Nike 2013 Annual Report Download

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Table of contents

  • Page 1

  • Page 2
    NIKE, INC. ANNUAL REPORT ON FORM 10-K Table of Contents Page PART I Business ...General ...Products ...Sales and Marketing ...United States Market ...International Markets ...Significant Customer ...Orders ...Product Research and Development ...Manufacturing ...International Operations and Trade ...

  • Page 3
    ... by non-affiliates were: As of July 19, 2013, the number of shares of the Registrant's Common Stock outstanding were: Class A Class B 177,957,876 712,394,590 890,352,466 DOCUMENTS INCORPORATED BY REFERENCE: Parts of Registrant's Proxy Statement for the Annual Meeting of Shareholders to be held on...

  • Page 4
    ... writing to NIKE Investor Relations, One Bowerman Drive, Beaverton, Oregon 970056453. Our principal business activity is the design, development and worldwide marketing and selling of athletic footwear, apparel, equipment, accessories and services. NIKE is the largest seller of athletic footwear and...

  • Page 5
    ..., development, marketing and selling of athletic footwear, apparel, equipment, accessories, and services. Our reportable operating segments for the NIKE Brand are: North America, Western Europe, Central & Eastern Europe, Greater China, Japan, and Emerging Markets. Our NIKE Brand Direct to Consumer...

  • Page 6
    ... apparel, sales of NIKE Brand equipment, sales from our Direct to Consumer operations, and sales from our Other Businesses. Product Research and Development We believe our research and development efforts are a key factor in our success. Technical innovation in the design and manufacturing process...

  • Page 7
    ... in our operations. NIKE is the largest seller of athletic footwear, apparel, and equipment in the world. Important aspects of competition in this industry are: • Product quality; performance and reliability; new product innovation and development; and consumer price/value; • Consumer connection...

  • Page 8
    ... & General Manager of the Americas Region in 2000. Mr. Sprunk was appointed corporate Vice President of Global Footwear in 2001, Vice President of Merchandising and Product in 2009 and Chief Operating Officer in 2013. Prior to joining NIKE, Mr. Sprunk was a certified public accountant with Price...

  • Page 9
    ... orders, and discounts, order cancellations and returns; the ability of NIKE to sustain, manage or forecast its growth and inventories; the size, timing and mix of purchases of NIKE's products; increases in the cost of materials, labor and energy used to manufacture products, new product development...

  • Page 10
    ... a material adverse effect on our business, operating results, and financial condition: • Slower consumer spending may result in reduced demand for our products, reduced orders from retailers for our products, order cancellations, lower revenues, higher discounts, increased inventories, and lower...

  • Page 11
    ... inventory at discounted prices could significantly impair our brand image and have an adverse effect on our operating results and financial condition. Conversely, if we underestimate consumer demand for our products or if our manufacturers fail to supply products we require at the time we need...

  • Page 12
    ... countries. If our capital or financing needs in the United States require us to repatriate earnings from foreign jurisdictions above our current levels, our effective income tax rates for the affected periods could be negatively impacted. Current economic and political conditions make tax rules...

  • Page 13
    ...operations and financial condition. Our success depends on our global distribution facilities. We distribute our products to customers directly from the factory and through distribution centers located throughout the world. Our ability to meet customer expectations, manage inventory, complete sales...

  • Page 14
    ... shares could have an adverse effect on the market price of our common stock. Changes in our credit ratings or macroeconomic conditions may affect our liquidity, increasing borrowing costs and limiting our financing options. Our long-term debt is currently rated investment grade by Standard & Poor...

  • Page 15
    ... or leased by NIKE. The NIKE World Campus, owned by NIKE and located near Beaverton, Oregon, USA, is a 250-acre facility of 35 buildings which functions as our world headquarters and is occupied by almost 8,000 employees engaged in management, research, design, development, marketing, finance, and...

