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: (in millions, except per share data)
| YEAR ENDED MAY 31, | 1999 | 1998 | 1997 |
| Determination of shares: | |||
|
283.3 | 288.7 | 288.4 |
|
5.0 | 6.3 | 8.6 |
|
Diluted average common shares outstanding |
288.3 | 295.0 | 297.0 |
|
Basic earnings per common share |
$1.59 | $1.38 | $2.76 |
| Diluted earnings per common share | $1.57 | $1.35 | $2.68 |
The Company has a profit sharing plan available to substantially all employees. The terms of the plan call for annual contributions by the Company as determined by the Board of Directors. Contributions of $12.8 million, $11.2 million and $18.5 million to the plan are included in other expense in the consolidated financial statements for the years ended May 31, 1999, 1998 and 1997, respectively. The Company has a voluntary 401(k) employee savings plan. The Company matches a portion of employee contributions with Common Stock, vesting that portion over 5 years. Company contributions to the savings plan were $7.4 million, $8.1 million and $6.3 million for the years ended May 31, 1999, 1998 and 1997, respectively, and are included in selling and administrative expenses.
Included in other income/expense for the years ended May 31, 1999, 1998 and 1997, was interest income of $13.0 million, $16.5 million and $20.1 million, respectively. In addition, included in other income/expense was income of $15.0 million related to the change in accounting for inventories in the U.S. from the LIFO to the FIFO method. The change was effected in the fourth quarter of fiscal 1999 and was not considered significant to show the cumulative effect or to restate comparable income statements as dictated by Accounting Principles Board Opinion No. 20. The Company's subsidiary, Bauer NIKE Hockey, recognized a one-time restructuring charge in fiscal year 1997 of $18.1 million for a plan which entailed, among other things, moving certain products to offshore production and closing certain facilities.
The Company leases space for its offices, warehouses and retail stores under leases expiring from one to eighteen years after May 31, 1999. Rent expense aggregated $129.5 million, $129.6 million and $84.1 million for the years ended May 31, 1999, 1998 and 1997, respectively. Amounts of minimum future annual rental commitments under non-cancelable operating leases in each of the five fiscal years 2000 through 2004 are $96.1 million, $86.9 million, $75.9 million, $69.3 million, $58.8 million, respectively, and $368.2 million in later years.
Lawsuits arise during the normal course of business. In the opinion of management, none of the pending lawsuits will result in a significant impact on the consolidated results of operations or financial position.
1999 Charge. During fiscal 1999, a $60.1 million charge was incurred as a result of certain actions taken to better align the Company's cost structure with expected revenue growth rates. The charge (shown below in tabular format) was primarily for costs of severing employees, including severance packages, lease abandonments and the write down of assets no longer in use. Employees were terminated in Europe, Asia Pacific, and in the United States, and included employees affected by the Company's shift to outsourcing certain of its information technology functions. The total number of employees terminated was 1,291, with 630 having left the Company as of May 31, 1999.
Also included was a write-off of $20.2 million of certain equipment, hardware and software development costs that are no longer in use at one of the Company's U.S. distribution centers due to a change in strategy around how the Company flows product for a specific type of business.
The accrual balance at May 31, 1999 will be relieved throughout fiscal 2000 and early 2001, as leases expire and severance payments are completed.
Detail of the 1999 restructuring charge is as follows: (in millions)
| Description | Cash/Non-Cash | FY99 Restructuring Charge |
Activity | Reserve Balance at 5/31/99 |
| Elimination of Job Responsibilities Company-Wide | $(39.9) | $21.9 | $(18.0) | |
|
cash | (28.0) | 11.7 | (16.3) |
|
cash | (2.4) | 1.6 | (0.8) |
|
non-cash | (7.8) | 7.8 | - |
|
cash/non-cash | (1.7) | 0.8 | (0.9) |
| Change in warehouse distribution strategy | (20.2) | 20.2 | - | |
|
non-cash | (20.2) | 20.2 | - |
| Effect of foreign currency translation | - | 0.1 | 0.1 | |
| Total | $(60.1) | $42.2 | $(17.9) |
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 relate 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 NIKE Hockey 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.
Employees were terminated from almost all areas of the Company, including marketing, sales and administrative areas. The total number of employees terminated was 1,208, with 1,203 having left the Company as of May 31, 1999.
During fiscal year 1999, it was determined that a total of $15.0 million of the restructuring accrual was not required due to changes in estimates related to severance payments of $4.0 million, a $3.6 million change in estimated vendor software costs related to Japan's software development, lease commitments of $3.2 million due to changes in sub-leasing arrangements, and other changes of $4.2 million. The $15.0 million is included in "Activity" in the table below and as an offset in the restructuring charge on the income statement.
