Total Selling and Administrative Expense
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Three Months Ended
|
|
Nine Months Ended
|
(Dollars in millions)
|
|
February 28, 2017
|
|
February 29, 2016
|
|
% Change
|
|
February 28, 2017
|
|
February 29, 2016
|
|
% Change
|
Demand creation expense
(1)
|
|
$
|
749
|
|
|
$
|
804
|
|
|
-7
|
%
|
|
$
|
2,552
|
|
|
$
|
2,405
|
|
|
6
|
%
|
Operating overhead expense
|
|
1,747
|
|
|
1,762
|
|
|
-1
|
%
|
|
5,346
|
|
|
5,298
|
|
|
1
|
%
|
Total selling and administrative expense
|
|
$
|
2,496
|
|
|
$
|
2,566
|
|
|
-3
|
%
|
|
$
|
7,898
|
|
|
$
|
7,703
|
|
|
3
|
%
|
% of Revenues
|
|
29.6
|
%
|
|
31.9
|
%
|
|
(230) bps
|
|
|
30.8
|
%
|
|
31.9
|
%
|
|
(110) bps
|
|
|
|
(1)
|
Demand creation expense consists of advertising and promotion costs, including costs of endorsement contracts, television, digital and print advertising, brand events and retail brand presentation.
|
Demand creation expense
decreased 7% for the third quarter of fiscal 2017 primarily due to
lower marketing, advertising and retail brand presentation costs. These decreases were partially offset by higher sports marketing costs.
For the first nine months of fiscal 2017,
Demand creation expense
increased 6% driven by higher sports marketing costs, as well as
higher marketing and advertising costs, primarily to support key sporting events including the Rio Olympics and European Football Championship in the first quarter. Changes in foreign currency exchange rates reduced
Demand creation expense
by approximately 1 percentage point for both the third quarter and first nine months of fiscal 2017.
Operating overhead expense
declined 1% for the third quarter of fiscal 2017 as continued investments in our growing DTC business were more than offset by efficiencies in administrative costs, as well as lower bad debt expense, primarily in North America. For the first nine months of fiscal 2017,
O
perating overhead expense
increased 1% as investments in our DTC business were largely offset by efficiencies in administrative costs and lower variable compensation.
Changes in foreign currency exchange rates reduced
Operating overhead expense
by approximately 1 percentage point for both the third quarter and first nine months of fiscal 2017.
Other (Income) Expense, Net
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Three Months Ended
|
|
Nine Months Ended
|
(In millions)
|
|
February 28, 2017
|
|
February 29, 2016
|
|
February 28, 2017
|
|
February 29, 2016
|
Other (income) expense, net
|
|
$
|
(88
|
)
|
|
$
|
(17
|
)
|
|
$
|
(168
|
)
|
|
$
|
(82
|
)
|
Other (income) expense, net
comprises foreign currency conversion gains and losses from the re-measurement of monetary assets and liabilities denominated in non-functional currencies and the impact of certain foreign currency derivative instruments, as well as unusual or non-operating transactions that are outside the normal course of business.
For the third quarter of fiscal 2017,
Other (income) expense, net
increased to $88 million of other income from $17 million of other income in the prior year, primarily due to a $55 million net beneficial change in foreign currency conversion gains and losses, as well as other non-operating items.
For the first nine months of fiscal 2017,
Other (income) expense, net
increased to $168 million of other income from $82 million of other income in the prior year, primarily due to a $77 million net beneficial change in foreign currency conversion gains and losses
.
We estimate the combination of the translation of foreign currency-denominated profits from our international businesses and the year-over-year change in foreign currency related gains and losses included in
Other (income) expense, net
had a favorable impact of approximately $24 million and an unfavorable impact of approximately $2 million on our
Income before income taxes
for the third quarter and first nine months of fiscal 2017, respectively.
Income Taxes
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Three Months Ended
|
|
Nine Months Ended
|
|
|
February 28, 2017
|
|
February 29, 2016
|
|
% Change
|
|
February 28, 2017
|
|
February 29, 2016
|
|
% Change
|
Effective tax rate
|
|
13.8
|
%
|
|
16.3
|
%
|
|
(250) bps
|
|
|
13.1
|
%
|
|
17.9
|
%
|
|
(480) bps
|
|
Our effective tax rate for the
third quarter
of fiscal 2017 was 13.8% compared to 16.3% for the
third quarter
of fiscal 2016. The decrease was primarily due to a reduction in tax reserves related to foreign operations and an increase in the proportion of earnings from operations outside of the United States, which are generally subject to a lower tax rate.
Our effective tax rate for the first nine months of fiscal 2017 was
13.1%
compared to
17.9%
for the first
nine months of fiscal 2016. The decline was primarily due to a one-time benefit related to the resolution with the U.S. Internal Revenue Service (IRS) of a foreign tax credit matter as well as a reduction in tax reserves related to foreign operations.
We expect our fourth quarter fiscal 2017 effective tax rate will be approximately
22.0%.
Our operating segments are evidence of the structure of the Company's internal organization. The NIKE Brand segments are defined by geographic regions for operations participating in NIKE Brand sales activity.
Each NIKE Brand geographic segment operates predominantly in one industry: the design, development, marketing and selling of athletic footwear, apparel and equipment. The Company’s reportable operating segments for the NIKE Brand are: North America, Western Europe, Central & Eastern Europe, Greater China, Japan and Emerging Markets, and include results for the NIKE, Jordan and Hurley brands. The Company’s NIKE Brand DTC operations are managed within each geographic operating segment. Converse is also a reportable segment for the Company and operates in one industry: the design, marketing, licensing and selling of casual sneakers, apparel and accessories.
As part of our centrally managed foreign exchange risk management program, standard foreign currency rates are assigned twice per year to each NIKE Brand entity in our geographic operating segments and Converse. These rates are set approximately nine and twelve months in advance of the future selling seasons to which they relate (specifically, for each currency, one standard rate applies to the fall and holiday selling seasons and one standard rate applies to the spring and summer selling seasons) based on average market spot rates in the calendar month preceding the date they are established.
Inventories
and
Cost of sales
for geographic operating segments and Converse reflect the use of these standard rates to record non-functional currency product purchases into the entity’s functional currency. Differences between assigned standard foreign currency rates and actual market rates are included in Corporate, together with foreign currency hedge gains and losses generated from our centrally managed foreign exchange risk management program and other conversion gains and losses.
The breakdown of revenues is as follows:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Three Months Ended
|
|
Nine Months Ended
|
(Dollars in millions)
|
|
February 28, 2017
|
|
February 29, 2016
|
|
% Change
|
|
% Change Excluding Currency Changes
(1)
|
|
February 28, 2017
|
|
February 29, 2016
|
|
% Change
|
|
% Change Excluding Currency Changes
(1)
|
North America
|
|
$
|
3,782
|
|
|
$
|
3,683
|
|
|
3
|
%
|
|
3
|
%
|
|
$
|
11,463
|
|
|
$
|
11,029
|
|
|
4
|
%
|
|
4
|
%
|
Western Europe
|
|
1,499
|
|
|
1,442
|
|
|
4
|
%
|
|
10
|
%
|
|
4,647
|
|
|
4,382
|
|
|
6
|
%
|
|
11
|
%
|
Central & Eastern Europe
|
|
362
|
|
|
359
|
|
|
1
|
%
|
|
3
|
%
|
|
1,130
|
|
|
1,086
|
|
|
4
|
%
|
|
7
|
%
|
Greater China
|
|
1,075
|
|
|
982
|
|
|
9
|
%
|
|
15
|
%
|
|
3,150
|
|
|
2,806
|
|
|
12
|
%
|
|
18
|
%
|
Japan
|
|
236
|
|
|
205
|
|
|
15
|
%
|
|
8
|
%
|
|
719
|
|
|
589
|
|
|
22
|
%
|
|
8
|
%
|
Emerging Markets
|
|
950
|
|
|
879
|
|
|
8
|
%
|
|
13
|
%
|
|
2,942
|
|
|
2,829
|
|
|
4
|
%
|
|
12
|
%
|
Global Brand Divisions
(2)
|
|
19
|
|
|
17
|
|
|
12
|
%
|
|
12
|
%
|
|
55
|
|
|
61
|
|
|
-10
|
%
|
|
-10
|
%
|
Total NIKE Brand
|
|
7,923
|
|
|
7,567
|
|
|
5
|
%
|
|
7
|
%
|
|
24,106
|
|
|
22,782
|
|
|
6
|
%
|
|
8
|
%
|
Converse
|
|
498
|
|
|
489
|
|
|
2
|
%
|
|
3
|
%
|
|
1,488
|
|
|
1,442
|
|
|
3
|
%
|
|
4
|
%
|
Corporate
(3)
|
|
11
|
|
|
(24
|
)
|
|
—
|
|
|
—
|
|
|
79
|
|
|
(92
|
)
|
|
—
|
|
|
—
|
|
TOTAL NIKE, INC. REVENUES
|
|
$
|
8,432
|
|
|
$
|
8,032
|
|
|
5
|
%
|
|
7
|
%
|
|
$
|
25,673
|
|
|
$
|
24,132
|
|
|
6
|
%
|
|
8
|
%
|
|
|
(1)
|
The percentage change has been calculated using actual exchange rates in use during the comparative prior year period to enhance the visibility of the underlying business trends by excluding the impact of translation arising from foreign currency exchange rate fluctuations, which is considered a non-GAAP financial measure.
