Nike 2016 Annual Report Download

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Table of contents

  • Page 1

  • Page 2
    ... ' Smaller reporting company • whether the registrant is a shell company (as defined in Rule 12b-2 of the Act). Class A Class B ' As of November 30, 2015, the aggregate market values of the Registrant's Common Stock held by non-affiliates were: As of July 15, 2016, the number of shares of the...

  • Page 3
    ...Proxy Statement for the NIKE, Inc. 2016 Annual Meeting of Shareholders.) Directors, Executive Officers and Corporate Governance ...125 Executive Compensation ...125 Security Ownership of Certain Beneficial Owners and Management and Related Stockholder Matters ...125 Certain Relationships and Related...

  • Page 4
    ...to any shareholder who submits a request in writing to NIKE Investor Relations, One Bowerman Drive, Beaverton, Oregon 97005-6453. Our principal business activity is the design, development and worldwide marketing and selling of athletic footwear, apparel, equipment, accessories and services. NIKE is...

  • Page 5
    ... 2015 and fiscal 2014. We sell our products to retail accounts, through our own Direct to Consumer operations and through a mix of independent distributors, licensees and sales representatives around the world. We sell to thousands of retail accounts and ship products from 42 distribution centers...

  • Page 6
    ..., all sales of NIKE Brand equipment, the difference between retail sales and internal orders from our Direct to Consumer in-line stores and e-commerce operations, and sales from our Converse, Hurley and NIKE Golf businesses. We believe our research, design and development efforts are key factors in...

  • Page 7
    ..., developed through marketing and promotion; social media interaction; customer support and service; identification with prominent and influential athletes, coaches, teams, colleges and sports leagues who endorse our brands and use our products and active engagement through sponsored sporting events...

  • Page 8
    ...management for the Company's flagship brand. In 2014, he was appointed Senior Vice President, Strategy, Finance and Investor Relations in addition to his role as Chief Financial Officer of NIKE Brand. Mr. Campion assumed the role of Executive Vice President and Chief Financial Officer in August 2015...

  • Page 9
    ... customers or suppliers; dependence on distributors and licensees; business disruptions; increased costs of freight and transportation to meet delivery deadlines; increases in borrowing costs due to any decline in NIKE's debt ratings; changes in business strategy or development plans; general...

  • Page 10
    ...or lower profit margins, any of which could have an adverse effect on our results of operations and financial condition. In addition, we market our products globally through a diverse spectrum of advertising and promotional programs and campaigns, including social media and online advertising. If we...

  • Page 11
    ... products ordered from manufacturers. Inventory levels in excess of customer demand may result in inventory write-downs, and the sale of excess inventory at discounted prices could significantly impair our brand image and have an adverse effect on our operating results, financial condition and cash...

  • Page 12
    ... sufficient capital or effectively manage their business operations, customer relationships, labor relationships, supplier relationships or credit risks, it could adversely affect our revenues, both directly from reduced royalties received and indirectly from reduced sales of our other products. We...

  • Page 13
    ... have a material adverse effect on our sales, financial condition or results of operations. Additionally, if any of our primary contract manufacturers fail to make timely shipments, do not meet our quality standards or otherwise fail to deliver us product in accordance with our plans, there could be...

  • Page 14
    ... 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 and...

  • Page 15
    ... and estimates used in preparing our consolidated financial statements include those related to revenue recognition, allowance for uncollectible accounts receivable, inventories, contingent payments under endorsement contracts, accounting for property, plant and equipment and definite-lived assets...

  • Page 16
    ... by NIKE and located near Beaverton, Oregon, USA, is a 400-acre site consisting of over 40 buildings which, together with adjacent leased properties, functions as our world headquarters and is occupied by approximately 10,700 employees engaged in management, research, design, development, marketing...

  • Page 17
    ...the Class B Common Stock as reported on the New York Stock Exchange Composite Tape, and dividends declared on the Class A and Class B Common Stock. The following table presents a summary of share repurchases made by NIKE under these programs during the quarter ended May 31, 2016: Maximum Number (or...

  • Page 18
    ... Steven Madden, Ltd., among other companies. 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 Index consists of V.F. Corporation, Coach, Inc., Ralph Lauren...

  • Page 19
    ...two-forone stock splits that began trading at split-adjusted prices on December 24, 2015 and December 26, 2012. (In millions, except per share data and financial ratios) 2016 2015 2013 2012 Year Ended May 31, Revenues Gross profit Gross margin % Net income from continuing operations Net income...