  • Page 16
    ... Number of Shares Purchased as Part of Publicly Announced Plans or Programs 2,198,417 1,573,111 450,000 4,221,528 $ $ $ 7,333 7,239 7,211 NIKE, INC. 2013 Annual Report and Notice of Annual Meeting 61 FORM 10-K NIKE's Class B Common Stock is listed on the New York Stock Exchange and trades...

  • Page 17
    ... Outdoor Corp., Wolverine World Wide, Inc., Iconix Brand Group, Inc., Crocs, Inc., and Steven Madden, Ltd. Because NIKE is part of the Dow Jones U.S. Footwear Index, the price and returns of NIKE stock have a substantial effect on this index. The Standard & Poor's Apparel, Accessories & Luxury Goods...

  • Page 18
    ... average common shares outstanding Cash dividends declared per common share Cash flow from operations, inclusive of discontinued operations Price range of common stock: High Low At May 31, Cash and equivalents Short-term investments Inventories Working capital, excluding assets and liabilities of...

  • Page 19
    ... discontinued operations: Basic earnings per common share Diluted earnings per common share Weighted average common shares outstanding Diluted weighted average common shares outstanding Cash dividends declared per common share Price range of common stock High Low (1) 1st Quarter(1) 2013 2012 6,474...

  • Page 20
    ... to effectively managing our business to achieve our financial goals over the long-term, by executing against the operational strategies outlined above. NIKE designs, develops, markets and sells athletic footwear, apparel, equipment, accessories and services worldwide. We are the largest seller...

  • Page 21
    ... per share data) Revenues Cost of sales Gross profit Gross margin % Demand creation expense Operating overhead expense Total selling and administrative expense % of Revenues Interest (income) expense, net Other (income) expense, net Income before income taxes Income tax expense Effective tax rate...

  • Page 22
    ... Apparel Equipment Global Brand Divisions Total NIKE Brand Other Businesses Corporate(3) TOTAL NIKE, INC. REVENUES Supplemental NIKE Brand Revenues Details: NIKE Brand Revenues by: Sales to Wholesale Customers Sales Direct to Consumer Global Brand Divisions TOTAL NIKE BRAND REVENUES NIKE Brand...

  • Page 23
    ...apparel revenue increased 15% and 13%, respectively, while NIKE Brand equipment revenues increased 16% during fiscal 2012. Continuing to fuel the growth of our NIKE Brand footwear business was the increased demand for performance products, including the NIKE Lunar and FREE technologies. The increase...

  • Page 24
    ... and apparel, sales of NIKE Brand equipment, sales from our Direct to Consumer operations, and sales from our Other Businesses. Gross Margin (Dollars in millions) Gross Profit Gross Margin % $ Fiscal 2013 11,034 $ 43.6% Fiscal 2012 10,148 43.5% FY13 vs. FY12 % Change 9% 10 bps $ Fiscal 2011...

  • Page 25
    ... line item on the consolidated statements of income. From this date until the sale, the assets and liabilities of Cole Haan were recorded as assets and liabilities of discontinued operations on the consolidated balance sheets of NIKE, Inc. Previously, these amounts were reported in our segment...

  • Page 26
    ... hedge gains and losses related to revenues generated by entities within the NIKE Brand geographic operating segments and certain Other Businesses but managed through our central foreign exchange risk management program. The primary financial measure used by the Company to evaluate performance...

  • Page 27
    ... on close-out sales, which more than offset the favorable impact of selling price increases, lower air freight costs and the growth of our Direct to Consumer business. Selling and administrative expense as a percentage of revenue decreased by 70 basis points for fiscal 2012, as both demand creation...

  • Page 28
    ...from changes in standard currency rates, which more than offset the favorable impact of product price increases and the growth of our Direct to Consumer business. The increase in selling and administrative expense as a percentage of revenues was mainly driven by an increased level of demand creation...

  • Page 29
    ... in fiscal 2013, driven by lower futures orders as well as increased discounts, product returns and proactive cancellation of orders to manage inventory levels at retail. These downsides were partially offset by 33% growth in our Direct to Consumer business driven by comparable store sales growth of...