|
|
|
(2)
|
Global Brand Divisions revenues are primarily attributable to NIKE Brand licensing businesses that are not part of a geographic operating segment.
|
|
|
(3)
|
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.
|
The primary financial measure used by the Company to evaluate performance of individual operating segments is earnings before interest and taxes (commonly referred to as “EBIT”), which represents
Net income
before
Interest expense (income), net
and
Income tax expense
in the Unaudited Condensed Consolidated Statements of Income, and is considered a non-GAAP financial measure. As discussed in
Note 11 — Operating Segments
in the accompanying Notes to the Unaudited Condensed Consolidated Financial Statements, certain corporate costs are not included in EBIT of our operating segments.
The breakdown of earnings before interest and taxes is as follows:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Three Months Ended
|
|
Nine Months Ended
|
(Dollars in millions)
|
|
February 28, 2017
|
|
February 29, 2016
|
|
% Change
|
|
February 28, 2017
|
|
February 29, 2016
|
|
% Change
|
North America
|
|
$
|
980
|
|
|
$
|
903
|
|
|
9
|
%
|
|
$
|
2,896
|
|
|
$
|
2,827
|
|
|
2
|
%
|
Western Europe
|
|
290
|
|
|
334
|
|
|
-13
|
%
|
|
918
|
|
|
1,126
|
|
|
-18
|
%
|
Central & Eastern Europe
|
|
57
|
|
|
69
|
|
|
-17
|
%
|
|
196
|
|
|
243
|
|
|
-19
|
%
|
Greater China
|
|
381
|
|
|
358
|
|
|
6
|
%
|
|
1,127
|
|
|
1,015
|
|
|
11
|
%
|
Japan
|
|
49
|
|
|
36
|
|
|
36
|
%
|
|
147
|
|
|
119
|
|
|
24
|
%
|
Emerging Markets
|
|
193
|
|
|
202
|
|
|
-4
|
%
|
|
601
|
|
|
701
|
|
|
-14
|
%
|
Global Brand Divisions
|
|
(598
|
)
|
|
(625
|
)
|
|
4
|
%
|
|
(1,988
|
)
|
|
(1,874
|
)
|
|
-6
|
%
|
Total NIKE Brand
|
|
1,352
|
|
|
1,277
|
|
|
6
|
%
|
|
3,897
|
|
|
4,157
|
|
|
-6
|
%
|
Converse
|
|
109
|
|
|
127
|
|
|
-14
|
%
|
|
340
|
|
|
359
|
|
|
-5
|
%
|
Corporate
|
|
(119
|
)
|
|
(264
|
)
|
|
55
|
%
|
|
(478
|
)
|
|
(952
|
)
|
|
50
|
%
|
TOTAL NIKE, INC. EARNINGS BEFORE INTEREST AND TAXES
|
|
1,342
|
|
|
1,140
|
|
|
18
|
%
|
|
3,759
|
|
|
3,564
|
|
|
5
|
%
|
Interest expense (income), net
|
|
19
|
|
|
5
|
|
|
—
|
|
|
41
|
|
|
14
|
|
|
—
|
|
TOTAL NIKE, INC. INCOME BEFORE INCOME TAXES
|
|
$
|
1,323
|
|
|
$
|
1,135
|
|
|
17
|
%
|
|
$
|
3,718
|
|
|
$
|
3,550
|
|
|
5
|
%
|
North America
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Three Months Ended
|
|
Nine Months Ended
|
(Dollars in millions)
|
|
February 28, 2017
|
|
February 29, 2016
|
|
% Change
|
|
% Change Excluding Currency Changes
|
|
February 28, 2017
|
|
February 29, 2016
|
|
% Change
|
|
% Change Excluding Currency Changes
|
Revenues by:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Footwear
|
|
$
|
2,490
|
|
|
$
|
2,404
|
|
|
4
|
%
|
|
3
|
%
|
|
$
|
7,227
|
|
|
$
|
6,932
|
|
|
4
|
%
|
|
4
|
%
|
Apparel
|
|
1,154
|
|
|
1,115
|
|
|
3
|
%
|
|
3
|
%
|
|
3,744
|
|
|
3,583
|
|
|
4
|
%
|
|
4
|
%
|
Equipment
|
|
138
|
|
|
164
|
|
|
-16
|
%
|
|
-16
|
%
|
|
492
|
|
|
514
|
|
|
-4
|
%
|
|
-4
|
%
|
TOTAL REVENUES
|
|
$
|
3,782
|
|
|
$
|
3,683
|
|
|
3
|
%
|
|
3
|
%
|
|
$
|
11,463
|
|
|
$
|
11,029
|
|
|
4
|
%
|
|
4
|
%
|
Revenues by:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Sales to Wholesale Customers
|
|
$
|
2,650
|
|
|
$
|
2,597
|
|
|
2
|
%
|
|
2
|
%
|
|
$
|
8,111
|
|
|
$
|
8,024
|
|
|
1
|
%
|
|
1
|
%
|
Sales Direct to Consumer
|
|
1,132
|
|
|
1,086
|
|
|
4
|
%
|
|
4
|
%
|
|
3,352
|
|
|
3,005
|
|
|
12
|
%
|
|
12
|
%
|
TOTAL REVENUES
|
|
$
|
3,782
|
|
|
$
|
3,683
|
|
|
3
|
%
|
|
3
|
%
|
|
$
|
11,463
|
|
|
$
|
11,029
|
|
|
4
|
%
|
|
4
|
%
|
EARNINGS BEFORE INTEREST AND TAXES
|
|
$
|
980
|
|
|
$
|
903
|
|
|
9
|
%
|
|
|
|
$
|
2,896
|
|
|
$
|
2,827
|
|
|
2
|
%
|
|
|
On a currency-neutral basis, North America revenues for the third quarter and first nine months of fiscal 2017 increased 3% and 4%, respectively, driven by growth in our Sportswear and Jordan Brand categories, partially offset by declines in other categories, including Running for the third quarter and NIKE Basketball for the first nine months of fiscal 2017. For the third quarter of fiscal 2017, DTC revenues increased 4% due to the addition of new stores, digital commerce sales growth and comparable store sales growth of 1%. For the first nine months of fiscal 2017, DTC revenues grew 12% driven by digital commerce sales growth, comparable store sales growth of 5% and the addition of new stores. T
he broader retail marketplace in North America is also being impacted by several significant trends, including shifting consumer traffic patterns across digital and physical channels, retail consolidation and an increasingly promotional environment.
