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 February 29, 1996 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 February 29, 1996 were: _________________ Class A 51,230,708 Class B 92,162,231 _________________ 143,392,939 ========== PART 1 - FINANCIAL INFORMATION Item 1. Financial Statements NIKE, Inc. CONDENSED CONSOLIDATED BALANCE SHEET Feb. 29, May 31, 1996 1995 ________ _______ (in thousands) ASSETS Current assets: Cash and equivalents $ 259,497 $ 216,071 Accounts receivable 1,169,068 1,053,237 Inventories (Note 3) 880,593 629,742 Deferred income taxes 79,687 72,657 Prepaid expenses 108,826 74,221 __________ _________ Total current assets 2,497,671 2,045,928 __________ _________ Property, plant and equipment 995,509 891,213 Less accumulated depreciation 378,986 336,334 __________ __________ 616,523 554,879 Identifiable intangible assets and goodwill 480,765 495,907 Other assets 47,545 46,031 __________ __________ $3,642,504 $3,142,745 ========== ========== LIABILITIES AND SHAREHOLDERS' EQUITY Current liabilities: Current portion of long-term debt $ 2,641 $ 31,943 Notes payable 529,823 397,100 Accounts payable 359,253 297,656 Accrued liabilities 377,683 345,224 Income taxes payable 32,113 35,612 __________ __________ Total current liabilities 1,301,513 1,107,535 Long-term debt 13,647 10,565 Non-current deferred income taxes 6,599 17,789 Other long-term liabilities 34,326 41,867 Commitments and contingencies (Note 4) - - Redeemable Preferred Stock 300 300 Shareholders' equity: Common Stock at stated value (Note 2): Class A convertible-51,231 and 52,990 shares outstanding 153 155 Class B-92,162 and 91,402 shares outstanding 2,701 2,698 Capital in excess of stated value 144,450 122,436 Foreign currency translation adjustment (16,507) 1,585 Retained earnings 2,155,322 1,837,815 ___________ __________ 2,286,119 1,964,689 ___________ __________ $3,642,504 $3,142,745 ========== ========== The accompanying Notes to Condensed Consolidated Financial Statements are an integral part of this statement. NIKE, Inc. CONDENSED CONSOLIDATED STATEMENT OF INCOME <TABLE> <CAPTION> Three Months Ended Nine Months Ended February 29 & 28, February 29 & 28, __________________ __________________ 1996 1995 1996 1995 ____ ____ ____ ____ (in thousands, except per share data) <S> <C> <C> <C> <C> Revenues $1,491,611 $1,124,697 $4,549,287 $3,348,798 _________ _________ _________ _________ Costs and expenses: Costs of sales 902,376 678,404 2,745,344 2,018,882 Selling and administrative 382,717 278,311 1,100,825 839,478 Interest expense 11,638 6,257 30,999 14,955 Other (income)/expense, net 9,831 5,376 26,973 6,208 ________ ________ _________ _________ 1,306,562 968,348 3,904,141 2,879,523 ________ ________ _________ _________ Income before income taxes 185,049 156,349 645,146 469,275 Income taxes 71,300 61,000 248,400 183,000 ________ ________ _________ _________ Net income $ 113,749 $ 95,349 $ 396,746 $ 286,275 ========= ========= ========== ========== Net income per common share(Note 2) $ 0.78 $ 0.65 $ 2.71 $ 1.94 ========= ========= ========== ========== Dividends declared per common share $ 0.15 $ 0.13 $ 0.43 $ 0.35 ========= ========= ========== ========== Average number of common and common equivalent shares (Note 2) 147,106 146,964 146,492 147,388 ========= ========= ========== ========== </TABLE> The accompanying Notes to Condensed Consolidated Financial Statements are an integral part of this statement. NIKE, Inc. CONDENSED CONSOLIDATED STATEMENT OF CASH FLOWS <TABLE> <CAPTION> Nine Months Ended February 29 & 28, _________________ 1996 1995 ____ ____ (in thousands) <S> <C> <C> Cash provided (used) by operations: Net income $396,746 $286,275 Income charges (credits) not affecting cash: Depreciation 64,374 48,029 Deferred income taxes and purchased tax benefits (18,231) 4,288 Other non-current liabilities (7,541) (2,316) Other 23,661 7,760 Changes in other working capital components (314,218) (205,171) ________ _______ Cash provided by operations 144,791 138,865 ________ _______ Cash provided (used) by investing activities: Acquisition of business: Net assets acquired -- (83,346) Goodwill and other intangibles acquired -- (344,474) Additions to property, plant and equipment (145,353) (96,008) Disposals of property, plant and equipment 5,033 6,671 Increase in other assets (3,858) (4,462) _______ _______ Cash used by investing activities (144,178) (521,619) _______ ________ Cash (used) provided by financing activities: Additions to long-term debt 1,793 1,631 Reductions in long-term debt including current portion (27,742) (5,247) Increase in notes payable 132,723 221,614 Proceeds from exercise of options 15,766 3,403 Repurchase of stock (18,756) (71,214) Dividends paid - common and preferred (57,295) (47,367) _______ _______ Cash provided by financing activities 46,489 102,820 _______ _______ Effect of exchange rate changes on cash (3,676) 3,865 _______ _______ Net increase (decrease) in cash and equivalents 43,426 (276,069) Cash and equivalents, May 31, 1995 and 1994 216,071 518,816 _______ _______ Cash and equivalents,February 29 & 28, 1996 and 1995 $259,497 $242,747 ======== ======== </TABLE> 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 three and nine months ended February 29, 1996 are not necessarily indicative of results to be expected for the entire year. NOTE 2 - Net income per common share: ___________________________ Net income per common share is computed based on the weighted average number of common and common equivalent (stock option) shares outstanding for the period(s). During the second quarter, the Company effected a two-for-one split of the outstanding Class A and Class B Common Stock in the form of a 100% stock dividend. The applicable outstanding shares and net income per common share figures for previous periods have been restated to reflect this change. NOTE 3 - Inventories: ___________ Inventories by major classification are as follows: Feb. 29, May 31, 1996 1995 ________ ________ (in thousands) Finished goods $854,759 $618,521 Work-in-process 21,559 9,064 Raw materials 4,275 2,157 ________ ________ $880,593 $629,742 ======== ======== NOTE 4 - 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. NOTE 5 - Change in year-end of certain subsidiaries: Currently certain of the Company's international operations report their results of operations on a one month lag which allows more time to compile results. The Company has taken steps to improve its internal reporting procedures that will allow for more timely reporting of these operations. Beginning in the first quarter of fiscal year 1997, the one month lag will be eliminated and as a result, the May 1996 results of operations of these entities will be recorded to retained earnings for fiscal 1996. The following tables include adjusted quarterly data for the previous fiscal year as well as the first three quarters of this fiscal year as if the change were already in effect. <TABLE> <CAPTION> Fiscal Year 1996 ____________________________________________________________________________ Three Months Ended ____________________________________________________________________________ 8/31/95 11/30/95 2/29/96 ______________________ ______________________ ______________________ As Reported Adjusted As Reported Adjusted As Reported Adjusted <S> <C> <C> <C> <C> <C> <C> Revenues $1,614,649 $1,700,020 $1,443,027 $1,356,758 $1,491,611 $1,582,039 Costs & expenses: Costs of sales 967,522 1,013,379 875,446 828,129 902,376 953,316 Selling & administrative 359,525 369,043 358,583 353,715 382,717 387,534 Interest expense 11,377 11,251 7,984 8,527 11,638 12,086 Other (income)/ expense, net 8,344 10,249 8,798 7,375 9,831 11,429 _________ _________ _________ _________ _________ _________ 1,346,768 1,403,922 1,250,811 1,197,746 1,306,562 1,364,365 _________ _________ _________ _________ _________ _________ Income before taxes 267,881 296,098 192,216 159,012 185,049 217,674 Income taxes 103,100 114,000 74,000 61,200 71,300 83,800 _________ _________ _________ _________ _________ Net income $164,781 $182,098 $118,216 $97,812 $113,749 $133,874 ========== ========== ========= ========= ========= ========= Net income per common share $1.13 $1.25 $0.80 $0.67 $0.78 $0.91 ========== ========== ========= ========= ========= ========= Dividends declared per common share $0.125 $0.125 $0.15 $0.15 $0.15 $0.15 ========== ========== ========= ========= ========= ========= Average number of common and common equivalent shares 145,852 145,852 146,994 146,994 147,106 147,106 </TABLE> <TABLE> <CAPTION> Fiscal Year 1995 ________________________________________________________________________________________________ Three Months Ended ________________________________________________________________________________________________ 8/31/94 11/30/94 2/28/95 5/31/95 _____________________ _____________________ _____________________ _____________________ As Reported Adjusted As Reported Adjusted As Reported Adjusted As Reported Adjusted <S> <C> <C> <C> <C> <C> <C> <C> <C> Revenues $1,170,355 $1,253,532 $1,053,746 $ 976,016 $1,124,697 $1,207,934 $1,412,036 $1,351,132 Costs & expenses: Costs of sales 700,447 746,914 640,031 599,385 678,404 720,548 846,398 816,768 Selling & administrative 292,294 301,383 268,873 255,960 278,311 283,508 370,282 373,482 Interest expense 4,757 5,206 3,941 4,360 6,257 6,006 9,253 9,565 Other (income)/ expense, net (830) 1,162 1,662 2,980 5,376 1,726 5,514 6,133 _________ _________ _________ _________ _________ ________ _______ _______ 996,668 1,054,665 914,507 862,685 968,348 1,011,788 1,231,447 1,205,948 _________ _________ _________ _________ _________ _________ _________ _________ Income before taxes 173,687 198,867 139,239 113,331 156,349 196,146 180,589 145,184 Income taxes 67,700 77,500 54,300 44,000 61,000 76,400 67,200 54,000 _________ _________ _________ _________ ________ ________ __________ _________ Net income $105,987 $121,367 $ 84,939 $69,331 $ 95,349 $119,746 $113,389 $91,184 ========== ========== ========= ========= ========= ========= ========== ========= Net income per common share $0.71 $0.82 $0.58 $0.47 $0.65 $0.81 $0.78 $0.63 ========== ========== ========= ========= ========= ========= =========== ========== Dividends declared per common share 0.100 0.100 0.125 0.125 0.125 0.125 0.125 0.125 ========== ========== ========== ========== ========== ========== ============ ========== Average number of common and common equivalent shares 148,444 148,444 146,738 146,738 146,964 146,964 145,878 145,878 </TABLE> Item 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF RESULTS OF OPERATIONS AND FINANCIAL CONDITION Operating Results _________________ Net income increased 19.3% for the fiscal third quarter ended February 29, 1996 over the same period last year. Continued strong revenue growth was the primary factor in record results for the quarter, increasing 32.6% over last year. This represents the Company's sixth straight quarter of double digit increases in total revenues and net income. For the nine months ended February 29, 1996, net income increased 38.6%, again on strong revenue growth of 35.8% and a reduction of selling and administrative costs as percentage of revenues from 25.1% to 24.2%, which was offset by an increase in interest and other expenses. The Company believes the continued strong revenues and earnings growth is a result of the strength of the NIKE Brand, with a focused effort on new and innovative product in all areas of the business. In addition, the Company continues to focus on developing the NIKE Brand outside the U.S., where sales for the trailing 12 month period surpassed the $2 billion level for the first time. The Company experienced double digit revenue growth during the quarter and nine months ended February 29, 1996 across all the breakout categories (see chart), with the most significant increase in U.S. apparel, which grew $100.5 million, or 85.1%, and $286.1 million, or 92.1%, respectively. For the quarter, U.S. apparel exceeded $200 million for the first time ever. U.S. footwear increased $65.0 million, or $10.8%, and $284.5 million, or 16.6%, for the three and nine months ended February 29, 1996, respectively. For the quarter, the increase in U.S. footwear was a result of a 12% increase in pairs sold and 1% reduction in average selling prices. Men's basketball, men's and kids' cross training and women's fitness dominated the U.S. footwear category. International revenues increased $153.2 million, or 44.3%, and $417.6 million, or 36.4%, for the three and nine months ended February 29, 1996, respectively. Excluding the positive effects of a weaker U.S. dollar, third quarter international revenues grew 42%. For the quarter on a constant dollar basis, all regions experienced strong double digit growth, with the most significant increases in Europe and Asia Pacific regions up 45% and 46%, respectively. For the nine months ended February 29, 1996, Europe is up 29% and Asia Pacific is up 37% compared to the prior year. Other Brands, which includes Cole Haan (R), Tetra Plastics, Sports Specialties and Canstar Sports, increased $48.3 million or 84.1%, and $212.3 million, or 120.1%, for the three and nine months ended February 29, 1996, respectively. $38.7 million and $181.7 million of the increase in Other Brands for