  • Page 30
    ... price was reflective of product price increases, partially offset by higher discounts on in-line and close-out products to accelerate the sales of slower moving apparel inventories. On a reported basis, revenues for Greater China increased 23% for fiscal 2012, while EBIT grew 17%, as revenue growth...

  • Page 31
    ... personnel costs to support our global brand functions. Fiscal 2013 Compared to Fiscal 2012 For fiscal 2013, Global Brand Divisions' loss before interest and taxes increased $196 million, primarily driven by increased investments and marketing support for our digital business, product creation and...

  • Page 32
    ... gains and losses related to revenues generated by entities within the NIKE Brand geographic operating segments and certain Other Businesses but managed through our central foreign exchange risk management program. Corporate loss before interest and taxes consists largely of unallocated general and...

  • Page 33
    ... the related non-functional currency denominated asset or liability or the embedded derivative contract being hedged. Refer to Note 6 - Fair Value Measurements and Note 17 - Risk Management and Derivatives in the accompanying Notes to the Consolidated Financial Statements for additional description...

  • Page 34
    ... Umbro and Cole Haan, as compared to a net cash outflow of $799 million for fiscal 2012. Our investments in working capital decreased due to slowing growth in inventory and reductions in accounts receivable compared to the prior year. During fiscal 2013, inventory for continuing operations increased...

  • Page 35
    ... terms. In some cases, prices are subject to change throughout the production process. The reported amounts exclude product purchase liabilities included in accounts payable on the consolidated balance sheet as of May 31, 2013. Other amounts primarily include service and marketing commitments...

  • Page 36
    ... their inability to make payments, a NIKE, INC. 2013 Annual Report and Notice of Annual Meeting Revenue Recognition We record wholesale revenues when title passes and the risks and rewards of ownership have passed to the customer, based on the terms of sale. Title passes generally upon shipment or...

  • Page 37
    ...benefits received from them. This method requires us to estimate the future revenue for the related brands, the appropriate royalty rate and the weighted average cost of capital. Contingent Payments under Endorsement Contracts A significant portion of our demand creation expense relates to payments...

  • Page 38
    ... level of our net investment decrease below hedged levels, the cumulative change in fair value of the over-hedged portion of the related hedge contract would be reported directly to earnings in the period in which changes occur. NIKE, INC. 2013 Annual Report and Notice of Annual Meeting 83 FORM...

  • Page 39
    ... and employment relationships, product liability claims, trademark rights, and a variety of other matters. We record contingent liabilities resulting from claims against us, including related legal costs, when a loss is assessed to be probable and the amount of the loss is reasonably estimable...

  • Page 40
    ... potential one-day loss in the fair value of these foreign exchange rate-sensitive financial instruments. The VaR model estimates assume normal market conditions and a 95% confidence level. There are various modeling techniques that can be used in the VaR computation. Our computations are based on...

  • Page 41
    ... information in this report is consistent with these financial statements. Our accounting systems include controls designed to reasonably assure assets are safeguarded from unauthorized use or disposition and provide for the preparation of financial statements in conformity with generally accepted...

  • Page 42
    ... (COSO). Based on the results of our evaluation, our management concluded that our internal control over financial reporting was effective as of May 31, 2013. PricewaterhouseCoopers LLP, an independent registered public accounting firm, has audited (1) the consolidated financial statements and...

  • Page 43
    ... II Report of Independent Registered Public Accounting Firm To the Board of Directors and Shareholders of NIKE, Inc.: In our opinion, the consolidated financial statements listed in the index appearing under Item 15(a)(1) present fairly, in all material respects, the financial position of NIKE, Inc...

  • Page 44
    ...accompanying notes to consolidated financial statements are an integral part of this statement. NIKE, INC. 2013 Annual Report and Notice of Annual Meeting 89 FORM 10-K Income from continuing operations: Revenues Cost of sales Gross profit Demand creation expense Operating overhead expense Total...