The currency-neutral footwear revenue growth for the third quarter and first nine months of fiscal 2017 was attributable to growth in our Sportswear and Jordan Brand categories, partially offset by declines in other categories. Unit sales of footwear for the third quarter of fiscal 2017 increased approximately 4%, while lower ASP per pair reduced footwear revenue growth by approximately 1 percentage point primarily due to lower ASP in our DTC business resulting from higher off-price sales. For the first nine months of fiscal 2017, unit sales of footwear increased approximately 4%, while ASP per pair was flat as higher off-price ASP was offset by unfavorable off-price mix.
The increase in constant currency apparel revenues for the third quarter and first nine months of fiscal 2017 was due to growth concentrated in our Sportswear category, partially offset by declines in other categories. Third quarter unit sales of apparel increased approximately 1%, while higher ASP per unit contributed approximately 2 percentage points of apparel revenue growth primarily due to higher DTC and full-price ASPs, which were partially offset by lower off-price ASP. For the first nine months of fiscal 2017, unit sales of apparel increased approximately 4%, while ASP per unit was flat as higher full-price ASP was offset by lower off-price ASP and unfavorable off-price mix.
EBIT increased 9% for the third quarter of fiscal 2017 driven by revenue growth, gross margin expansion and lower selling and administrative expense. Gross margin increased 40 basis points as higher full-price ASP and lower other costs, including inventory obsolescence, were only partially offset by higher product costs and the impact of increased off-price sales through our DTC business. Selling and administrative expense declined as lower demand creation expense more than offset higher operating overhead. Demand creation expense decreased primarily due to lower marketing expense for brand events, while operating overhead increased as continued investments in our growing DTC business more than offset lower bad debt expense compared to the third quarter of fiscal 2016.
EBIT grew 2% for the first nine months of fiscal 2017 as higher revenues were largely offset by gross margin contraction and higher selling and administrative expense.
Gross margin decreased 30 basis points as higher full-price ASP was more than offset by increased off-price mix as a result of clearing excess inventories through off-price channels, including through our DTC business. S
elling and administrative expense grew due to higher operating overhead as continued investments in our growing DTC business more than offset a reduction in administrative costs and lower bad debt expense. Demand creation also increased as higher sports marketing and retail brand presentation costs were only partially offset by lower advertising costs.
Western Europe
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Three Months Ended
|
|
Nine Months Ended
|
(Dollars in millions)
|
|
February 28, 2017
|
|
February 29, 2016
|
|
% Change
|
|
% Change Excluding Currency Changes
|
|
February 28, 2017
|
|
February 29, 2016
|
|
% Change
|
|
% Change Excluding Currency Changes
|
Revenues by:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Footwear
|
|
$
|
990
|
|
|
$
|
985
|
|
|
1
|
%
|
|
6
|
%
|
|
$
|
3,002
|
|
|
$
|
2,958
|
|
|
1
|
%
|
|
6
|
%
|
Apparel
|
|
445
|
|
|
392
|
|
|
14
|
%
|
|
21
|
%
|
|
1,430
|
|
|
1,217
|
|
|
18
|
%
|
|
23
|
%
|
Equipment
|
|
64
|
|
|
65
|
|
|
-2
|
%
|
|
5
|
%
|
|
215
|
|
|
207
|
|
|
4
|
%
|
|
9
|
%
|
TOTAL REVENUES
|
|
$
|
1,499
|
|
|
$
|
1,442
|
|
|
4
|
%
|
|
10
|
%
|
|
$
|
4,647
|
|
|
$
|
4,382
|
|
|
6
|
%
|
|
11
|
%
|
Revenues by:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Sales to Wholesale Customers
|
|
$
|
1,062
|
|
|
$
|
1,078
|
|
|
-1
|
%
|
|
4
|
%
|
|
$
|
3,344
|
|
|
$
|
3,335
|
|
|
0
|
%
|
|
5
|
%
|
Sales Direct to Consumer
|
|
437
|
|
|
364
|
|
|
20
|
%
|
|
28
|
%
|
|
1,303
|
|
|
1,047
|
|
|
24
|
%
|
|
30
|
%
|
TOTAL REVENUES
|
|
$
|
1,499
|
|
|
$
|
1,442
|
|
|
4
|
%
|
|
10
|
%
|
|
$
|
4,647
|
|
|
$
|
4,382
|
|
|
6
|
%
|
|
11
|
%
|
EARNINGS BEFORE INTEREST AND TAXES
|
|
$
|
290
|
|
|
$
|
334
|
|
|
-13
|
%
|
|
|
|
$
|
918
|
|
|
$
|
1,126
|
|
|
-18
|
%
|
|
|
On a currency-neutral basis, Western Europe revenues for the third quarter and first nine months of fiscal 2017 grew 10% and 11%, respectively, due to higher revenues in every territory. Revenue growth for the third quarter was led by Western Europe's largest territory, the UK & Ireland, which grew 7%, and by France, which grew 13%. For the first nine months of fiscal 2017, growth was broad-based across all territories, led by the UK & Ireland, which grew 8%. On a category basis, revenues for the third quarter and first nine months of fiscal 2017 increased in nearly all key categories led by Sportswear, Running and Football (Soccer), with the Jordan Brand also contributing to year-to-date growth.
DTC revenues increased 28% for the third quarter of fiscal 2017 driven by strong digital commerce sales growth, comparable store sales growth of 17% and the addition of new stores. For the first nine months of fiscal 2017, DTC revenues increased 30% fueled by comparable store sales growth of 17%, significant digital commerce sales growth and the addition of new stores.
Currency-neutral footwear revenue growth for the third quarter and first nine months of fiscal 2017 was led by Sportswear and Running, partially offset by declines concentrated in Football (Soccer) for the year-to-date period. For the third quarter and first nine months of fiscal 2017, unit sales of footwear increased approximately 5% and 2%, respectively, while higher ASP per pair contributed approximately 1 and 4 percentage points of footwear revenue growth for the respective periods. Higher ASP per pair for the third quarter was due to the favorable impact of growth in our DTC business. For the first nine months of fiscal 2017, higher ASP per pair was primarily driven by the favorable impact of growth in our DTC business and higher full-price ASP, partially offset by higher off-price mix.
The increase in constant currency apparel revenues for the third quarter and first nine months of fiscal 2017 was due to growth in nearly every category, most notably Sportswear and Football (Soccer). Unit sales of apparel increased 16% for both the third quarter and first nine months of fiscal 2017, while higher ASP per unit contributed approximately 5 and 7 percentage points of apparel revenue growth for the respective periods. The increase in ASP per unit for both periods was primarily attributable to higher full-price ASP and the favorable impact of growth in our DTC business.
On a reported basis, EBIT decreased 13% for the third quarter of fiscal 2017, in part reflecting the negative impact of weakening foreign currency exchange rates. Reported revenue growth and selling and administrative expense leverage were more than offset by significantly lower gross margin. Gross margin declined 440 basis points primarily driven by the effects of unfavorable standard foreign currency exchange rates and higher product costs. S
elling and administrative expense increased due to higher operating overhead resulting from increased investments in our growing DTC business, which more than offset a decline in variable compensation, administrative cost efficiencies and lower bad debt expense. Demand creation expense also increased, primarily due to higher sports marketing and advertising costs, which were partially offset by lower marketing and retail brand presentation costs.
In part reflecting the negative impact of translation, reported EBIT declined 18% for the first nine months of fiscal 2017.
H
igher reported revenues and selling and administrative expense leverage were more than offset by significant gross margin contraction.
Gross margin declined 590 basis points primarily driven by the effects of unfavorable standard foreign currency exchange rates.
Selling and administrative expense increased due to higher demand creation expense primarily resulting from an increase in sports marketing costs and advertising expense. Operating overhead also increased due to continued investments in our growing DTC business, partially offset by lower administrative and variable compensation costs.