The remaining accrual will be relieved throughout fiscal year 2000, as leases expire and severance payments, some of which are paid on a monthly basis, are completed.
Detail of the restructuring charge is as follows: (in millions)
| Description | Cash/Non-Cash | FY98 Restructuring Charge |
Activity | Reserve Balance at 5/31/99 |
| Elimination of Job Responsibilities Company-Wide | $(49.8) | $46.5 | $(3.3) | |
|
cash | (29.1) | 28.2 | (0.9) |
|
cash | (10.8) | 8.4 | (2.4) |
|
non-cash | (9.6) | 9.6 | - |
|
cash | (0.3) | 0.3 | - |
| Downsizing the Asia Pacific Headquarters In Hong Kong | (13.1) | 13.0 | (0.1) | |
|
cash | (4.6) | 4.6 | - |
|
cash | (5.5) | 5.4 | (0.1) |
|
non-cash | (3.0) | 3.0 | - |
| Downsizing the Japan Distribution Center | (31.6) | 30.5 | (1.1) | |
|
non-cash | (12.5) | 12.5 | - |
|
cash/non-cash | (19.1) | 18.0 | (1.1) |
| Cancellation of Endorsement Contracts | cash | (5.6) | 5.3 | (0.3) |
| Exiting Certain Manufacturing Operations at Bauer NIKE Hockey | (22.7) | 21.7 | (1.0) | |
|
non-cash | (14.7) | 14.7 | - |
|
non-cash | (5.2) | 5.2 | - |
|
cash | (1.6) | 0.9 | (0.7) |
|
cash | (1.2) | 0.9 | (0.3) |
| Other | (7.1) | 6.4 | (0.7) | |
|
cash | (0.6) | 0.6 | - |
|
non-cash | (6.5) | 5.8 | (0.7) |
| Effect of foreign currency translation | - | 0.2 | 0.2 | |
| Total | $(129.9) | $123.6 | $(6.3) |
The carrying amounts reflected in the consolidated balance sheet for cash and equivalents and notes payable approximate fair value as reported in the balance sheet due to the short maturities. The fair value of long-term debt is estimated using discounted cash flow analyses, based on the Company's incremental borrowing rates for similar types of borrowing arrangements. The fair value of the Company's long-term debt, including current portion, is approximately $384.8 million, compared to a carrying value of $387.1 million at May 31, 1999 and $384.4 million, compared to a carrying value of $381.0 million at May 31, 1998. See Note 15 for fair value of derivatives.
The purpose of the Company's foreign currency hedging activities is to protect the Company from the risk that the eventual dollar cash flows resulting from the sale and purchase of products in foreign currencies will be adversely affected by changes in exchange rates. In addition, the Company seeks to manage the impact of foreign currency fluctuations related to the repayment of intercompany transactions, including intercompany borrowings. The Company does not hold or issue financial instruments for trading purposes. It is the Company's policy to utilize derivative financial instruments to reduce foreign exchange risks where internal netting strategies cannot be effectively employed. Fluctuations in the value of hedging instruments are offset by fluctuations in the value of the underlying exposures being hedged.
The Company uses forward exchange contracts and purchased options to hedge certain firm purchases and sales commitments and the related receivables and payables including other third party or intercompany foreign currency transactions. Purchased currency options are used to hedge certain anticipated but not yet firmly committed transactions expected to be recognized within one year. Cross-currency swaps are used to hedge foreign currency denominated payments related to intercompany loan agreements. Hedged transactions are denominated primarily in European currencies, Japanese yen and Canadian dollars. Premiums paid on purchased options and any realized gains are included in prepaid expenses or accrued liabilities and recognized in earnings when the underlying transaction is recognized. Deferred option premiums paid, net of realized gains, were $4.0 million and $21.7 million at May 31, 1999 and 1998, respectively. Gains and losses related to hedges of firmly committed transactions and the related receivables and payables are deferred and are recognized in income or as adjustments of carrying amounts when the offsetting gains and losses are recognized on the underlying transaction. Net realized and unrealized gains on forward contracts deferred at May 31, 1999 and 1998 were $31.5 million and $12.0 million, respectively.