  • Page 20
    ...millions, except per share data) Revenues Gross profit Gross margin % Net income Earnings per common share: Basic Diluted Weighted average common shares outstanding Diluted weighted average common shares outstanding Cash dividends declared per common share Price range of common stock: High Low 1st...

  • Page 21
    ... operational strategies outlined above. NIKE designs, develops, markets and sells athletic footwear, apparel, equipment, accessories and services worldwide. We are the largest seller of athletic footwear and apparel in the world. We sell our products to retail accounts, through NIKE-owned in-line...

  • Page 22
    ... 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 expense (income), net Other (income) expense, net Income before income taxes Income tax expense Effective tax rate...

  • Page 23
    .... Corporate revenues primarily consist of foreign currency hedge gains and losses related to revenues generated by entities within the NIKE Brand geographic operating segments and Converse but managed through our central foreign exchange risk management program. References to NIKE Brand wholesale...

  • Page 24
    ...priced DTC business. While wholesale revenues remain the largest component of overall NIKE Brand revenues, we continue to expand our DTC businesses in each of our geographies. NIKE Brand DTC operations include NIKE-owned in-line and factory stores, as well as online sales through NIKE-owned websites...

  • Page 25
    ... and apparel, all sales of NIKE Brand equipment, the difference between retail sales and internal orders from our DTC in-line stores and e-commerce operations, and sales from Converse, NIKE Golf and Hurley. Gross Margin (Dollars in millions) Gross profit Gross margin % $ Fiscal 2016 Fiscal 2015...

  • Page 26
    ... prior year, primarily due to support for key brand and consumer events, including the World Cup in early fiscal 2015, increased digital brand marketing, investments in DTC marketing and higher sports marketing expense. Changes in foreign currency exchange rates decreased growth in Demand creation...

  • Page 27
    ... the NIKE Brand geographic operating segments and Converse, but managed through our central foreign exchange risk management program. The primary financial measure used by the Company to evaluate performance of individual operating segments is earnings before interest and taxes (commonly referred...

  • Page 28
    ... Fiscal 2016 Fiscal 2015 % Change Changes % Change Excluding Currency Fiscal 2014 % Change Changes (Dollars in millions) Revenues by: Footwear Apparel Equipment TOTAL REVENUES Revenues by: Sales to Wholesale Customers Sales Direct to Consumer TOTAL REVENUES EARNINGS BEFORE INTEREST AND TAXES...

  • Page 29
    ... Fiscal 2016 Fiscal 2015 % Change Changes % Change Excluding Currency Fiscal 2014 % Change Changes (Dollars in millions) Revenues by: Footwear Apparel Equipment TOTAL REVENUES Revenues by: Sales to Wholesale Customers Sales Direct to Consumer TOTAL REVENUES EARNINGS BEFORE INTEREST AND TAXES...

  • Page 30
    ... despite higher operating overhead to support DTC expansion and higher demand creation expense due to increased sports marketing costs and spending to support brand events. Fiscal 2015 Compared to Fiscal 2014 Excluding changes in currency exchange rates, Central & Eastern Europe revenues for fiscal...

  • Page 31
    ... while demand creation was also higher, primarily due to retail brand presentation costs to re-profile category and consumer-focused retail stores as well as spending for key brand events. Fiscal 2015 Compared to Fiscal 2014 Excluding changes in currency exchange rates, Greater China revenue growth...

  • Page 32
    ... investments in operating overhead to support our growing DTC business. Demand creation spending for DTC marketing and brand events was largely offset by lower spending for retail brand presentation and advertising costs. Fiscal 2015 Compared to Fiscal 2014 Constant currency revenues for Japan...

  • Page 33
    ...performance-based compensation were more than offset by changes in foreign currency exchange rates. Demand creation expense also increased driven by sports marketing and digital brand marketing costs, offset by the impact of foreign currency exchange rates. by Sportswear, Running, Action Sports and...

  • Page 34
    ...higher operating overhead due to investments in infrastructure to support growth. Fiscal 2015 Compared to Fiscal 2014 Excluding changes in currency exchange rates, revenues for Converse increased 21% for fiscal 2015. Comparable direct distribution markets grew 14%, contributing 12 percentage points...

  • Page 35
    ... forward and option contracts to hedge a portion of the remaining effect of exchange rate fluctuations on probable forecasted future cash flows, including certain product cost purchase exposures, non-functional currency denominated external sales and other costs described above. Generally, these are...

  • Page 36
    ...long-term debt in October 2015. In fiscal 2016, we purchased 55.4 million shares of NIKE's Class B Common Stock for $3,238 million (an average price of $58.44). During the third quarter of fiscal 2016, we concluded the Company's four-year, $8 billion share repurchase program approved by our Board of...

