Nike Term Project Nike Financial

Nike

Term Project

Nike Financial Analysis

Prepare an historical timeline for the company in essay format indicating major events in the history of the company from its inception to date. Bold each significant year, and list source.

Nike's history started before the company was established, due to two visionary men: Phil Knight, a talented middle-distance runner from Portland, on the one hand, and Bill Bowerman, a nationally respected track and field coach at the University of Oregon, on the other hand.

In 1965, Phil Knight and Bill Bowerman founded Blue Ribbon Sports, a company that distributed sports shoes created by the Japanese Onitsuka Tiger. The company was successful from its beginning. Later, Blue Ribbon Sports launched Swoosh, a line of footwear. In 1972, the company launched the first line of Nike shoes. This line's success determined Blue Ribbon Sports' founders to change the company's name into Nike in 1978.

In 1979, Nike launched the Nike Air technology, fact that significantly contributed to the company's position on the market, as Nike had reached a 50% market share in the United States. However, this situation was not exploited by the company as it should have been, and Nike slipped from its position as an industry leader.

The company's image was revived in 1985, when Nike introduced a new signature shoe for Michael Jordan. In 1987, the company launched an aggressive marketing campaign that was designed to help Nike regain its leadership position on the market. This campaign's objective was attained in 1989, when Nike became the leader on this market once again.

The company's marketing efforts have diversified over the years, leading to the 2002 Secret Tournament campaign. This campaign was an integrated approached that includes advertising, the Internet, public relations, retail and consumer events. The company's product diversification continues in the present.

2. What type of audit opinion did the auditors issue? What evidence supports your answer? Explain.

The audit on Nike was performed by PriceWaterhouseCoopers. The audit was performed in accordance with the standards of the Public Company Accounting Oversight Board. Regarding consolidated financial statements and financial statement schedule, the auditors have stated that these statements present fairly, in all material respects, the financial position of Nike Inc. And its subsidiaries. Also, the results of the company's operations and its cash flows were in accordance with accounting principles generally accepted in the United States of America. The same opinion was issued on the financial statement schedule listed in the index. The auditors also observed that Nike changed the accounting manner for stock-based compensation in accordance with the Statement of Financial Accounting Standards.

Regarding internal control over financial reporting, the auditors have stated that the management's analysis included in Management's Annual Report on Internal Control over Financial Reporting presented a clear outlook, and Nike's internal control over financial reporting was effective and it was based on criteria established in Internal Control - Integrated Framework that was issued by the Committee of Sponsoring Organizations of the Treadway Commission.

3. Briefly summarize the key points of the letter to shareholders.

The letter to shareholders issued by PriceWaterhouseCoopers was based on stating and explaining the auditors' results and opinion after performing the audit on Nike. The introduction of the letter presents details about the audited financial period and the standards under which the audit was performed. The letter continues with the opinions expressed by the auditor regarding Nike's financial activity. In the auditors' opinion, the consolidated financial statements present fairly Nike's financial situation. The letter continues with the auditors' opinion on the internal control performed by Nike on its financial reporting. The auditors' opinion was also favorable for the company regarding this issue.

4. How many notes to the consolidated financial statements are there? Select one note and discuss why you found it interesting.

There are 17 notes accompanying the consolidated financial statements. These notes refer to: note 1 - summary of significant accounting policies; note 2 - inventories; note 3 - property, plant, and equipment; note 4 - identifiable intangible assets and goodwill; note 5 - accrued liabilities; note 6 - short-term borrowings and credit lines; note 7 - long-term debt; note 8 - income taxes; note 9 - redeemable preferred stock; note 10 - common stock; note 11 - earnings per share; note 12 - benefit plans; note 13 - comprehensive income; note 14 - commitments and contingencies; note 15 - acquisitions; note 16 - risk management and derivatives; note 17 - operating segments and related operations.

Of course, each of these notes accompanying the consolidated financial statements is important, since they regard each aspect of the company's activity. However, the most important seems to be note 1 that summarizes all significant policies. This is probably the most complex note. The note is important because it provides information on issues of extreme interest, like: basis of consolidation, stock split, recognition of revenues, shipping and handling costs, advertising and promotion, cash and equivalents, short-term investments, inventory valuation, property, plant, and equipment and depreciation, stock-based compensation, and other issues.

5. Which financial statement indicates profit and loss? What was that amount for the current period?

Values regarding profit and loss can be found in the consolidated statements of income. Nike's revenues in 2007 reached $16,325.9 million, the cost of sales reached $9,165.4 million, leading to a net income of $1,491.5 million in 2007.

6. Which financial statement measures the financial position f a company? Indicate its 3 major categories and their total dollars amounts for the current year.

The company's financial position is detailed in the consolidated balance sheet. This statement includes the following major categories: assets, liabilities and shareholders' equity, and cash flows. For 2007, the company's financial situation was the following:

a) total assets - $10,688.3 million.