the three and nine months ended February 29, 1996, respectively, relates to Canstar Sports, which the Company acquired at the end of the third quarter of the prior year. The breakdown of revenues follows: <TABLE> <CAPTION> Three Months Ended Nine Months Ended February 29 & 28, February 29 & 28, 1996 1995 % Change 1996 1995 % Change ____ ____ ___ ____ ____ ___ (in thousands) <S> <C> <C> <C> <C> <C> <C> U.S. Footwear $ 668,545 $ 603,529 11% $1,998,610 $1,714,130 17% U.S. Apparel 218,512 118,049 85 596,790 310,668 92 __________ __________ __________ _________ Total United States 887,057 721,578 23 2,595,400 2,024,798 28 __________ __________ __________ _________ International Footwear 371,047 262,974 41 1,132,437 846,264 34 International Apparel 127,836 82,732 55 432,485 301,050 44 __________ __________ __________ _________ Total International 498,883 345,706 44 1,564,922 1,147,314 36 __________ __________ __________ _________ Other Brands 105,671 57,413 84 388,965 176,686 120 __________ __________ _________ _________ Total Revenues $1,491,611 $1,124,697 33% $4,549,287 $3,348,798 36% ========== ========== === ========= ========= === </TABLE> Consolidated gross margin percentage was 39.5% for the quarter compared to 39.7% for last year's third quarter. For the nine months ended February 29,1996, margins remained flat with last year at 39.7%. Strong demand for NIKE products worldwide and sound inventory management are holding margins stable on a year-to-date basis. The Company continues to place strong emphasis on inventory management, minimizing foreign exchange risk and production sourcing in order to maximize gross profit. The Company expects gross profit percentages for the remaining three months of fiscal year 1996 to be affected by strong demand for NIKE products offset by continued higher levels of air freight expense to meet the delivery dates on increasing customer orders.* Selling and administrative expenses increased $104.4 million in absolute dollars for the quarter ended February 29, 1996, and as a percentage of revenues increased one percentage point to 25.7% compared to the same period last year. On a year to date basis, selling and administrative expenses have increased $261.4 million, but have decreased to 24.2% of consolidated revenues compared to 25.1% in the prior year. For the quarter, U.S. operations expenses increased $38.4 million and international expenses increased $46.6 million, primarily a result of planned increases in marketing and advertising expenses as well as infrastructure to support the growth outside the U.S. Canstar Sports accounted for $11.1 million of the increase. The Company intends to continue to invest in growth opportunities and to increase marketing and advertising expenses in order to ensure the successful sell-through of the high level of orders discussed below.* As a result, the Company expects selling and administrative expenses as a percentage of revenues for the current year to approximate that of the prior year.* Interest expense increased $5.4 million and $16.0 million for the quarter and nine months ended February 29, 1996, respectively, compared to the same period last year. The increase is due to the higher levels of short term borrowings in the U.S. and international needed to fund current operations. In the prior year, fiscal year to date average cash and equivalents were higher through February 28, as available cash was used to fund the acquisition of Canstar Sports, which occurred at the end of the third quarter of the prior year. Other expense increased $4.5 million and $20.8 million for the quarter and nine months ended February 29, 1996, respectively, compared to the same periods last year. The increase is primarily due to increased goodwill amortization resulting from the acquisition of Canstar Sports and decreased interest income from lower available cash. The Company's effective tax rate for both the quarter and nine months ended February 29, 1996 was 38.5% compared to 39.0% in both of the prior year's comparable periods. The Company anticipates the tax rate will remain at 38.5% for fiscal year 1996.