  • Page 37
    ... be sufficient to meet our domestic and foreign capital needs in the foreseeable future. We utilize a variety of tax planning and financing strategies to manage our worldwide cash and deploy funds to locations where they are needed. We routinely repatriate a portion of our foreign earnings for which...

  • Page 38
    ... customers. We generally order product at least four to five months in advance of sale based primarily on futures orders received from external wholesale customers and internal orders from our DTC in-line stores and e-commerce operations. The amounts listed for product purchase obligations represent...

  • Page 39
    ... unit based on the present value of the cash flows that we expect the reporting unit to generate in the future. Our significant estimates in the discounted cash flows model include: our weighted average cost of capital; long-term rate of growth and profitability of the reporting unit's business; and...

  • Page 40
    ...traded options on our common stock and our assessment that implied volatility is more representative of future stock price trends than historical volatility. If factors change and we use different assumptions for estimating stock-based compensation expense in future periods, stock-based compensation...

  • Page 41
    ... our assessment changes. We recognize interest and penalties related to income tax matters in Income tax expense. Other Contingencies In the ordinary course of business, we are involved in legal proceedings regarding contractual and employment relationships, product liability claims, trademark...

  • Page 42
    ... sales, product sourcing and funding activities. Our foreign exchange risk management program is intended to lessen both the positive and negative effects of currency fluctuations on our consolidated results of operations, financial position and cash flows. We use forward and option contracts...

  • Page 43
    ..., the monthly translation of these instruments, which varies due to changes in foreign exchange rates, is recognized in Accumulated other comprehensive income upon consolidation of this subsidiary. ITEM 8. Financial Statements and Supplementary Data An internal Corporate Audit department reviews...

  • Page 44
    ..., has audited (1) the Consolidated Financial Statements and (2) the effectiveness of our internal control over financial reporting as of May 31, 2016, as stated in their report herein. Andrew Campion Chief Financial Officer NIKE, INC. 2016 Annual Report and Notice of Annual Meeting 97 FORM 10-K

  • Page 45
    ..., 2016 and 2015, and the results of their operations and their cash flows for each of the three years in the period ended May 31, 2016 in conformity with accounting principles generally accepted in the United States of America. In addition, in our opinion, the financial statement schedule listed in...

  • Page 46
    ...) Revenues Cost of sales Gross profit Demand creation expense Operating overhead expense Total selling and administrative expense Interest expense (income), net Other (income) expense, net Income before income taxes Income tax expense NET INCOME Earnings per common share: Basic Diluted Dividends...

  • Page 47
    ... of tax benefit (expense) of $0 million, $0 million and $0 million, respectively. $ Year Ended May 31, 2016 2015 2014 3,760 $ 3,273 $ 2,693 $ (176) (757) 5 (928) 2,832 $ (20) 1,188 (7) 1,161 4,434 $ (32) (161) 4 (189) 2,504 The accompanying Notes to the Consolidated Financial Statements are...

  • Page 48
    ...and 355 shares outstanding Class B - 1,329 and 1,357 shares outstanding Capital in excess of stated value Accumulated other comprehensive income Retained earnings Total shareholders' equity TOTAL LIABILITIES AND SHAREHOLDERS' EQUITY The accompanying Notes to the Consolidated Financial Statements are...

  • Page 49
    ... Payments on capital lease obligations Proceeds from exercise of stock options and other stock issuances Excess tax benefits from share-based payment arrangements Repurchase of common stock Dividends - common and preferred Cash used by financing activities Effect of exchange rate changes on cash...

  • Page 50
    ... Earnings $ 5,620 (In millions, except per share data) Balance at May 31, 2013 Stock options exercised Conversion to Class B Common Stock Repurchase of Class B Common Stock Dividends on common stock ($0.47 per share) Issuance of shares to employees Stock-based compensation Forfeiture of shares...

  • Page 51
    ... Preferred Stock ...114 Common Stock and Stock-Based Compensation ...115 Earnings Per Share ...116 Benefit Plans ...116 Accumulated Other Comprehensive Income ...117 Commitments and Contingencies ...118 Risk Management and Derivatives ...118 Operating Segments and Related Information ...121...

  • Page 52
    ... the Hurley trademark. Sales of Hurley brand products are included within the NIKE Brand Action Sports category and within the NIKE Brand's North America geographic operating segment, respectively. Converse designs, distributes, markets and sells casual sneakers, apparel and accessories under the...

  • Page 53
    ... Cash and equivalents represent cash and short-term, highly liquid investments, including commercial paper, U.S. Treasury, U.S. Agency, money market funds, time deposits and corporate debt securities with maturities of 90 days or less at the date of purchase. Software Development Costs Internal Use...