Central & Eastern Europe
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Three Months Ended
|
|
Nine Months Ended
|
(Dollars in millions)
|
|
February 28, 2017
|
|
February 29, 2016
|
|
% Change
|
|
% Change Excluding Currency Changes
|
|
February 28, 2017
|
|
February 29, 2016
|
|
% Change
|
|
% Change Excluding Currency Changes
|
Revenues by:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Footwear
|
|
$
|
232
|
|
|
$
|
237
|
|
|
-2
|
%
|
|
1
|
%
|
|
$
|
694
|
|
|
$
|
658
|
|
|
5
|
%
|
|
9
|
%
|
Apparel
|
|
110
|
|
|
102
|
|
|
8
|
%
|
|
8
|
%
|
|
368
|
|
|
361
|
|
|
2
|
%
|
|
5
|
%
|
Equipment
|
|
20
|
|
|
20
|
|
|
0
|
%
|
|
0
|
%
|
|
68
|
|
|
67
|
|
|
1
|
%
|
|
6
|
%
|
TOTAL REVENUES
|
|
$
|
362
|
|
|
$
|
359
|
|
|
1
|
%
|
|
3
|
%
|
|
$
|
1,130
|
|
|
$
|
1,086
|
|
|
4
|
%
|
|
7
|
%
|
Revenues by:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Sales to Wholesale Customers
|
|
$
|
313
|
|
|
$
|
311
|
|
|
1
|
%
|
|
2
|
%
|
|
$
|
957
|
|
|
$
|
938
|
|
|
2
|
%
|
|
5
|
%
|
Sales Direct to Consumer
|
|
49
|
|
|
48
|
|
|
2
|
%
|
|
7
|
%
|
|
173
|
|
|
148
|
|
|
17
|
%
|
|
22
|
%
|
TOTAL REVENUES
|
|
$
|
362
|
|
|
$
|
359
|
|
|
1
|
%
|
|
3
|
%
|
|
$
|
1,130
|
|
|
$
|
1,086
|
|
|
4
|
%
|
|
7
|
%
|
EARNINGS BEFORE INTEREST AND TAXES
|
|
$
|
57
|
|
|
$
|
69
|
|
|
-17
|
%
|
|
|
|
$
|
196
|
|
|
$
|
243
|
|
|
-19
|
%
|
|
|
On a currency-neutral basis, Central & Eastern Europe revenues increased 3% and 7% for the third quarter and first nine months of fiscal 2017, respectively, with strong growth in nearly every territory. For the third quarter of fiscal 2017, territory revenue growth was led by Poland, which grew 13%. Revenue growth for the first nine months of fiscal 2017 was led by Russia, Greece and Turkey, which grew 18%, 23% and 9%, respectively, while revenues for our distributors business decreased 8%. On a category basis, revenue growth for the third quarter and first nine months of fiscal 2017 was fueled by growth primarily in Sportswear, which more than offset declines in other categories. For the third quarter of fiscal 2017, DTC revenues increased 7% due to digital commerce sales growth, the addition of new stores and comparable store sales growth of 1%. For the first nine months of fiscal 2017, DTC revenues grew 22% fueled by comparable store sales growth of 12%, the addition of new stores and digital commerce sales growth.
Constant currency footwear revenue growth for the third quarter and first nine months of fiscal 2017 was primarily attributable to growth in Sportswear, partially offset by declines concentrated in Football (Soccer). Third quarter unit sales of footwear increased approximately 2%, while lower ASP per pair reduced footwear revenue growth approximately 1 percentage point primarily due to lower full-price ASP, largely reflecting higher discounts. For the first nine months of fiscal 2017, unit sales of footwear increased approximately 7%, while higher ASP per pair contributed approximately 2 percentage points of footwear revenue growth. For the first nine months of fiscal 2017, higher ASP per pair was driven by higher off-price and DTC ASPs, partially offset by lower full-price ASP resulting from higher discounts.
The constant currency increase in apparel revenues for the third quarter of fiscal 2017 was due to revenue growth in several key categories, most notably Sportswear. For the first nine months of fiscal 2017, apparel revenue growth was driven by increases in our Sportswear, Men's Training and Football (Soccer) categories. Unit sales of apparel for the third quarter and first nine months of fiscal 2017 increased approximately 8% and 4%, respectively, while ASP per unit was flat and contributed approximately 1 percentage point of apparel revenue growth for the respective periods. For the third quarter, ASP per unit was flat as higher DTC ASP and, to a lesser extent, lower off-price mix offset lower full-price ASP resulting from higher discounts. ASP per unit was higher for the first nine months of fiscal 2017 as lower full-price ASP resulting from higher discounts was more than offset by higher DTC ASP and, to a lesser extent, lower off-price mix.
Reported EBIT for the third quarter of fiscal 2017 decreased 17% as modest revenue growth was more than offset by gross margin contraction and higher selling and administrative expense. Gross margin declined 380 basis points as lower product costs were more than offset by unfavorable standard foreign currency exchange rates and lower full-price ASP, largely reflecting higher discounts. For the third quarter of fiscal 2017, selling and administrative expense increased due to higher demand creation expense primarily attributable to higher advertising and sports marketing costs. Operating overhead expense decreased as ongoing investments in our growing DTC business were more than offset by a reduction in variable compensation and lower operational infrastructure costs.
On a reported basis, EBIT for the first nine months of fiscal 2017 decreased 19% as revenue growth and selling and administrative expense leverage were more than offset by lower gross margin. Gross margin declined 640 basis points primarily due to significant unfavorable standard foreign currency exchange rates. Selling and administrative expense decreased as a percent of revenues, despite higher demand creation expense driven by higher advertising and sports marketing costs, partially offset by lower retail brand presentation costs. Operating overhead expense decreased due to lower administrative and variable compensation costs, partially offset by continued investments in our DTC business.
Greater China
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Three Months Ended
|
|
Nine Months Ended
|
(Dollars in millions)
|
|
February 28, 2017
|
|
February 29, 2016
|
|
% Change
|
|
% Change Excluding Currency Changes
|
|
February 28, 2017
|
|
February 29, 2016
|
|
% Change
|
|
% Change Excluding Currency Changes
|
Revenues by:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Footwear
|
|
$
|
776
|
|
|
$
|
719
|
|
|
8
|
%
|
|
14
|
%
|
|
$
|
2,155
|
|
|
$
|
1,918
|
|
|
12
|
%
|
|
18
|
%
|
Apparel
|
|
271
|
|
|
235
|
|
|
15
|
%
|
|
22
|
%
|
|
895
|
|
|
787
|
|
|
14
|
%
|
|
19
|
%
|
Equipment
|
|
28
|
|
|
28
|
|
|
0
|
%
|
|
7
|
%
|
|
100
|
|
|
101
|
|
|
-1
|
%
|
|
4
|
%
|
TOTAL REVENUES
|
|
$
|
1,075
|
|
|
$
|
982
|
|
|
9
|
%
|
|
15
|
%
|
|
$
|
3,150
|
|
|
$
|
2,806
|
|
|
12
|
%
|
|
18
|
%
|
Revenues by:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Sales to Wholesale Customers
|
|
$
|
703
|
|
|
$
|
672
|
|
|
5
|
%
|
|
10
|
%
|
|
$
|
2,071
|
|
|
$
|
1,963
|
|
|
6
|
%
|
|
11
|
%
|
Sales Direct to Consumer
|
|
372
|
|
|
310
|
|
|
20
|
%
|
|
27
|
%
|
|
1,079
|
|
|
843
|
|
|
28
|
%
|
|
35
|
%
|
TOTAL REVENUES
|
|
$
|
1,075
|
|
|
$
|
982
|
|
|
9
|
%
|
|
15
|
%
|
|
$
|
3,150
|
|
|
$
|
2,806
|
|
|
12
|
%
|
|
18
|
%
|
EARNINGS BEFORE INTEREST AND TAXES
|
|
$
|
381
|
|
|
$
|
358
|
|
|
6
|
%
|
|
|
|
$
|
1,127
|
|
|
$
|
1,015
|
|
|
11
|
%
|
|
|
On a currency-neutral basis, Greater China revenues grew 15% and 18% for the third quarter and first nine months of fiscal 2017, respectively. Nearly all key categories grew, led by Sportswear, Running and the Jordan Brand. DTC revenues increased 27% and 35% for the third quarter and first nine months of fiscal 2017, respectively, fueled by strong digital commerce sales growth, the addition of new stores and increases in comparable store sales of 7% and 8%, respectively.
