________
<Table/>
NOTE 6 - Commitments and contingencies:
_____________________________
There have been no other significant subsequent developments
relating to the commitments and contingencies reported on the
Company's most recent Form 10-K.
Item 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF RESULTS OF OPERATIONS AND
FINANCIAL CONDITION
Operating Results
_________________
Net income for the second quarter of fiscal year 1999 was $68.9 million, a
51% decrease compared to the $141.1 million in the prior year's second quarter.
Year-to-date net income decreased 41% to $232.8 million. Results for both the
quarter and year-to-date were driven by lower revenues, lower gross margin
percentages and higher selling and administrative expenses as a percentage of
revenues. In addition, the quarter also includes an $18.7 million restructuring
charge, discussed further below.
Consolidated revenues decreased 15%, or $342.3 million for the quarter, and
12%, or $603.5 million year-to-date. U.S. brand revenues declined $175.2
million, or 14% for the quarter, with a 15% decrease in footwear and a 13%
decrease in apparel revenues. Year-to-date U.S. revenues decreased 12%, with a
14% drop in footwear and a 9% decrease in apparel. Sales in the U.S. are being
affected by a difficult selling environment at retail, particularly in athletic
apparel. Three of the largest apparel categories, Men's Athletic, Team Sports,
and Accessories decreased 30%, 17% and 34%, respectively, for the quarter. In
addition, the uncertainty surrounding the National Basketball Association's
season has slowed the momentum beginning to be seen in the footwear basketball
category. U.S. Basketball footwear revenue was down 24% in the quarter (31%
year-to-date). However, Brand Jordan was up 23% in the quarter (45% year-to-
date). The decline in overall footwear revenues for the quarter was a result of
a 17% decrease in pairs sold and a 1% increase in average selling price. The
major categories of running and crosstraining increased 9% and decreased 40%,
respectively, for the quarter. Year-to-date, running decreased 3% while
crosstraining was down 34%.
Total revenues in Europe were up 9%, or $37.3 million for the quarter. For
the year, revenues increased 11%. Had the dollar remained constant, revenues
would have increased 1% and 6% for the quarter and year-to-date, respectively.
The revenue increase was driven by growth in apparel, as footwear revenues were
down. Of the major countries within the region, the United Kingdom and France,
increased 9%, in constant dollars, for the quarter, while Spain and Italy,
decreased 7% and 5%, respectively.
The Asia Pacific region remains affected by the general economic crisis in
the area. Revenues decreased 46% for the quarter and 47% year-to-date. Had the
dollar remained constant, revenues would have decreased 38% for both the quarter
and year-to-date. Footwear and apparel revenues were down 56% and 33%,
respectively, for the quarter. Revenues in Japan declined 53% (49% on a
constant dollar basis) for the quarter and 53% for the year (47% on a constant
dollar basis).
The Americas region, which includes Canada, Mexico, South America and South
Africa, decreased 16% for the quarter and 13% year-to-date, compared to last
year. Had the dollar remained constant, revenues would have decreased 9% and 7%
for the quarter and year-to-date, respectively, primarily due to the
strengthening of the dollar in Canada.
Other Brands, which includes Bauer NIKE Hockey, Cole Haan, Sports
Specialties, and NIKE IHM (which includes what was formally Tetra Plastics),
decreased 12% for the quarter and less than 1% year-to-date.