  • Page 54
    ... Statements of Cash Flows. Refer to Note 16 - Risk Management and Derivatives for more information on the Company's risk management program and derivatives. NIKE, INC. 2016 Annual Report and Notice of Annual Meeting 107 Fair Value Measurements The Company measures certain financial assets...

  • Page 55
    ... presented with optional practical expedients. The Company is currently evaluating the effect the guidance will have on the Consolidated Financial Statements. In March 2016, the FASB Issued ASU No. 2016-09, Compensation - Stock Compensation (Topic 718): Improvements to Employee Share-Based Payment...

  • Page 56
    ... Leasehold improvements Construction in process Total property, plant and equipment, gross Less accumulated depreciation TOTAL PROPERTY, PLANT AND EQUIPMENT, NET Capitalized interest was not material for the years ended May 31, 2016, 2015 and 2014. $ $ NOTE 4 - Identifiable Intangible Assets and...

  • Page 57
    ... 2: Time deposits U.S. Agency securities Commercial paper and bonds Money market funds Total level 2 Level 3: Non-marketable preferred stock TOTAL The Company elects to record the gross assets and liabilities of its derivative financial instruments on the Consolidated Balance Sheets. The Company...

  • Page 58
    ...a one year extension NIKE, INC. 2016 Annual Report and Notice of Annual Meeting 111 FORM 10-K Available-for-sale securities comprise investments in U.S. Treasury and Agency securities, money market funds, corporate commercial paper and bonds. These securities are valued using market prices on both...

  • Page 59
    ... markets (Level 2). The fair value of the Company's Long-term debt, including the current portion, was approximately $2,125 million at May 31, 2016 and $1,160 million at May 31, 2015. NOTE 9 - Income Taxes Income before income taxes is as follows: Year Ended May 31, 2015 (In millions) 2016 2014...

  • Page 60
    ... than the effective tax rate for the year ended May 31, 2014 primarily due to the favorable resolution of audits in several jurisdictions. (In millions) As of May 31, 2016 2015 Deferred tax assets: Allowance for doubtful accounts Inventories Sales return reserves Deferred compensation Stock-based...

  • Page 61
    ... millions) Net operating losses $ $ $ $ $ During the years ended May 31, 2016, 2015 and 2014, income tax benefits attributable to employee stock-based compensation transactions of $281 million, $224 million and $135 million, respectively, were allocated to Total shareholders' equity. NOTE 10...

  • Page 62
    ...1.7% 1.7% 2016 2014 Dividend yield Expected volatility Weighted average expected life (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 1 year, along with...

  • Page 63
    ... value of the options exercised during the years ended May 31, 2016, 2015 and 2014 was $946 million, $795 million and $474 million, respectively. In addition to the Stock Incentive Plan, the Company gives employees the right to purchase shares at a discount to the market price under employee stock...

  • Page 64
    ..., net Refer to Note 16 - Risk Management and Derivatives for more information on the Company's risk management program and derivatives. NIKE, INC. 2016 Annual Report and Notice of Annual Meeting 117 FORM 10-K Balance at May 31, 2014 Other comprehensive gains (losses) before reclassifications...

  • Page 65
    ... the Company's results of operations, financial position or cash flows. NOTE 16 - Risk Management and Derivatives The Company is exposed to global market risks, including the effect of changes in foreign currency exchange rates and interest rates, and uses derivatives to manage financial exposures...

  • Page 66
    ... of Shareholders' Equity for additional information on changes in Accumulated other comprehensive income for the years ended May 31, 2016, 2015 and 2014. Cash Flow Hedges The purpose of the Company's foreign exchange risk management program is to lessen both the positive and negative effects of...

  • Page 67
    ... May 31, 2016, 2015 or 2014. The Company had no outstanding net investment hedges as of May 31, 2016. Undesignated Derivative Instruments The Company may elect to enter into foreign exchange forwards to mitigate the change in fair value of specific assets and liabilities on the balance sheet and/or...

  • Page 68
    ... of casual sneakers, apparel and accessories. Global Brand Divisions is included within the NIKE Brand for presentation purposes to align with the way management views the Company. Global Brand Divisions primarily represent NIKE Brand licensing businesses that are not part of a geographic operating...

  • Page 69
    ...(In millions) 2016 Year Ended May 31, 2015 2014 REVENUES North America Western Europe Central & Eastern Europe Greater China Japan Emerging Markets Global Brand Divisions Total NIKE Brand Converse Corporate TOTAL NIKE CONSOLIDATED REVENUES EARNINGS BEFORE INTEREST AND TAXES North America Western...