A b) total liabilities and shareholders' equity - $10,688.3 million.

A c) cash and cash equivalents - $1,856.7 million.

7. What type of stock has the company issued and how many shares are outstanding? What is the company's stock symbol and which stock exchange is it listed on?

The company has issued common stock issues Class a and Class B. In 2007, Nike's outstanding shares were: 127.8 Class a shares, and 384.2 Class B shares. Nike is listed on the New York Stock Exchange under the NKE symbol.

8. In the past year what was the:

A. Highest price per share of common stock?

B. Lowest price per share of common stock?

C. Last (closing) price per share on common stock on the most recent date? List the date.

On December 11, 2007 the closing price was $64.20.

9. Which financial statement measures the inflows and outflows of cash? What are the three major categories of cash activities and what was the balance for each of the most current years reported?

Cash inflows and outflows are detailed in the consolidated statements of cash flows. This statement is consisted of three categories: cash provided (used) by operations, cash provided (used) by investing activities, and cash provided (used) by financing activities. For Nike, the amounts for these categories were the following:

cash provided (used) by operations - $1,878.7 million in 2007, $1,667.9 million in 2006, $1,570.7 million in 2005.

A cash provided (used) by investing activities - $92.9 million in 2007, ($1,276.6) million in 2006, ($360.4) million in 2005.

A cash provided (used) by financing activities - ($1,111.5) in 2007, ($850.9) million in 2006, ($657) million in 2005.

10. What type of industry does it operate in? In your opinion, what type of competition exists in that industry? Explain.

Nike operates in the apparel industry. More specifically, Nike's main activity consists in designing and manufacturing high quality footwear, apparel, equipment, and accessory products. Competition on this market is very intense and has expanded on a global level. The number of sports equipment companies is continuously increasing all over the world. Nike is the worldwide leader on this market, followed by other large companies like Adidas and Puma.

11. Has the company recently been accused of any ethical violations? Explain.

The company states that there are no pending legal proceedings, other than ordinary routine litigation incidental to the company's activity.

12. How much of its financing (dollar amount) is through equity financial (stock) and debt (bonds) financing? Show amounts.

In 2007, Nike's total equity was of $7,025.4 million, while debt was of $409.9 million.

13. Does the company have any current liabilities (short-term debt)? If so, list the amount and type.

The company's total current liabilities are of $2,584 million. They are composed of: current portion of long-term debt - $30.5 million; notes payable - $100.8 million; accounts payable - $1,040.3 million; accrued liabilities - $1,303.4 million; and income taxes payable - $109 million. The company has short-term and intermediate term loans. In 2006, Nike entered into a $1 billion multi-year credit facility that can be extended up to two years.

14. What, if any, goals does the company mention and hope to achieve? Are they short, intermediate, or long-term in nature? Explain.

One of Nike's intermediate term objectives refers to the company's subsidiaries that are expected to grow to $23 billion in revenue by 2011. It is more than likely that these subsidiaries will attain this financial objective, given the fact that they have tripled their revenues and significantly increased their pretax income contribution. Another objective of Nike's strategy consists in optimizing the company's portfolio. This objective can be approached on medium term and on long-term.

15. Who are the following individuals in the company's organization structure:

Chairman

President (CEO)

Members of the Board of Directors.

The company is represented by:

Chairman - Philip H. Knight

President (CEO) - Mark G. Parker

Members of the Board of Directors - David J. Ayre (Vice President), Lewis L. Bird (President, Subsidiaries), Donald W. Blair (Vice President), Mary Kate Buckley (Vice President), Craig Cheek, Thomas E. Clarke, Charles S. Denson, Gary M. DeStefano, Trevor Edwards, Adam S. Helfant, Joaquin Hidalgo, Elliott Hill, P. Eunan McLaughlin, Eric D. Sprunk, Lindsay D. Stewart, Hans van Alebeek, Roland P. Wolfram, Roger S. Wyett.

Part II

1. Compute the ratios listed bellow for the two years provided in your annual report. Show all work clearly.

Current ratio: 2007-3.1% and 2006-2.8%

Quick ratio: 2007-1.6% and 2006-3.6%

Inventory turnover: 2007-4.4% and 2006-4.3%

Profit margin: 2007-43.9% and 2006-44%

Receivable turnover: 2007-6.5% and 2006-6.2%

2. Prepare a typed summary indicating whether you view your company to have improved in these ratio areas from the previous year to the current year. Explain what each ratio indicates about the financial position of the company.

The current ratio is one of the two ratios that measure liquidity, the company's ability to pay its debts. The company's current ratio expresses its ability to pay current liabilities by using current assets only. In Nike's case, the total current assets have increased from $7,346 in 2006 to $8,076 in 2007, on the one hand. On the other hand, the company's current liabilities have decreased from $2,612 in 2006 to $2,584 in 2007. With the current assets increasing and with total liabilities decreasing, the company's ability to pay these debts has significantly increased, adding more financial power to the company.