The constant currency growth in footwear revenues for the third quarter and first nine months of fiscal 2017 was attributable to increases in nearly all key categories, most notably Running, Sportswear and the Jordan Brand. Third quarter unit sales of footwear increased approximately 14%, while ASP per pair was flat as lower DTC ASP and unfavorable off-price mix offset higher off-price and full-price ASPs. For the first nine months of fiscal 2017, unit sales of footwear increased approximately 19%, while ASP per pair reduced footwear revenue growth by approximately 1 percentage point as higher full-price and off-price ASPs were more than offset by unfavorable off-price mix and lower DTC ASP.
Constant currency apparel revenue growth for the third quarter and first nine months of fiscal 2017 was due to higher revenues in nearly all key categories, led by Sportswear and Running. Unit sales of apparel for the third quarter and first nine months of fiscal 2017 increased approximately 19% and 18%, respectively, while higher ASP per unit increased apparel revenue growth by approximately 3 and 1 percentage points for the respective periods. The increase in ASP for both periods was attributable to higher full-price ASP partially offset by lower ASP in our DTC business.
On a reported basis, EBIT for the third quarter of fiscal 2017 increased 6% despite the negative impact of changes in foreign currency exchange rates. EBIT growth was driven by reported revenue growth and selling and administrative expense leverage, partially offset by lower gross margin.
Gross margin declined 210 basis points as higher full-price ASP was more than offset by unfavorable standard foreign currency exchange rates, higher product costs and lower DTC margin. Selling and administrative expense increased as higher operating overhead, primarily to support our growing DTC business, more than offset slightly lower demand creation. The decrease in demand creation expense was attributable to lower retail brand presentation costs, which more than offset higher advertising and marketing costs.
Despite the negative impact of translation, reported EBIT increased 11% for the first nine months of fiscal 2017, driven by higher revenues and selling and administrative expense leverage, partially offset by lower gross margin.
Gross margin contracted 200 basis points primarily due to unfavorable standard foreign currency exchange rates and higher product costs.
Selling and administrative expense increased due to higher operating overhead to support DTC growth. Demand creation expense also increased as higher marketing costs more than offset lower retail brand presentation expenses.
Japan
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Three Months Ended
|
|
Nine Months Ended
|
(Dollars in millions)
|
|
February 28, 2017
|
|
February 29, 2016
|
|
% Change
|
|
% Change Excluding Currency Changes
|
|
February 28, 2017
|
|
February 29, 2016
|
|
% Change
|
|
% Change Excluding Currency Changes
|
Revenues by:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Footwear
|
|
$
|
153
|
|
|
$
|
133
|
|
|
15
|
%
|
|
8
|
%
|
|
$
|
470
|
|
|
$
|
383
|
|
|
23
|
%
|
|
8
|
%
|
Apparel
|
|
67
|
|
|
52
|
|
|
29
|
%
|
|
21
|
%
|
|
197
|
|
|
158
|
|
|
25
|
%
|
|
10
|
%
|
Equipment
|
|
16
|
|
|
20
|
|
|
-20
|
%
|
|
-24
|
%
|
|
52
|
|
|
48
|
|
|
8
|
%
|
|
-4
|
%
|
TOTAL REVENUES
|
|
$
|
236
|
|
|
$
|
205
|
|
|
15
|
%
|
|
8
|
%
|
|
$
|
719
|
|
|
$
|
589
|
|
|
22
|
%
|
|
8
|
%
|
Revenues by:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Sales to Wholesale Customers
|
|
$
|
147
|
|
|
$
|
133
|
|
|
11
|
%
|
|
4
|
%
|
|
$
|
468
|
|
|
$
|
391
|
|
|
20
|
%
|
|
6
|
%
|
Sales Direct to Consumer
|
|
89
|
|
|
72
|
|
|
24
|
%
|
|
15
|
%
|
|
251
|
|
|
198
|
|
|
27
|
%
|
|
12
|
%
|
TOTAL REVENUES
|
|
$
|
236
|
|
|
$
|
205
|
|
|
15
|
%
|
|
8
|
%
|
|
$
|
719
|
|
|
$
|
589
|
|
|
22
|
%
|
|
8
|
%
|
EARNINGS BEFORE INTEREST AND TAXES
|
|
$
|
49
|
|
|
$
|
36
|
|
|
36
|
%
|
|
|
|
$
|
147
|
|
|
$
|
119
|
|
|
24
|
%
|
|
|
On a constant currency basis, revenues for Japan increased 8% for both the third quarter and first nine months of fiscal 2017. Most key categories grew, led by Sportswear and Running, partially offset by declines in Golf. DTC revenues grew 15% for the third quarter of fiscal 2017 due to comparable store sales growth of 18% and the addition of new stores. DTC revenue growth of 12% for the first nine months of fiscal 2017 was driven by comparable store sales growth of 10%, digital commerce sales growth and the addition of new stores.
Reported EBIT for the third quarter of fiscal 2017 increased 36%, in part reflecting the impact of the stronger Yen, driven by higher reported revenues, gross margin expansion and selling and administrative expense leverage. Gross margin expanded 140 basis points as lower product costs and lower other costs, including inventory obsolescence, more than offset unfavorable off-price margin and lower margin in our DTC business. S
elling and administrative expense increased due to higher demand creation expense, primarily driven by higher marketing support for brand events, as well as other demand creation costs. Operating overhead also increased as reduced investments in operational infrastructure and administrative cost efficiencies were more than offset by increased investments in our growing DTC business and the impact of changes in foreign currency exchange rates.
For the first nine months of fiscal 2017, reported EBIT increased 24%, also reflecting the impact of the stronger Yen. Reported revenue growth and selling and administrative expense leverage were only partially offset by lower gross margin.
Gross margin declined 190 basis points as lower product costs were more than offset by the impact of unfavorable standard foreign currency exchange rates, unfavorable off-price margin and lower DTC margin. S
elling and administrative expense grew due to higher operating overhead and demand creation expense. Operating overhead increased as lower administrative and operational infrastructure costs were more than offset by increased investments in our growing DTC business and the impact of changes in foreign currency exchange rates. Demand creation expense increased due to higher marketing, retail brand presentation and other demand creation costs.