The breakdown of revenues follows:
Three Months Ended Six Months Ended
November 30, November 30,
___________________ ________________
% %
1998 1997 change 1998 1997 change
______ ______ _______ ______ ______ ________
(in millions)
U.S.A. REGION
FOOTWEAR $665.9 $787.6 -15% $1,583.3 $1,843.7 -14%
APPAREL 365.0 418.3 -13% 770.2 843.5 -9%
EQUIPMENT AND OTHER 17.5 17.7 -1% 42.8 36.7 17%
_______ _______ _______ _______
TOTAL U.S.A. 1,048.4 1,223.6 -14% 2,396.3 2,723.9 -12%
EUROPE REGION
FOOTWEAR 199.3 245.6 -19% 553.4 629.6 -12%
APPAREL 217.7 143.0 52% 528.5 361.3 46%
EQUIPMENT AND OTHER 16.8 7.9 113% 32.7 15.4 112%
_______ _______ _______ _______
TOTAL EUROPE 433.8 396.5 9% 1,114.6 1,006.3 11%
ASIA PACIFIC REGION
FOOTWEAR 90.7 208.4 -56% 197.1 472.5 -58%
APPAREL 101.4 151.7 -33% 180.7 254.7 -29%
EQUIPMENT AND OTHER 4.8 2.6 85% 10.5 3.0 250%
_______ _______ _______ _______
TOTAL ASIA PACIFIC 196.9 362.7 -46% 388.3 730.2 -47%
AMERICAS REGION
FOOTWEAR 73.7 91.2 -19% 176.3 212.7 -17%
APPAREL 42.5 50.7 -16% 89.5 96.3 -7%
EQUIPMENT AND OTHER 3.5 1.3 169% 6.5 4.6 41%
_______ _______ _______ _______
TOTAL AMERICAS 119.7 143.2 -16% 272.3 313.6 -13%
_______ _______ _______ _______
TOTAL NIKE BRAND 1,798.8 2,126.0 -15% 4,171.5 4,774.0 -13%
OTHER & OTHER BRANDS 114.2 129.3 -12% 246.4 247.4 -0%
_______ _______ _______ _______
TOTAL REVENUES $1,913.0 $2,255.3 -15% $4,417.9 $5,021.4 -12%
======== ======== ======== =========
The Company's gross margin percentage for the second quarter was 35.7%,
down from 37.5% in the prior year. On a year-to-date basis, margins fell 200
basis points to 36.8%. Margins continue to be adversely affected by continued
efforts to liquidate the Company's closeout inventories around the world,
particularly apparel. Additionally, increased levels of research and
development spending on reduced levels of comparative revenues, further reduced
margins.
Selling and administrative expenses have decreased 10% from last year's
second quarter and 5% year-to-date, however are up as a percentage of revenues,
to 27.8% for the quarter (compared to 26.3%) and 26.8% for the year (compared to
24.9%). Sports marketing and advertising reductions accounted for more than 50%
of the reduction for the quarter, and wage related expenses fell 4%. Spending
levels continue to reflect management's efforts to control expenditures.
Interest expense has decreased for both the quarter and year-to-date,
compared to last year, as less short term debt has been needed to finance lower
levels of inventories and accounts receivable. Other expense has increased over
the prior year, mainly due to the $18.7 million restructuring charge taken in
the second quarter (discussed further below). Offsetting this charge was a $6.7
million reversal of fiscal 1998's restructuring charge and reduced foreign
currency transaction losses.
Worldwide futures and advance orders for NIKE brand athletic footwear and
apparel scheduled for delivery from December 1998 through April 1999 totaled
$3.8 billion, 10% lower than such orders for the same period last year. These
orders and the percentage change in these orders are not necessarily indicative
of the change in revenues which the Company will experience for subsequent
periods. This is due to potential shifts in the mix of advance orders in
relation to at once orders and varying cancellation rates. Finally exchange
rate fluctuations will also cause differences in the comparisons.
During the fourth quarter of fiscal 1998, the Company recorded a
restructuring charge of $129.9 million as a result of certain of the Company's
actions to better align its overall cost structure and organization with planned
revenue levels. The restructuring activities (shown below in tabular format)
primarily related to: 1) the elimination of job responsibilities company-wide,
resulting in costs to sever employees and related asset write-downs and lease
abandonments related to the affected employees; 2) the relocation of, and
elimination of, certain job responsibilities of the Asia Pacific headquarters in
Hong Kong, resulting in reduction in workforce, lease abandonments and other
costs of downsizing the Hong Kong headquarters; 3) the downsizing of the
Company's Japan distribution center, resulting in the write-down of assets no
longer in use; 4) the cancellation of certain non-strategic long-term
endorsement contracts, resulting in one-time termination fees; and 5) the
decision to exit certain manufacturing operations of the Bauer subsidiary,
resulting in the reduction in manufacturing related jobs, the write-down of
assets no longer in use and the estimated loss on divestiture of certain
manufacturing plants.