  • Page 45
    ... tax (benefit) of $(47) million, $0 million, and $0 million, respectively. $ Year Ended May 31, 2013 2012 2,485 $ 2,223 $ 2011 2,133 30 117 - (105) 83 125 2,610 $ (295) 255 45 49 - 54 2,277 $ 263 (242) (57) (84) - (120) 2,013 $ The accompanying notes to consolidated financial statements are...

  • Page 46
    ... 180 shares outstanding Class B - 716 and 736 shares outstanding Capital in excess of stated value Accumulated other comprehensive income (Note 14) Retained earnings Total shareholders' equity TOTAL LIABILITIES AND SHAREHOLDERS' EQUITY The accompanying notes to consolidated financial statements are...

  • Page 47
    ... 31, 2012 2011 Cash provided by operations: Net income Income charges (credits) not affecting cash: Depreciation Deferred income taxes Stock-based compensation (Note 11) Amortization and other Net gain on divestitures Changes in certain working capital components and other assets and liabilities...

  • Page 48
    ... NIKE, Inc. Consolidated Statements of Shareholders' Equity Common Stock Class A Class B Shares Amount Shares Amount 180 $ - 788 $ 3 14 Capital in Excess of Stated Value $ 3,441 368 Accumulated Other Comprehensive Income $ 215 Retained Earnings $ 6,095 (In millions, except per share data) Balance...

  • Page 49
    ... Intangible Assets and Goodwill ...99 Accrued Liabilities ...99 Fair Value Measurements ...100 Short-Term Borrowings and Credit Lines ...101 Long-Term Debt ...102 Income Taxes ...102 Redeemable Preferred Stock ...104 Common Stock and Stock-Based Compensation ...105 Earnings Per Share ...106 Benefit...

  • Page 50
    ...30, 2012. As a result, the Company reports the operating results of Cole Haan and Umbro in the net income (loss) from discontinued operations line in the consolidated statements of income for all periods presented. In addition, the assets and liabilities associated with these businesses are reported...

  • Page 51
    .... The Company's significant estimates in the discounted cash flows model include: its weighted average cost of capital; long-term rate of growth and profitability of the reporting unit's business; and working capital effects. Inventory Valuation Inventories are stated at lower of cost or market and...

  • Page 52
    ...in the consolidated statements of income over the vesting period using the straight-line method. Refer to Note 11 - Common Stock and Stock-Based Compensation for more information on the Company's stock programs. Income Taxes The Company accounts for income taxes using the asset and liability method...

  • Page 53
    ... Per Share for further discussion. Management Estimates The preparation of financial statements in conformity with generally accepted accounting principles requires management to make estimates, including estimates relating to assumptions that affect the reported amounts of assets and liabilities...

  • Page 54
    ... 34 407 1,986 $ (In millions) Compensation and benefits, excluding taxes Endorsement compensation Taxes other than income taxes Dividends payable Import and logistics costs Advertising and marketing Fair value of derivatives Other(1) TOTAL ACCRUED LIABILITIES (1) $ $ 2012 691 288 169 165 133 94...

  • Page 55
    ... the Company's fair value measurement methodology. As of May 31, 2013 Fair Value Measurements Using Level 1 Level 2 Level 3 Assets/Liabilities at Fair Value (In millions) Balance Sheet Classification ASSETS Derivatives: Foreign exchange forwards and options Interest rate swap contracts Total...

  • Page 56
    ... reflected in the consolidated balance sheets for short-term investments and cash and equivalents approximate fair value. The Company's Level 3 assets comprise investments in certain nonmarketable preferred stock. These investments are valued using internally developed models with unobservable...

  • Page 57
    ...283 million at May 31, 2012. The fair value of long-term debt is estimated based upon quoted prices of similar instruments (level 2). NOTE 9 - Income Taxes Income before income taxes is as follows: Year Ended May 31, 2012 (In millions) 2013 2011 Income before income taxes: United States Foreign...

  • Page 58
    ... effective rate related to a decrease in earnings in higher tax jurisdictions. (In millions) As of May 31, 2013 2012 Deferred tax assets: Allowance for doubtful accounts Inventories Sales return reserves Deferred compensation Stock-based compensation Reserves and accrued liabilities Foreign loss...