Emerging Markets
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Three Months Ended
|
|
Nine Months Ended
|
(Dollars in millions)
|
|
February 28, 2017
|
|
February 29, 2016
|
|
% Change
|
|
% Change Excluding Currency Changes
|
|
February 28, 2017
|
|
February 29, 2016
|
|
% Change
|
|
% Change Excluding Currency Changes
|
Revenues by:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Footwear
|
|
$
|
673
|
|
|
$
|
596
|
|
|
13
|
%
|
|
17
|
%
|
|
$
|
2,060
|
|
|
$
|
1,940
|
|
|
6
|
%
|
|
15
|
%
|
Apparel
|
|
222
|
|
|
228
|
|
|
-3
|
%
|
|
3
|
%
|
|
719
|
|
|
721
|
|
|
0
|
%
|
|
8
|
%
|
Equipment
|
|
55
|
|
|
55
|
|
|
0
|
%
|
|
2
|
%
|
|
163
|
|
|
168
|
|
|
-3
|
%
|
|
3
|
%
|
TOTAL REVENUES
|
|
$
|
950
|
|
|
$
|
879
|
|
|
8
|
%
|
|
13
|
%
|
|
$
|
2,942
|
|
|
$
|
2,829
|
|
|
4
|
%
|
|
12
|
%
|
Revenues by:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Sales to Wholesale Customers
|
|
$
|
743
|
|
|
$
|
702
|
|
|
6
|
%
|
|
11
|
%
|
|
$
|
2,365
|
|
|
$
|
2,340
|
|
|
1
|
%
|
|
10
|
%
|
Sales Direct to Consumer
|
|
207
|
|
|
177
|
|
|
17
|
%
|
|
19
|
%
|
|
577
|
|
|
489
|
|
|
18
|
%
|
|
25
|
%
|
TOTAL REVENUES
|
|
$
|
950
|
|
|
$
|
879
|
|
|
8
|
%
|
|
13
|
%
|
|
$
|
2,942
|
|
|
$
|
2,829
|
|
|
4
|
%
|
|
12
|
%
|
EARNINGS BEFORE INTEREST AND TAXES
|
|
$
|
193
|
|
|
$
|
202
|
|
|
-4
|
%
|
|
|
|
$
|
601
|
|
|
$
|
701
|
|
|
-14
|
%
|
|
|
On a currency-neutral basis, Emerging Markets revenues for the third quarter and first nine months of fiscal 2017 increased 13% and 12%, respectively, driven by higher revenues in most territories. Revenues for three of Emerging Market's largest territories, SOCO (which includes Argentina, Uruguay and Chile), Mexico and Korea, grew 28%, 26% and 14%, respectively, for the third quarter of fiscal 2017, and 40%, 16% and 12%, respectively, for the first nine months of fiscal 2017. On a category basis, revenues for the third quarter and first nine months of fiscal 2017 increased in most key categories, led by Sportswear and Running. DTC revenues increased 19% and 25% for the third quarter and first nine months of fiscal 2017, respectively, fueled by the addition of new stores, comparable store sales growth of 11% and 10%, respectively, and higher digital commerce sales.
Constant currency footwear revenue growth for the third quarter and first nine months of fiscal 2017 was driven by higher revenues in most key categories, led by Sportswear and Running. Unit sales of footwear increased approximately 11% and 3% for the third quarter and first nine months of fiscal 2017, while higher ASP per pair contributed approximately 6 and 12 percentage points of footwear revenue growth for the respective periods. Higher ASP per pair for both the third quarter and first nine months of fiscal 2017 was primarily attributable to higher full-price ASP, in part reflecting inflationary conditions in certain territories.
The constant currency apparel revenue growth for the third quarter and first nine months of fiscal 2017 was fueled by increases in most key categories, led by Sportswear, with Running contributing to the year-to-date period. For the third quarter and first nine months of fiscal 2017, unit sales of apparel decreased approximately 2% and 3%, respectively, while higher ASP per unit contributed approximately 5 and 11 percentage points of apparel revenue growth for the respective periods. The increase in ASP per unit for both periods was primarily driven by higher full-price ASP, in part reflecting inflationary conditions in certain territories.
On a reported basis, EBIT decreased 4% for the third quarter of fiscal 2017, reflecting the negative impact of changes in foreign currency exchange rates, primarily the Argentine Peso and Mexican Peso.
Reported revenue growth and lower selling and administrative expense were more than offset by lower gross margin.
Gross margin declined 530 basis points as higher product costs and unfavorable standard foreign currency exchange rates were only partially offset by higher full-price ASP. Selling and administrative expense decreased as lower demand creation expense more than offset higher operating overhead expense. The decrease in demand creation expense was attributable to lower advertising and marketing expense, while operating overhead increased primarily as a result of continued investments in our growing DTC business, partially offset by lower variable compensation and administrative cost efficiencies.
For the first nine months of fiscal 2017, reported EBIT decreased 14%, in part reflecting the negative impact of translation.
Reported revenue growth was more than offset by gross margin contraction and higher selling and administrative expense
.
Gross margin decreased 400 basis points as unfavorable standard foreign currency exchange rates and higher product costs were only partially offset by higher full-price ASP.
Selling and administrative expense increased as a percent of revenues due to
higher operating overhead costs primarily resulting from ongoing investments in our growing DTC business. Demand creation expense also increased as lower advertising costs were more than offset by increased marketing support for the Rio Olympics in the first quarter, as well as higher sports marketing costs.
Global Brand Divisions
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Three Months Ended
|
|
Nine Months Ended
|
(Dollars in millions)
|
|
February 28, 2017
|
|
February 29, 2016
|
|
% Change
|
|
% Change Excluding Currency Changes
|
|
February 28, 2017
|
|
February 29, 2016
|
|
% Change
|
|
% Change Excluding Currency Changes
|
Revenues
|
|
$
|
19
|
|
|
$
|
17
|
|
|
12
|
%
|
|
12
|
%
|
|
$
|
55
|
|
|
$
|
61
|
|
|
-10
|
%
|
|
-10
|
%
|
(Loss) Before Interest and Taxes
|
|
$
|
(598
|
)
|
|
$
|
(625
|
)
|
|
-4
|
%
|
|
|
|
$
|
(1,988
|
)
|
|
$
|
(1,874
|
)
|
|
6
|
%
|
|
|
Global Brand Divisions primarily represent demand creation, operating overhead and product creation and design expenses that are centrally managed for the NIKE Brand. Revenues for Global Brand Divisions are primarily attributable to NIKE Brand licensing businesses that are not part of a geographic operating segment.
Global Brand Divisions’ loss before interest and taxes decreased 4% for the third quarter of fiscal 2017 as a result of lower demand creation expense, while operating overhead expense was flat. Demand creation expense declined due to lower advertising and retail brand presentation costs. Operating overhead expense was flat as costs remained largely unchanged compared to the prior year.
Global Brand Divisions’ loss before interest and taxes increased 6% for the first nine months of fiscal 2017 primarily due to higher demand creation expense, partially offset by lower operating overhead expense. The increase in demand creation expense was due to higher marketing and advertising expenses for key brand and sporting events, including the Rio Olympics and the European Football Championship in the first quarter. Operating overhead expense decreased as continued investments in operational infrastructure were more than offset by administrative cost efficiencies and lower variable compensation.
Converse
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Three Months Ended
|
|
Nine Months Ended
|
(Dollars in millions)
|
|
February 28, 2017
|
|
February 29, 2016
|
|
% Change
|
|
% Change Excluding Currency Changes
|
|
February 28, 2017
|
|
February 29, 2016
|
|
% Change
|
|
% Change Excluding Currency Changes
|
Revenues
|
|
$
|
498
|
|
|
$
|
489
|
|
|
2
|
%
|
|
3
|
%
|
|
$
|
1,488
|
|
|
$
|
1,442
|
|
|
3
|
%
|
|
4
|
%
|
Earnings Before Interest and Taxes
|
|
$
|
109
|
|
|
$
|
127
|
|
|
-14
|
%
|
|
|
|
$
|
340
|
|
|
$
|
359
|
|
|
-5
|
%
|
|
|
In territories we define as “direct distribution markets,” Converse designs, markets and sells products directly to distributors and wholesale customers, and to consumers through DTC operations. The largest direct distribution markets are the United States, the United Kingdom and China. We do not own the Converse trademarks in Japan and accordingly do not earn revenues in Japan. Territories other than direct distribution markets and Japan are serviced by third-party licensees who pay royalty revenues to Converse for the use of its registered trademarks and other intellectual property rights.