No increases to the 1998 restructuring charge were made during the first
six months of fiscal 1999. A total of $6.7 million of the restructuring
accrual was not required due to changes in estimates related to severance
payments, asset valuations and lease commitments. This amount is included in
"other expense" on the income statement.
In the second quarter of fiscal 1999, an additional $18.7 million
restructuring charge was recorded due to further cost realignment programs in
the Company's Asia Pacific region. The charge (detailed below in tabular
format) was for costs of severing employees, including severance packages, lease
abandonments and the write down of assets no longer in use. The charge is
included in "other expense" on the income statement.
As of November 30, 1998, there were a total of 1,208 employees terminated
in the original plan announced in the fourth quarter of fiscal 1998, with 1,168
having left the Company as of that date. An additional 237 employees were
terminated in the plan announced during the current quarter, with 138 having
left the Company as of November 30, 1998.
Detail of the 1998 restructuring charge is as follows:
</TABLE>
<TABLE>
<CAPTION>
<S> <C> <C> <C> <C> <C> <C>
(in millions)
4th QTR FY98
DESCRIPTION CASH/NON- RESTRUCTURING ACTIVITY RESERVE ACTIVITY RESERVE
CASH CHARGE BALANCE AT BALANCE AT
5/31/98 11/30/98
___________________________________________________________________________________________________________
ELIMINATION OF JOB
RESPONSIBILITES COMPANY-
WIDE $(49.8) $18.8 $(31.0) $24.1 $(6.9)
Severance packages cash (29.1) 9.0 (20.1) 17.7 (2.4)
Lease cancellations &
commitments cash (10.8) 0.2 (10.6) 6.1 (4.5)
Write-down of assets non-cash (9.6) 9.6 - - -
Other cash (0.3) - (0.3) 0.3 -
___________________________________________________________________________________________________________
DOWNSIZING THE ASIA PACIFIC
HEADQUARTERS IN HONG KONG $(13.1) 5.4 $(7.7) $3.3 $(4.4)
Severance packages cash (4.6) 2.3 (2.3) 1.0 (1.3)
Lease cancellations &
commitments cash (5.5) 0.1 (5.4) 2.3 (3.1)
Write-down of assets non-cash (3.0) 3.0 - - -
____________________________________________________________________________________________________________
DOWNSIZING THE JAPAN
DISTRIBUTION CENTER $(31.6) $25.4 $(6.2) $4.7 $(1.5)
Write-off of assets non-cash (12.5) 12.5 - - -
Software development costs cash/non (19.1) 12.9 (6.2) 4.7 (1.5)
cash
____________________________________________________________________________________________________________
CANCELLATION OF ENDORSEMENT
CONTRACTS cash $(5.6) $0.6 $(5.0) $4.1 $(0.9)
____________________________________________________________________________________________________________
EXITING CERTAIN MANUFACTURING
OPERATIONS AT BAUER $(22.7) $19.9 $(2.8) $0.2 $(2.6)
Write-down of assets non-cash (14.7) 14.7 - - -
Divestiture of manufacturing
facilities non-cash (5.2) 5.2 - - -
Lease cancellations &
commitments cash (1.6) - (1.6) 0.1 (1.5)
Severance packages cash (1.2) - (1.2) 0.1 (1.1)
____________________________________________________________________________________________________________
OTHER $(7.1) 2.4 $(4.7) $2.7 $(2.0)
Cash cash (0.6) - (0.6) 0.1 (0.5)
Non-cash non-cash (6.5) 2.4 (4.1) 2.6 (1.5)
____________________________________________________________________________________________________________
Effect of foreign currency
translation - $1.8 $1.8 $(0.9) $0.9
____________________________________________________________________________________________________________
____________________________________________________________________________________________________________
TOTAL $(129.9) $74.3 $(55.6) $38.2 $(17.4)
____________________________________________________________________________________________________________
</TABLE>
Detail of the 1999 restructuring charge is as follows:
<TABLE>
<CAPTION>
<S> <C> <C> <C> <C>
(in millions)
2nd QTR FY99