  • Page 59
    ... net income per share (diluted) was $0.12, $0.12, and $0.04 for the fiscal years ended May 31, 2013, 2012, and 2011, respectively. Deferred tax assets at May 31, 2013 and 2012 were reduced by a valuation allowance relating to tax benefits of certain subsidiaries with operating losses. The net change...

  • Page 60
    ...in years) Risk-free interest rate The Company estimates the expected volatility based on the implied volatility in market traded options on the Company's common stock with a term greater than one year, along with other factors. The weighted average expected life of options is based on an analysis of...

  • Page 61
    ... value of the options exercised during the years ended May 31, 2013, 2012, and 2011 was $293 million, $453 million, and $267 million, respectively. In addition to the 1990 Plan, the Company gives employees the right to purchase shares at a discount to the market price under employee stock purchase...

  • Page 62
    ... of Cole Haan were recorded in the assets of discontinued operations and liabilities of discontinued operations line items on the consolidated balance sheets, respectively. Previously, these amounts were reported in the Company's segment presentation as "Other Businesses." Under the sale agreement...

  • Page 63
    ... were outstanding currency forward contracts with maturities up to 24 months. The following table presents the fair values of derivative instruments included within the consolidated balance sheets as of May 31, 2013 and 2012: Asset Derivatives Balance Sheet Location 2013 Liability Derivatives 2012...

  • Page 64
    ...financial instruments are valued, Note 14 - Accumulated Other Comprehensive Income and the consolidated statements of shareholders' equity for additional information on changes in other comprehensive income for the years ended May 31, 2013, 2012 and 2011. Cash Flow Hedges The purpose of the Company...

  • Page 65
    ... the cash provided or used by investing component of the cash flow statement. The Company assesses hedge effectiveness based on changes in forward rates. The Company recorded no ineffectiveness from its net investment hedges for the years ended May 31, 2013, 2012, or 2011. Embedded Derivatives As...

  • Page 66
    ... "Global Brand Divisions" category primarily represents NIKE Brand licensing businesses that are not part of a geographic operating segment, demand creation and operating overhead expenses that are centrally managed for the NIKE Brand, and costs associated with product development and supply chain...

  • Page 67
    PART II (In millions) 2013 Year Ended May 31, 2012 2011 REVENUE North America Western Europe Central & Eastern Europe Greater China Japan Emerging Markets Global Brand Divisions Total NIKE Brand Other Businesses Corporate TOTAL NIKE CONSOLIDATED REVENUES EARNINGS BEFORE INTEREST AND TAXES North...

  • Page 68
    ... As of May 31, 2013 2012 ACCOUNTS RECEIVABLE, NET North America Western Europe Central & Eastern Europe Greater China Japan Emerging Markets Global Brand Divisions Total NIKE Brand Other Businesses Corporate TOTAL ACCOUNTS RECEIVABLE, NET INVENTORIES North America Western Europe Central & Eastern...

  • Page 69
    ... Revenues by Major Product Lines. Revenues to external customers for NIKE Brand products are attributable to sales of footwear, apparel and equipment. Other revenues to external customers primarily include external sales by Converse, Hurley, and NIKE Golf. (In millions) Footwear Apparel Equipment...

  • Page 70
    ... and Services The information required by Item 9(e) of Schedule 14A is included under "Ratification Of Independent Registered Public Accounting Firm" in the definitive Proxy Statement for our 2013 Annual Meeting of Shareholders and is incorporated herein by reference. NIKE, INC. 2013 Annual Report...

  • Page 71
    ...as part of this report: Form 10-K Page No. 1. Financial Statements: Report of Independent Registered Public Accounting Firm Consolidated Statements of Income for each of the three years ended May 31, 2013, May 31, 2012 and May 31, 2011 Consolidated Statements of Comprehensive Income for each of the...