On a currency-neutral basis, revenues for Converse increased 3% and 4% for the third quarter and first nine months of fiscal 2017, respectively. Comparable direct distribution markets (i.e., markets served under a direct distribution model for comparable periods in the current and prior fiscal years) grew 2% for the third quarter of fiscal 2017, contributing approximately 2 percentage points of total Converse revenue growth. For the first nine months of fiscal 2017, comparable direct distribution markets grew 4%, contributing approximately 4 percentage points of total Converse revenue growth. Comparable direct distribution market unit sales decreased approximately 1% for the third quarter and increased 2% for the first nine months of fiscal 2017, respectively, while higher ASP per unit contributed approximately 3 and 2 percentage points, respectively, of direct distribution markets revenue growth. On a territory basis, the increase in comparable direct distribution markets revenues for the third quarter and first nine months of fiscal 2017 was primarily attributable to growth in the United States, partially offset by lower revenues in Europe. Conversion of markets from licensed to direct distribution increased total Converse revenues by approximately 2 and 1 percentage points for the third quarter and first nine months of fiscal 2017, respectively. Revenues from comparable licensed markets decreased 11% and 7% for the third quarter and first nine months of fiscal 2017, respectively, reducing total Converse revenue growth by approximately 1 percentage point for both periods. The decrease in comparable licensed markets revenues for the third quarter is primarily due to lower revenues in Latin America.
Reported EBIT for Converse decreased 14% for the third quarter of fiscal 2017 as higher revenues were more than offset by lower gross margin and higher selling and administrative expense. Gross margin declined 400 basis points as higher product costs more than offset higher full-price ASP, primarily due to a shift in mix to lower margin products. Gross margin was also negatively impacted by the unfavorable impact of lower licensing revenues, primarily due to market transitions, higher off-price sales and unfavorable standard foreign currency exchange rates. Selling and administrative expense increased as a percent of revenues due to higher operating overhead expense as lower administrative costs were more than offset by investments in operational infrastructure. Demand creation expense also increased as
lower retail brand presentation costs were more than offset by higher advertising and marketing expenses.
On a reported basis, Converse EBIT declined 5% for the first nine months of fiscal 2017 as revenue growth and lower selling and administrative expense were more than offset by gross margin contraction. Gross margin decreased 410 basis points as higher product costs more than offset higher full-price ASP, primarily due to a shift in mix to lower margin products. Gross margin also contracted due to unfavorable standard foreign currency exchange rates and the unfavorable impact of lower licensing revenues, primarily due to market transitions. Selling and administrative expense decreased due to lower demand creation expense, primarily as a result of lower retail brand presentation costs. Operating overhead also declined as investments in operational infrastructure were more than offset by lower administrative and variable compensation costs.
Corporate
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Three Months Ended
|
|
Nine Months Ended
|
(Dollars in millions)
|
|
February 28, 2017
|
|
February 29, 2016
|
|
% Change
|
|
February 28, 2017
|
|
February 29, 2016
|
|
% Change
|
Revenues
|
|
$
|
11
|
|
|
$
|
(24
|
)
|
|
—
|
|
|
$
|
79
|
|
|
$
|
(92
|
)
|
|
—
|
|
(Loss) Before Interest and Taxes
|
|
$
|
(119
|
)
|
|
$
|
(264
|
)
|
|
-55
|
%
|
|
$
|
(478
|
)
|
|
$
|
(952
|
)
|
|
-50
|
%
|
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.
The Corporate loss before interest and taxes consists largely of unallocated general and administrative expenses, including expenses associated with centrally managed departments; depreciation and amortization related to our corporate headquarters; unallocated insurance, benefit and compensation programs, including stock-based compensation; and certain foreign currency gains and losses.
In addition to the foreign currency gains and losses recognized in Corporate revenues, foreign currency results in Corporate include gains and losses resulting from the difference between actual foreign currency rates and standard rates used to record non-functional currency denominated product purchases within the NIKE Brand geographic operating segments and Converse; related foreign currency hedge results; conversion gains and losses arising from re-measurement of monetary assets and liabilities in non-functional currencies; and certain other foreign currency derivative instruments.
Corporate's loss before interest and taxes decreased $145 million and $474 million for the third quarter and first nine months of fiscal 2017, respectively. The decreases were due to the following:
|
|
•
|
a beneficial change of $54 million and $317 million for the third quarter and first nine months of fiscal 2017, respectively, related to the difference between actual foreign currency exchange rates and standard foreign currency exchange rates assigned to the NIKE Brand geographic operating segments and Converse, net of hedge gains and losses; these results are reported as a component of consolidated gross margin;
|
|
|
•
|
an increase in net foreign currency gains of $47 million and $74 million for the third quarter and first nine months of fiscal 2017, respectively, related to the re-measurement of monetary assets and liabilities denominated in non-functional currencies and the impact of certain foreign currency derivative instruments
,
reported as a component of consolidated
Other (income) expense, net
; and
|
|
|
•
|
a beneficial change of $44 million and $83 million for the third quarter and first nine months of fiscal 2017, respectively, primarily driven by the impact of lower variable compensation on operating overhead expense.
|
|
|
Foreign Currency Exposures and Hedging Practices
|
Overview
As a global company with significant operations outside the United States, in the normal course of business we are exposed to risk arising from changes in currency exchange rates. Our primary foreign currency exposures arise from the recording of transactions denominated in non-functional currencies and the translation of foreign currency denominated results of operations, financial position and cash flows into U.S. Dollars.
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 manage global foreign exchange risk centrally on a portfolio basis to address those risks that are material to NIKE, Inc. We manage these exposures by taking advantage of natural offsets and currency correlations that exist within the portfolio and, where practical and material, by hedging a portion of the remaining exposures using derivative instruments such as forward contracts and options. As described below, the implementation of the NIKE Trading Company (NTC) and our foreign currency adjustment program enhanced our ability to manage our foreign exchange risk by increasing the natural offsets and currency correlation benefits that exist within our portfolio of foreign exchange exposures. Our hedging policy is designed to partially or entirely offset the impact of exchange rate changes on the underlying net exposures being hedged. Where exposures are hedged, our program has the effect of delaying the impact of exchange rate movements on our Unaudited Condensed Consolidated Financial Statements; the length of the delay is dependent upon hedge horizons. We do not hold or issue derivative instruments for trading or speculative purposes.
Transactional Exposures
We conduct business in various currencies and have transactions which subject us to foreign currency risk. Our most significant transactional foreign currency exposures are:
|
|
•
|
Product Costs — NIKE’s product costs are exposed to fluctuations in foreign currencies in the following ways:
|
|
|
1.
|
Product purchases denominated in currencies other than the functional currency of the transacting entity:
|
|
|
a.
|
Certain NIKE entities purchase product from the NTC, a wholly-owned sourcing hub that buys NIKE branded products from third-party factories, predominantly in U.S. Dollars. The NTC, whose functional currency is the U.S. Dollar, then sells the products to NIKE entities in their respective functional currencies. When the NTC sells to a NIKE entity with a different functional currency, the result is a foreign currency exposure for the NTC.
|
|
|
b.
|
Other NIKE entities purchase product directly from third-party factories in U.S. Dollars. These purchases generate a foreign currency exposure for those NIKE entities with a functional currency other than the U.S. Dollar.
|
In both purchasing scenarios, a weaker U.S. Dollar reduces the inventory cost incurred by NIKE whereas a stronger U.S. Dollar increases its cost.
|
|
2.
|
Factory input costs: NIKE operates a foreign currency adjustment program with certain factories. The program is designed to more effectively manage foreign currency risk by assuming certain of the factories’ foreign currency exposures, some of which are natural offsets to our existing foreign currency exposures. Under this program, our payments to these factories are adjusted for rate fluctuations in the basket of currencies (“factory currency exposure index”) in which the labor, materials and overhead costs incurred by the factories in the production of NIKE branded products (“factory input costs”) are denominated.
|
For the currency within the factory currency exposure indices that is the local or functional currency of the factory, the currency rate fluctuation affecting the product cost is recorded within
Inventories
and is recognized in
Cost of sales
when the related product is sold to a third-party. All currencies within the indices, excluding the U.S. Dollar and the local or functional currency of the factory, are recognized as embedded derivative contracts and are recorded at fair value through
Other (income) expense, net
. Refer to
Note 9 — Risk Management and Derivatives
in the accompanying Notes to the Unaudited Condensed Consolidated Financial Statements for additional detail.