The estimated fair values of derivatives used to hedge the Company's risks will fluctuate over time. The fair value of the forward exchange contracts and cross-currency swaps are estimated by obtaining quoted market prices. The fair value of option contracts is estimated using option pricing models widely used in the financial markets. These fair value amounts should not be viewed in isolation, but rather in relation to the fair values of the underlying hedged transactions and the overall reduction in the Company's exposure to adverse fluctuations in foreign exchange rates. The notional amounts of derivatives summarized below do not necessarily represent amounts exchanged by the parties and, therefore, are not a direct measure of the exposure to the Company through its use of derivatives. The amounts exchanged are calculated on the basis of the notional amounts and the other terms of the derivatives, which relate to interest rates, exchange rates or other financial indices.
The following table presents the aggregate notional principal amounts, carrying values and fair values of the Company's derivative financial instruments outstanding at May 31, 1999 and 1998. (in millions)
| May 31, | 1999 | 1998 | ||||
| Notional Principal Amounts |
Notional Carrying Values |
Fair Values |
Principal Amounts |
Carrying Values |
Fair Values |
|
| Currency Swaps | $ 300.0 | $44.3 | $ 32.1 | $300.0 | $30.8 | $30.3 |
| Forward Contracts | 2,206.8 | 29.1 | 73.2 | 2,453.1 | 3.0 | 62.3 |
| Purchased Options | 220.0 | 7.2 | 3.8 | 232.4 | 7.7 | 1.9 |
| Total | $2,726.8 | $80.6 | $109.1 | $2,985.5 | $41.5 | $94.5 |
At May 31, 1999 and May 31, 1998, the Company had no contracts outstanding with maturities beyond one year except the currency swaps which have maturity dates consistent with the maturity dates of the related debt. All realized gains/losses deferred at May 31, 1999 will be recognized within one year.
The counterparties to derivative transactions are major financial institutions with high investment grade credit ratings and, additionally, counterparties to derivatives three years or greater are all AAA rated. However, this does not eliminate the Company's exposure to credit risk with these institutions. This credit risk is generally limited to the unrealized gains in such contracts should any of these counterparties fail to perform as contracted and is immaterial to any one institution at May 31, 1999 and 1998. To manage this risk, the Company has established strict counterparty credit guidelines which are continually monitored and reported to Senior Management according to prescribed guidelines. The Company utilizes a portfolio of financial institutions either headquartered or operating in the same countries the Company conducts its business. As a result, the Company considers the risk of counterparty default to be minimal.
Operating Segments. Effective June 1, 1998, the Company adopted SFAS No. 131, "Disclosures about Segments of an Enterprise and Related Information". SFAS No. 131 establishes new standards for the way public business enterprises report information about operating segments, and also requires certain disclosures about products and services, geographic areas of business and major customers. The adoption of SFAS No. 131 did not affect the Company's consolidated financial position or results of operations, but did change business segment information previously disclosed.
The Company's major operating segments are defined by geographic regions for subsidiaries participating in NIKE brand sales activity. Other brands as shown below represent activity for non-NIKE brand subsidiaries (Cole Haan Holdings Inc., Bauer NIKE Hockey Inc., NIKE Team Sports, Inc., and NIKE IHM, Inc.) and are considered immaterial for individual disclosure. Where applicable, "Corporate" represents items necessary to reconcile to the consolidated financial statements which generally include corporate activity and corporate eliminations. The segments are evidence of the structure of the enterprise's internal organization. Each NIKE brand geographic segment operates predominantly in one industry: the design, production, marketing and selling of sports and fitness footwear, apparel, and equipment.
Net revenues as shown below represent sales to external customers for each segment. Intercompany revenues have been eliminated and are immaterial for separate disclosure. The Company centrally manages substantially all interest expense activity. Operating segment interest activity is primarily the result of intercompany lending, which is eliminated for consolidated purposes. The Company evaluates performance of individual operating segments based on Contribution Profit before Corporate Allocations, Interest Expense and Income Taxes. On a consolidated basis, this amount represents Income Before Taxes less Interest Expense as shown in the Consolidated Statement of Income. Other reconciling items related to Contribution Profit represent corporate costs that are not allocated to the operating segments for management reporting and intercompany eliminations for specific income statement items.
Additions to long-lived assets predominantly represent capital expenditures, which are shown below by operating segment. At the start of fiscal year 1999, certain corporate costs, assets and liabilities were segregated from the U.S. region. Therefore, breakout of capital expenditures and depreciation activity between United States and Corporate is not available for years prior to fiscal year 1999.
Other additions to long-lived assets represent additions to identifiable intangibles and goodwill, which are managed as a corporate expense and are not attributable to any specific operating segment. See Note 1 for further discussion on identifiable intangible assets and goodwill.