DESCRIPTION CASH/NON- RESTRUCTURING ACTIVITY RESERVE
CASH CHARGE BALANCE AT
11/30/98
_____________________________________________________________________________________
_____________________________________________________________________________________
ELIMINATION OF JOB
RESPONSIBILITES $(18.7) $ 5.9 $(12.8)
Severance packages cash (8.7) 0.6 (8.1)
Lease cancellations &
commitments cash (2.3) - (2.3)
Write-down of assets non-cash (5.5) 5.0 (0.5)
Other cash/non- (2.2) 0.3 (1.9)
cash
_____________________________________________________________________________________
<Table/>
In June 1998, the Financial Accounting Standards Board issued Statement
of Financial Accounting Standards No. 133, "Accounting for Derivative
instruments and Hedging Activities" (FAS 133). FAS 133 is effective for all
fiscal quarters of all fiscal years beginning after June 15, 1999 (June 1, 2000
for the Company). This statement will require the Company to recognize all
derivatives on the balance sheet at fair value. Changes in the fair value of
derivatives will be recorded in current earnings or other comprehensive income,
depending on the intended use of the derivative and the resulting designation.
The ineffective portion of all hedges will be recognized in current-period
earnings. Management of the Company has not yet determined the impact that the
adoption of FAS 133 will have on the Company's results from operations or its
financial position.
Year 2000 issue
_______________
The year 2000 issue is the result of computer programs using two digits
rather than four to define the applicable year. Such software may recognize a
date using "00" as the year 1900 rather than the year 2000. This could result
in system failures or miscalculations leading to disruptions in the Company's
activities and operations (the "year 2000" or "Y2K" issue). If the Company or
its significant suppliers or customers fail to make necessary modifications,
conversions, and contingency plans on a timely basis, the year 2000 issue could
have a material adverse effect on NIKE's business, operations, cash flow, and
financial condition. However, the effect cannot be quantified at this time
because NIKE cannot accurately estimate the magnitude, duration, or ultimate
impact of noncompliance by third parties that have no direct relationship to
NIKE. The Company believes that its competitors face a similar risk. Although
not quantifiable, the disclosure below is intended to summarize NIKE's actions
to minimize that risk.
In May 1997, the Company established a corporate-wide project team to
identify non-compliant software and complete the corrections or plans required
to mitigate the year 2000 issue. NIKE has identified three categories of
software and systems that require attention:
(1) information technology ("IT") systems, such as mainframes, PCs,
networks, and production control system,
(2) non-IT systems, such as equipment, machinery, climate control, and
security systems, which may contain microcontrollers with embedded
technology, and
(3) partner (supplier and customer) IT and non-IT systems.
The Company intends to fix or replace non-compliant IT and non-IT software and
systems through the following project phases:
(1) inventory systems,
(2) assess risks and impact,
(3) prioritize projects,
(4) fix, replace, or develop contingency plans for non-compliant
systems,
(5) test and on-going quality control, and
(6) audit results.
Currently, our remediation projects are at different phases of completion.
Remediation and testing activities are underway or have been completed on all of
the Company's critical business applications. NIKE engages the services of
independent consultants to analyze and develop testing standards, quality
assurance, and contingency plans. NIKE's internal auditing department audits
the process and remediation testing, and NIKE has consulted with external
independent consultants to evaluate and audit those results.