  • Page 70
    ...-Lived Assets by Geographic Area After allocation of revenues for Global Brand Divisions, Converse and Corporate to geographical areas based on the location where the sales originated, revenues by geographical area are essentially the same as reported above for the NIKE Brand operating segments with...

  • Page 71
    ... in our Exchange Act reports is recorded, processed, summarized and reported within the time periods specified in the SEC's rules and forms and that such information is accumulated and communicated to our management, including our Chief Executive Officer and Chief Financial Officer, as appropriate...

  • Page 72
    ..."Election of Directors - Stock Holdings of Certain Owners and Management" in the definitive Proxy Statement for our 2016 Annual Meeting of Shareholders and is incorporated herein by reference. ITEM 13. Certain Relationships and Related Transactions and Director Independence The information required...

  • Page 73
    ... the three years ended May 31, 2016, May 31, 2015 and May 31, 2014 Consolidated Balance Sheets at May 31, 2016 and May 31, 2015 Consolidated Statements of Cash Flows for each of the three years ended May 31, 2016, May 31, 2015 and May 31, 2014 Consolidated Statements of Shareholders' Equity for each...

  • Page 74
    ... Report on Form 10-K for the fiscal year ended May 31, 2014).* 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 August 28, 2015 among NIKE, Inc., Bank of America...

  • Page 75
    ... to the Company's Current Report on Form 8-K filed September 23, 2015). Computation of Ratio of Earnings to Fixed Charges. Subsidiaries of the Registrant. Consent of PricewaterhouseCoopers LLP, Independent Registered Public Accounting Firm (included within this Annual Report on Form 10-K). Rule 13a...

  • Page 76
    ... currency translation. Includes both current and non-current portions of the allowance for doubtful accounts. The non-current portion is included in Deferred income taxes and other assets on the Consolidated Balance Sheets. NIKE, INC. 2016 Annual Report and Notice of Annual Meeting 129 FORM 10-K

  • Page 77
    ... and 333-208900) of NIKE, Inc. of our report dated July 21, 2016 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 21, 2016 130

  • Page 78
    ... Director Director Director Director Director Director Director Director Director July 21, 2016 July 21, 2016 July 21, 2016 July 21, 2016 July 21, 2016 July 21, 2016 July 21, 2016 July 21, 2016 July 21, 2016 July 21, 2016 July 21, 2016 NIKE, INC. 2016 Annual Report and Notice of Annual Meeting...

  • Page 79
    PART IV EXHIBIT 12.1 NIKE, Inc. Computation of Ratio of Earnings to Fixed Charges Year Ended May 31, 2015 2014 4,205 $ 3,544 $ - - 4,205 3,544 The following disclosure reflects the Company's continuing operations: (In millions) Income before income taxes Capitalized interest, net of ...

  • Page 80
    ...Retail B.V. Converse Retail Italy S.r.l. Converse Sporting Goods (China) Co., Ltd. Converse Trading Company B.V. F.C. Internazionale Merchandising s.r.l. French Football... Netherlands Bermuda Finland France Netherlands NIKE, INC. 2016 Annual Report and Notice of Annual Meeting 133 FORM 10-K

  • Page 81
    ... NIKE Panama S. de R.L. NIKE Philippines, Inc. NIKE Poland Sp. z o.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 Turkey NIKE Revolution C.V. NIKE Russia LLC NIKE SALES (MALAYSIA) SDN. BHD. NIKE...

  • Page 82
    ... Netherlands Netherlands United Kingdom Oregon United Kingdom Netherlands Vietnam Texas Netherlands Slovenia Oregon Oregon Oregon Oregon Delaware United Kingdom Italy Indonesia Indonesia Hawaii Hong Kong Netherlands Japan NIKE, INC. 2016 Annual Report and Notice of Annual Meeting 135 FORM 10-K

  • Page 83
    ... Financial Officer Trevor A. Edwards President, NIKE Brand Hilary K. Krane Executive Vice President, Chief Administrative Officer & General Counsel John F. Slusher Executive Vice President, Global Sports Marketing Michael Spillane President, Product & Merchandising Eric D. Sprunk Chief Operating...

  • Page 84
    ...Investor Relations Department at NIKE World Headquarters, One Bowerman Drive, Beaverton, Oregon 970056453. Copies are available on the investor relations website, http://investors.nike.com. Dividend Payments Quarterly dividends on NIKE common stock, when declared by the Board of Directors, are paid...

  • Page 85
    NIKE, INC. One Bowerman Drive Beaverton, OR 97005-6453 www.nike.com