* Worldwide orders for NIKE Brand athletic footwear and apparel scheduled for delivery from March 1996 through July 1996 were approximately $3.4 billion, 38% higher than such orders booked in the comparable period of the prior year. These orders are not necessarily indicative of total revenues over that period because the mix of advance orders and at once shipments may vary significantly from quarter to quarter and year to year. Additionally, as international operations continue to account for a greater percentage of total revenues and place a greater emphasis on futures orders, this mix again may vary. Finally, exchange rates can cause differences in the comparisons. Currently certain of the Company's international operations report their results of operations on a one month lag which allows more time to compile their results. As further discussed in Note 5 to these financial statements, the Company will eliminate this one month lag beginning in the first quarter of fiscal year 1997. The change should not have a material effect on the annual results of operations, however, quarterly results will change as certain reporting periods will shift one month.* Liquidity and Capital Resources The Company's financial position remains strong, with working capital rising $257.8 million since May 31, 1995. The working capital ratio increased from 1.8:1 at May 31, 1995 to 1.9:1 at February 29, 1996. Cash and equivalents increased $43.4 million from May 31, 1995. Cash provided by operations was reduced by changes in other working capital components discussed below. Other significant uses of cash included additions to property, plant and equipment, reductions in long-term debt and the dividends payment. The most significant source of cash was from an increase in notes payable. The decrease in other working capital components was due primarily to increases in accounts receivable and inventories, offset by increases in accounts payable. The increase in accounts receivable of $115.8 million was due to sales growth in both January and February over last fiscal year's final two months. Overall inventories increased $250.9 million. U.S. footwear, U.S. apparel and international footwear and apparel inventories have increased $13.2 million, $68.0 million and $129.0 million, respectively. Increases in accounts payable are a result of the increased levels of the Company's operations, most significantly, international operations. The additions to property, plant and equipment were composed of normal operational spending, the continued consolidation of European footwear warehouses, expansion of NIKE Town retail locations and acquisition of land adjacent to the world headquarters. The Company also utilized cash to retire long-term debt acquired in the purchase of Canstar Sports. Notes payable increased in order to fund the high level of operations. For the nine months ended February 29, 1996, the Company has purchased 200,000 shares of its own stock under the stock repurchase program announced in July 1993, bringing the total number of shares purchased in the program to approximately 5,149,000. There were no purchases during the third quarter. The debt to equity ratio at February 29, 1996 was .6:1 compared to .6:1 at May 31, 1995 and .5:1 at February 28, 1995. Management believes that funds generated by operations, together with currently available resources, will adequately finance anticipated fiscal 1996 expenditures.* At February 29, 1996, the Company had $500 million available in committed unused lines of credit. *The marked items are forward-looking statements that involve risks and uncertainties detailed from time to time in reports filed by NIKE with the S.E.C., including Forms 8-K, 10-Q, and 10-K. 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, 1995. 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 first 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 first 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). 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 (in- corporated by reference from Exhibit 10.1 to the Company's Quarterly Report on Form 10-Q for the 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 17, 1990).* 10.6 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).* 10.7 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).* 27 Financial Data Schedule. * Management contract or compensatory plan or arrangement. (b) The following reports on Form 8-K were filed by the Company during the third quarter of fiscal 1996: December 18, 1995 ITEM 5. OTHER EVENTS Press release announcing second quarter earnings. 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 S. Falcone Robert S. Falcone Vice President, Chief Financial Officer DATED:________________________, 1996