Recently, NIKE's Y2K project team completed a mid-project review
of all projects not yet completed. The result was the consolidation of
several projects, the elimination of redundant projects, and the
identification of several additional projects that need to be addressed. To
date, NIKE has identified 148 major internal I.T. remediation projects
worldwide. That number may increase slightly if anticipated "gaps" in
remediation are identified later. As of December 31, 1998, 77 of the
projects have been completed (including testing). Of the remaining
projects, approximately 50 percent are in final test and implementation
phases. The Company has already completed remediation on most of its
critical business information systems.
The Company is also assessing the compliance of its major customers and
suppliers. NIKE has relationships with certain significant suppliers and
customers in most of the locations in which it operates. The level of
preparedness of significant suppliers and customers can very greatly from
country to country. These relationships are material to many local operations
and, in the aggregate, are material to the Company. NIKE relies on suppliers to
timely deliver a broad range of goods and services worldwide, including raw
materials, footwear, apparel, accessories, equipment, advertising,
transportation services, banking services, telecommunications and utilities.
Moreover, NIKE's suppliers rely on countless other suppliers, over which NIKE
may have little or no influence regarding year 2000 compliance. NIKE believes
that suppliers and customers presents the area of greatest risk to the Company
in part because of the Company's limited ability to influence actions of third
parties, and in part because of the Company's inability to estimate the level
and impact of noncompliance of third parties throughout the extended supply
chain.
NIKE is sending surveys to and conducting formal communications with its
significant suppliers and customers to determine the extent to which it may be
affected by those third parties' Y2K preparedness plans. Some of NIKE's
significant suppliers and customers have not responded to inquiries from NIKE,
have refused to respond for liability reasons, or have not responded with
sufficient detail for NIKE to determine (a) whether the supplier or customer is
or timely will be Y2K compliant, or (b) if any noncompliance will have a
material adverse effect on NIKE's business or financial condition. In the
absence of adequate responses and disclosures, NIKE is attempting to make
independent assessments of significant vendors and customers. However, a
compliance failure by a major supplier or customer, or one of their suppliers or
customers, could have a material adverse effect on NIKE's business or financial
condition. The size of that effect cannot be quantified at this time because of
variables such as the type and importance of the non-responding suppliers and
customers, the unknown level and duration of noncompliance of suppliers and
customers (and their suppliers and customers), the possible effect on NIKE's
operations, and NIKE's ability to respond. Thus, there can be no assurance that
there will not be a material adverse effect on the Company if third party
governmental or business entities do not convert or replace their systems in a
timely manner and in a way that is compatible with the Company's systems.
As a result, in some cases NIKE will develop contingency plans that
assume some estimated level of noncompliance by, or business disruption to,
suppliers and customers. The Company is currently developing those contingency
plans, with the goal of completing them by mid-1999 for significant suppliers
and customers determined to be at high risk of noncompliance or business
disruption. The contingency plans are being developed on a case-by-case basis,
and may include booking orders and producing products before anticipated
business disruptions, manual intervention, or finding alternative suppliers.
Even so, judgments regarding contingency plans - such as how to develop them and
to what extent - are themselves subject to many variables and uncertainties.
There can be no assurance that NIKE will correctly anticipate the level, impact
or duration of noncompliance by suppliers and customers that provide inadequate
information. As a result, there is no certainty that its contingency plans will
be sufficient to mitigate the impact of noncompliance by suppliers and
customers, and some material adverse effect to NIKE may result from one or more
third parties regardless of defensive contingency plans.
Costs related to the year 2000 issue are funded through operating cash
flows. Through the second quarter of fiscal 1999, the Company expended
approximately $31 million in remediation efforts, including the cost of new
software, modifying the applicable code of existing software, and internal
costs. Approximately $7 million of these expenditures was for new hardware
and software, and has been capitalized. The remainder has been expensed as
incurred.