  • Page 72
    ...to the Company's Annual Report on Form 10-K for the fiscal year ended May 31, 2008).* Policy for Recoupment of Incentive Compensation (incorporated by reference to Exhibit 10.3 to the Company's Current Report on Form 8-K filed July 20, 2010).* Credit Agreement dated as of November 1, 2011 among NIKE...

  • Page 73
    ...total assets of NIKE and its subsidiaries on a consolidated basis. NIKE agrees, pursuant to Item 601(b)(4)(iii) of Regulation S-K, that it will furnish a copy of any such instrument to the SEC upon request. Upon written request to Investor Relations, NIKE, Inc., One Bowerman Drive, Beaverton, Oregon...

  • Page 74
    ...120 91 104 $ $ $ Includes both current and non-current portions of the allowance for doubtful accounts. The non-current portion is classified in deferred income taxes and other assets on the consolidated balance sheets. NIKE, INC. 2013 Annual Report and Notice of Annual Meeting 119 FORM 10-K

  • Page 75
    ..., and 333-173727) of NIKE, Inc. of our report dated July 23, 2013 relating to the financial statements, financial statement schedule and the effectiveness of internal control over financial reporting, which appears in this Form 10-K. /s/ PRICEWATERHOUSECOOPERS LLP Portland, Oregon July 23, 2013 120

  • Page 76
    ...of the Board Director Director Director Director Director Director Director Director Director Director July 23, 2013 July 23, 2013 July 23, 2013 July 23, 2013 July 23, 2013 July 23, 2013 July 23, 2013 July 23, 2013 July 23, 2013 July 23, 2013 July 23, 2013 NIKE, INC. 2013 Annual Report and Notice...

  • Page 77
    ... 12.1 NIKE, Inc. Computation of Ratio of Earnings to Fixed Charges Year Ended May 31, 2012 2011 2,269 2,172 756 690 3,025 2,862 The following disclosure reflects the company's continuing operations: (in millions) Net income from continuing operations Income taxes Income before income taxes Add...

  • Page 78
    ... Converse Europe Limited Converse Footwear Technical Service (Zhongshan) Co., Ltd. Converse Holdings LLC Converse Hong Kong Holding Company Limited Converse Hong Kong Limited Converse Inc. Converse Netherlands B.V. Converse Sporting Goods (China) Co., Ltd. Converse Trading Company B.V. Exeter Brands...

  • Page 79
    ..., LLC NIKE New Zealand Company NIKE Norway AS NIKE NZ Holding B.V. NIKE Offshore Holding B.V. NIKE Pegasus NIKE Philippines, Inc. NIKE Poland Sp.zo.o NIKE Retail B.V. NIKE Retail Hellas Ltd. NIKE Retail Israel Ltd. NIKE Retail LLC NIKE Retail Poland sp. z o. o. NIKE Retail Services, Inc. NIKE Retail...

  • Page 80
    .... NIKE Trading Company B.V. NIKE trgovina na debelo d.o.o. NIKE UK Holding B.V. NIKE (UK) Limited NIKE USA, Inc. NIKE Vapor Ltd. NIKE Victory Cooperatief U.A. NIKE Vietnam Limited Liability Company NIKE Vision, Timing and Techlab, LP NIKE Vomero Cooperatief U.A. NIKE Waffle NIKE Wholesale LLC NIKE...

  • Page 81
    ...Financial Officer Trevor A. Edwards President, NIKE Brand Jeanne P. Jackson President, Product and Merchandising Hilary K. Krane Executive Vice President, Chief Administrative Officer and General Counsel John F. Slusher Executive Vice President, Global Sports Marketing Eric D. Sprunk Chief Operating...

  • Page 82
    ... Relations Department at NIKE World Headquarters, One Bowerman Drive, Beaverton, Oregon 970056453. Copies are available on the investor relations website, http://investors.nikeinc.com. Dividend Payments Quarterly dividends on NIKE common stock, when declared by the Board of Directors, are paid...

  • Page 83
    NIKE, INC. One Bowerman Drive Beaverton, OR 97005-6453 www.nike.com

  • Page 84
    2013 ANNUAL REPORT AND NOTICE OF ANNUAL MEETING