Accounts receivable, inventory, and fixed assets for operating segments are regularly reviewed by management and are therefore provided below. (in millions)
| YEAR ENDED MAY 31, | 1999 | 1998 | 1997 |
| Net Revenue | |||
|
$4,723.7 | $5,139.4 | $5,201.6 |
|
2,255.8 | 2,096.1 | 1,789.8 |
|
844.5 | 1,253.9 | 1,241.9 |
|
507.1 | 599.0 | 449.2 |
|
445.8 | 464.7 | 504.0 |
| $8,776.9 | $9,553.1 | $9,186.5 | |
| Contribution Profit | |||
|
$882.3 | $978.8 | $1,411.7 |
|
338.4 | 281.2 | 254.5 |
|
78.8 | (26.8) | 227.4 |
|
57.6 | 110.6 | 74.3 |
|
22.4 | (13.1) | 34.7 |
|
(589.3) | (617.7) | (655.1) |
| $790.2 | $713.0 | $1,347.5 | |
| Capital Expenditures | |||
|
$48.5 | ||
|
161.7 | ||
|
$210.2 | $246.8 | $266.4 |
|
87.7 | 121.0 | 90.0 |
|
43.7 | 103.5 | 69.7 |
|
12.5 | 12.6 | 6.4 |
|
30.0 | 22.0 | 33.4 |
| $384.1 | $505.9 | $465.9 | |
| Depreciation | |||
|
$22.0 | ||
|
73.3 | ||
|
$95.3 | $96.8 | $75.9 |
|
40.6 | 37.8 | 27.0 |
|
20.8 | 23.4 | 13.8 |
|
6.8 | 4.7 | 2.6 |
|
34.7 | 21.8 | 18.7 |
|
|
$198.2 | $184.5 | $138.0 |
| MAY 31, | 1999 | 1998 | 1997 |
| Accounts Receivable, net | |||
|
$574.4 | $716.9 | $844.6 |
|
551.6 | 531.9 | 362.2 |
|
141.5 | 165.9 | 305.7 |
|
119.2 | 125.5 | 96.3 |
|
108.8 | 109.6 | 114.7 |
|
44.6 | 24.6 | 30.6 |
| $1,540.1 | $1,674.4 | $1,754.1 | |
| Inventory, net | |||
|
$544.6 | $561.6 | $528.7 |
|
316.3 | 424.5 | 329.6 |
|
81.5 | 118.5 | 182.6 |
|
73.1 | 79.9 | 67.6 |
|
144.6 | 185.1 | 188.3 |
|
39.2 | 27.0 | 41.8 |
| $1,199.3 | $1,396.6 | $1,338.6 | |
| Property, Plant and Equipment, net | |||
|
$290.4 | $322.7 | $227.5 |
|
271.4 | 244.8 | 177.0 |
|
148.0 | 143.4 | 92.5 |
|
21.5 | 16.9 | 11.1 |
|
114.3 | 119.1 | 125.1 |
|
420.2 | 306.2 | 289.2 |
| $1,265.8 | $1,153.1 | $922.4 | |
Revenues by Major Product Lines. Footwear, Apparel and Equipment revenues are defined as sales to external customers for NIKE brand products. Other brands revenues includes external sales by the non-NIKE brand subsidiaries.
| YEAR ENDED MAY 31, | 1999 | 1998 | 1997 |
| Footwear | $5,218.4 | $5,959.0 | $6,144.5 |
| Apparel | 2,914.7 | 2,991.8 | 2,493.5 |
| Equipment | 197.9 | 137.6 | 44.4 |
| Other brands | 445.9 | 464.7 | 504.1 |
| $8,776.9 | $9,553.1 | $9,186.5 |
Revenues and Long-Lived Assets by Geographic Area. Geographic information is similar to that shown above under operating segments with the exception that Other brands activity is derived predominantly from activity in the United States and Americas. Revenues derived in the United States were $5.04 billion, $5.46 billion, and $5.54 billion during the year ended May 31, 1999, 1998, and 1997, respectively. Long-lived assets, which are comprised of net property, plant and equipment and net identifiable assets and goodwill, attributable to operations in the United States were $1.11 billion, $1.07 billion, and $1.69 billion at May 31, 1999, 1998, and 1997, respectively.
Major Customers. During fiscal 1999, 1998 and 1997, revenues derived from one customer represented 10%, 11% and 12% respectively of the Company's consolidated revenues. Sales to this customer are included in all segments of the Company.