The Company currently estimates that total costs related to the year 2000
issue will be composed of approximately $45 to $50 million in external expenses,
$20 to $25 million in internal costs, and $40 to $45 million in replacement
projects that are not Y2K-related but have some Y2K remediation benefits.
Approximately $10 million of these expenses will be capitalized. (Previously
the Company did not report internal costs or unrelated replacement projects.)
The Company presently believes that the total cost of achieving year 2000
compliant systems is not expected to be material to NIKE's financial
condition, liquidity, or results of operations.
Estimates of time, cost, and risk estimates are based on currently
available information. Developments that could affect estimates include, but
are not limited to, the availability and cost of trained personnel; the ability
to locate and correct all relevant computer code and systems; cooperation and
remediation success of the Company's suppliers and customers (and their
suppliers and customers); and the ability to correctly anticipate risks and
implement suitable contingency plans in the event of system failures at NIKE or
its suppliers and customers (and their suppliers and customers).
The above section, even if incorporated by reference into other documents
or disclosures, is a Year 2000 Readiness Disclosure as defined under
the Year 2000 Information and Readiness Disclosure Act of 1998.
Liquidity and Capital Resources
The Company's financial position remained strong at November 30, 1998.
Compared to May 31, 1998 shareholder's equity remained consistent at $3.2
billion. Working capital decreased 6% to $1.7 billion and the current ratio was
2.10:1 at November 30, 1998 compared to 2.07:1 at May 31, 1998.
Cash provided by operations increased $382 million compared to the first
six months of last year. Working capital changes were the main reason for the
increase, primarily the decrease in accounts receivable, due to lower revenue,
and the decrease in inventory levels. Consolidated inventory levels at November
30, 1998 were 17% lower than last November and 14% lower than May 31, 1998.
Closeout levels in footwear inventory continued to fall to more normal levels in
all regions. In apparel, the Company was able to reduce closeout levels in
every region except Europe. The advancement of the Company's retail strategy
around the world has helped sell through of closeout product. During the second
quarter the Company added 13 new outlet locations: 6 in the U.S., 4 in Europe
and one each in Japan, Australia and Canada. The total outlet store count is 95
globally, with 64 of those in the U.S.
Additions to property, plant and equipment for the first half of fiscal
1999 were $173.6 million, mainly due to the expansion of the U.S. headquarters,
retail locations and customer service distribution facilities. Outside of the
U.S., the majority of the expenditures were related to the Company's customer
service distribution center in Europe and retail expansion in all regions. In
the previous year, expenditures were higher due to increased NIKETOWN
expenditures in the U.S. and more activity surrounding the European customer
service facility.
Management believes that significant funds generated by operations,
together with access to sufficient sources of funds, will adequately meet its
anticipated operating, global infrastructure expansion and capital needs.
The Company maintains significant short and long-term lines of credit with
banks, which, along with cash on hand, provide adequate operating liquidity.
Liquidity is also provided by the Company's commercial paper program, under
which there was $167.8 million outstanding at November 30, 1998.
Dividends per share of common stock for the second quarter of fiscal 1999
remained at $.12 per share, the same level as the previous year.
As of November 30, 1998, the Company purchased a total of 6.4 million
shares of NIKE's Class B common stock for $252 million in the open market since
the $1 billion share repurchase program was approved in December 1997. During
the first half of fiscal 1999, the Company purchased a total of 5.2 million
shares for $198 million. Funding has, and is expected to continue to, come from
operating cash flow in conjunction with short-term borrowings. The timing and
the amount of shares purchased will be dictated by working capital needs and
stock market conditions.
Special Note Regarding Forward-Looking Statements
and Reports Analyst Reports
Certain written and oral statements made or incorporated by reference
from time to time by NIKE or its representatives in this report, other
reports, filings with the Securities and Exchange Commission, press releases,
conferences, or otherwise, are "forward-looking statements" within the meaning
of the Private Securities Litigation Reform Act of 1995 ("the Act"). Forward-
looking statements include, without limitation, any statement that may predict,
forecast, indicate, or imply future results, performance, or achievements, and
may contain the words "believe," "anticipate," "expect," "estimate," "project,"
"will be," "will continue," "will result," or words or phrases of similar
meaning. Forward-looking statements involve risks and uncertainties which may
cause actual results to differ materially from the forward-looking statements.
The risks and uncertainties are detailed from time to time in reports filed by
NIKE with the S.E.C., including Forms 8-K, 10-Q, and 10-K, and include, among
others, the following: international, national and local general economic and
market conditions (including the current Asian economic problems); the size and
growth of the overall athletic footwear, apparel, and equipment markets; intense
competition among designers, marketers, distributors and sellers of athletic
footwear, apparel, and equipment for consumers and endorsers; demographic
changes; changes in consumer preferences; popularity of particular designs,
categories of products, and sports; seasonal and geographic demand for NIKE
products; the size, timing and mix of purchases of NIKE's products; fluctuations
and difficulty in forecasting operating results, including, without limitation,
the fact that advance "futures" orders may not be indicative of future revenues
due to the changing mix of futures and at-once orders; the ability of NIKE to
sustain, manage or forecast its growth and inventories; new product development
and introduction; the ability to secure and protect trademarks, patents, and
other intellectual property; performance and reliability of products; customer
service; adverse publicity; the loss of significant customers or suppliers;
dependence on distributors; business disruptions; disruptions due to Year 2000
noncompliance by NIKE, its suppliers or customers (or their suppliers or
customers); increased costs of freight and transportation to meet delivery
deadlines; changes in business strategy or development plans; general risks
associated with doing business outside the United States, including, without
limitation, import duties, tariffs, quotas and political and economic
instability; changes in government regulations; liability and other claims
asserted against NIKE; the ability to attract and retain qualified personnel;
and other factors referenced or incorporated by reference in this report and
other reports.
The risks included here are not exhaustive. Other sections of this
report may include additional factors which could adversely impact NIKE's
business and financial performance. Moreover, NIKE operates in a very
competitive and rapidly changing environment. New risk factors emerge from
time to time and it is not possible for management to predict all such risk
factors, nor can it assess the impact of all such risk factors on NIKE's
business or the extent to which any factor, or combination of factors, may
cause actual results to differ materially from those contained in any forward-
looking statements. Given these risks and uncertainties, investors should not
place undue reliance on forward-looking statements as a prediction of actual
results.
Investors should also be aware that while NIKE does, from time to time,
communicate with securities analysts, it is against NIKE's policy to disclose
to them any material non-public information or other confidential commercial
information. Accordingly, shareholders should not assume that NIKE agrees with
any statement or report issued by any analyst irrespective of the content of
the statement or report. Furthermore, NIKE has a policy against issuing or
confirming financial forecasts or projections issued by others. Thus, to the
extent that reports issued by securities analysts contain any projections,
forecasts or opinions, such reports are not the responsibility of NIKE.
Part II - Other Information
.
Item 1. Legal Proceedings:
There have been no material changes from the information previously
reported under Item 3 of the Company's Annual Report on Form 10-K for the
fiscal year ended May 31, 1998.
Item 6. Exhibits and Reports on Form 8-K:
(a) EXHIBITS:
3.1 Restated Articles of Incorporation, as amended (incorporated by
reference from Exhibit 3.1 to the Company's Quarterly Report on
Form 10-Q for the fiscal quarter ended August 31, 1995).
3.2 Third Restated Bylaws, as amended (incorporated by reference
from Exhibit 3.2 to the Company's Quarterly Report on Form 10-Q for
the fiscal quarter ended August 31, 1995).
4.1 Restated Articles of Incorporation, as amended (see Exhibit 3.1).
4.2 Third Restated Bylaws, as amended (see Exhibit 3.2).
4.3 Form of Indenture between the Company and The First National Bank
of Chicago, as Trustee (incorporated by reference from Exhibit
4.01 to Amendment No. 1 to Registration Statement No. 333-15953
filed by the Company on November 26, 1996).
10.1 Credit Agreement dated as of September 15, 1995 among NIKE, Inc.,
Bank of America National Trust & Savings Association,
individually and as Agent, and the other banks party thereto
(incorporated by reference from the Company's Quarterly Report
on Form 10-Q for the fiscal quarter ended August 31, 1995).
10.2 Form of non-employee director Stock Option Agreement (incorporated
by reference from Exhibit 10.3 to the Company's Annual Report on
Form 10-K for the fiscal year ended May 31, 1993).*
10.3 Form of Indemnity Agreement entered into between the Company and
each of its officers and directors (incorporated by reference from
the Company's definitive proxy statement filed in connection with
its annual meeting of shareholders held on September 21, 1987).
10.4 NIKE, Inc. Restated Employee Incentive Compensation Plan
(incorporated by reference from Registration Statement No. 33-29262
on Form S-8 filed by the Company on June 16, 1989).*
10.5 NIKE, Inc. 1990 Stock Incentive Plan (incorporated by reference
from the Company's definitive proxy statement filed in connection
with its annual meeting of shareholders held on September 22, 1997).*
10.6 NIKE, Inc. Executive Performance Sharing Plan (incorporated
by reference from the Company's definitive proxy statement filed
in connection with its annual meeting of shareholders held on
September 18, 1995).*
10.7 NIKE, Inc. Long-Term Incentive Plan (incorporated by reference
from the Company's definitive proxy statement filed in connection
with its annual meeting of shareholders held on September 22, 1997).*
10.8 Collateral Assignment Split-Dollar Agreement between NIKE, Inc.
and Philip H. Knight dated March 10, 1994 (incorporated by
reference from Exhibit 10.7 to the Company's Annual Report on
Form 10-K for he fiscal year ended May 31, 1994).*
12.1 Computation of Ratio of Earnings to Charges.
27 Financial Data Schedule.
* Management contract or compensatory plan or arrangement.
SIGNATURES
Pursuant to the requirements of the Securities Exchange Act of 1934,
the Registrant has duly caused this report to be signed on its behalf by
the undersigned thereunto duly authorized.
NIKE, Inc.
An Oregon Corporation
BY:/s/Robert E. Harold
________________________
Robert E. Harold
Interim Chief Financial Officer
DATED: January 14, 1999
</TABLE>
NIKE, INC.
COMPUTATION OF RATIO OF EARNINGS TO CHARGES
Six Months Ended
November 30,
__________________
1998 1997
____ ____
(in millions)
Net income $232.8 $394.2
Income taxes 151.9 246.7
______ ______
Income before income taxes 384.7 640.9
______ _____
Add fixed charges
Interest expense (A) 27.5 34.9
Interest component of leases (B) 20.9 21.9
______ ______
Total fixed charges 48.4 56.8
______ ______
Earnings before income taxes and
fixed charges (C) 429.9 $696.9
====== ======
Ratio of earnings to total fixed
charges 8.88 12.27
====== ======
(A) Interest expense includes both expensed and capitalized.
(B) Interest component of leases includes one-third of rental expense,
which approximates the interest component of operating leases.
(C) Earnings before income taxes and fixed charges is exclusive of
capitalized interest.
<TABLE> <S> <C>
<ARTICLE> 5
<LEGEND>
THIS SCHEDULE CONTAINS SUMMARY FINANCIAL INFORMATION EXTRACTED FROM
THE NOVEMBER 30, 1998 FORM 10-Q AND IS QUALIFIED IN ITS ENTIRETY BY
REFERENCE TO SUCH FINANCIAL STATEMENTS.
</LEGEND>
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<PERIOD-END> NOV-30-1998
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0
0
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</TABLE>