As an offset to the impacts of the fluctuating U.S. Dollar on our non-functional currency denominated product purchases described above, a strengthening U.S. Dollar against the foreign currencies within the factory currency exposure indices decreases NIKE’s U.S. Dollar inventory cost. Conversely, a weakening U.S. Dollar against the indexed foreign currencies increases our inventory cost.
|
|
•
|
Non-Functional Currency Denominated External Sales — A portion of our Western Europe and Central & Eastern Europe geography revenues, as well as a portion of our Converse European operations revenues, are earned in currencies other than the Euro (e.g. the British Pound) but are recognized at a subsidiary that uses the Euro as its functional currency. These sales generate a foreign currency exposure.
|
|
|
•
|
Other Costs — Non-functional currency denominated costs, such as endorsement contracts, also generate foreign currency risk, though to a lesser extent. In certain cases, the Company has also entered into other contractual agreements which have payments that are indexed to foreign currencies and create embedded derivative contracts that are recorded at fair value through
Other (income) expense, net
.
Refer to
Note 9 — Risk Management and Derivatives
in the accompanying Notes to the Unaudited Condensed Consolidated Financial Statements for additional detail.
|
|
|
•
|
Non-Functional Currency Denominated Monetary Assets and Liabilities — Our global subsidiaries have various assets and liabilities, primarily receivables and payables, including intercompany receivables and payables, denominated in currencies other than their functional currencies. These balance sheet items are subject to re-measurement which may create fluctuations in
Other (income) expense, net
within our consolidated results of operations.
|
Managing Transactional Exposures
Transactional exposures are managed on a portfolio basis within our foreign currency risk management program. We manage these exposures by taking advantage of natural offsets and currency correlations that exist within the portfolio and may also elect to use currency forward and option contracts to hedge the remaining effect of exchange rate fluctuations on probable forecasted future cash flows, including certain product cost exposures, non-functional currency denominated external sales and other costs described above. Generally, these are accounted for as cash flow hedges in accordance with U.S. GAAP, except for hedges of the embedded derivative components of the product cost exposures and other contractual agreements as discussed above.
Certain currency forward contracts used to manage the foreign exchange exposure of non-functional currency denominated monetary assets and liabilities subject to re-measurement and embedded derivative contracts are not formally designated as hedging instruments under U.S. GAAP. Accordingly, changes in fair value of these instruments are immediately recognized in
Other (income) expense, net
and are intended to offset the foreign currency impact of the re-measurement of the related non-functional currency denominated asset or liability or the embedded derivative contract being hedged.
Refer to
Note 4 — Fair Value Measurements
and
Note 9 — Risk Management and Derivatives
in the accompanying Notes to the Unaudited Condensed Consolidated Financial Statements for additional description of how the above financial instruments are valued and recorded, as well as the fair value of outstanding derivatives at each reported period end.
Translational Exposures
Many of our foreign subsidiaries operate in functional currencies other than the U.S. Dollar. Fluctuations in currency exchange rates create volatility in our reported results as we are required to translate the balance sheets, operational results and cash flows of these subsidiaries into U.S. Dollars for consolidated reporting. The translation of foreign subsidiaries’ non-U.S. Dollar denominated balance sheets into U.S. Dollars for consolidated reporting results in a cumulative translation adjustment to
Accumulated other comprehensive income
within
Shareholders’ equity
. In the translation of our Unaudited Condensed Consolidated Statements of Income, a weaker U.S. Dollar in relation to foreign functional currencies benefits our consolidated earnings whereas a stronger U.S. Dollar reduces our consolidated earnings. The impact of foreign exchange rate fluctuations on the translation of our consolidated
Revenues
was a detriment of approximately $132 million and $493 million for the three months ended February 28, 2017 and February 29, 2016, respectively. The impact of foreign exchange rate fluctuations on the translation of our
Income before income taxes
was a detriment of approximately $31 million and $104 million for the three months ended February 28, 2017 and February 29, 2016, respectively. The impact of foreign exchange rate fluctuations on the translation of our consolidated
Revenues
was a detriment of approximately $412 million and $1,780 million for the nine months ended February 28, 2017 and February 29, 2016, respectively. The impact of foreign exchange rate fluctuations on the translation of our
Income before income taxes
was a detriment of approximately $79 million and $407 million for the nine months ended February 28, 2017 and February 29, 2016, respectively.
Managing Translational Exposures
To minimize the impact of translating foreign currency denominated revenues and expenses into U.S. Dollars for consolidated reporting, certain foreign subsidiaries use excess cash to purchase U.S. Dollar denominated available-for-sale investments. The variable future cash flows associated with the purchase and subsequent sale of these U.S. Dollar denominated investments at non-U.S. Dollar functional currency subsidiaries creates a foreign currency exposure that qualifies for hedge accounting under U.S. GAAP. We utilize forward contracts and/or options to mitigate the variability of the forecasted future purchases and sales of these U.S. Dollar investments. The combination of the purchase and sale of the U.S. Dollar investment and the hedging instrument has the effect of partially offsetting the year-over-year foreign currency translation impact on net earnings in the period the investments are sold. Hedges of the purchase of U.S. Dollar denominated available-for-sale investments are accounted for as cash flow hedges.
Refer to
Note 4 — Fair Value Measurements
and
Note 9 — Risk Management and Derivatives
in the accompanying Notes to the Unaudited Condensed Consolidated Financial Statements for additional description of how the above financial instruments are valued and recorded as well as the fair value of outstanding derivatives at each reported period end.
We estimate the combination of translation of foreign currency-denominated profits from our international businesses and the year-over-year change in foreign currency related gains and losses included in
Other (income) expense, net
had a favorable impact of approximately $24 million and an unfavorable impact of approximately $2 million on our
Income before income taxes
for the
three and nine months ended February 28, 2017
, respectively.
Net Investments in Foreign Subsidiaries
We are also exposed to the impact of foreign exchange fluctuations on our investments in wholly-owned foreign subsidiaries denominated in a currency other than the U.S. Dollar, which could adversely impact the U.S. Dollar value of these investments, and therefore the value of future repatriated earnings. We have, in the past, hedged and may, in the future, hedge net investment positions in certain foreign subsidiaries to mitigate the effects of foreign exchange fluctuations on these net investments. These hedges are accounted for in accordance with U.S. GAAP. There were no outstanding net investment hedges as of
February 28, 2017
and
February 29, 2016
. There were no cash flows from net investment hedge settlements for the
three and nine months ended February 28, 2017
and
February 29, 2016
.
|
|
Liquidity and Capital Resources
|
Cash Flow Activity
Cash provided by operations
was
$2,751 million
for the first nine months of fiscal 2017 compared to
$1,912 million
for the first nine months of fiscal 2016. Our primary source of operating cash flows for the first nine months of fiscal 2017 was
Net income
of
$3,232 million
compared to
$2,914 million
for the first nine months of fiscal 2016. Operating cash flows also increased due to changes in working capital, which resulted in a cash outflow of
$882 million
for the first nine months of fiscal 2017 compared to an outflow of
$1,863 million
for the first nine months of fiscal 2016. The change in working capital was primarily due to an $818 million net change in the amount of posted cash collateral with derivative counterparties as a result of hedging activities. For the first nine months of fiscal 2017, cash collateral received from counterparties increased $188 million as compared to a decrease of $630 million during the first nine months of fiscal 2016. Refer to the Credit Risk section of
Note 9 — Risk Management and Derivatives
in the accompanying
Notes to the Unaudited Condensed Consolidated Financial Statements
for additional detail.
Cash used by investing activities
was
$488 million
for the first nine months of fiscal 2017 compared to
$544 million
for the first nine months of fiscal 2016. The primary driver of the change in
Cash used by investing activities
was a reduction in cash used for property, plant and equipment additions from
$901 million
for the first nine months of fiscal 2016 to
$776 million
for the first nine months of fiscal 2017.
Cash used by investing activities
also decreased as a result of an increase in net sales/maturities of short-term investments (including sales, maturities and purchases) of
$201 million
in the first nine months of fiscal 2016 compared to
$309 million
for the first nine months of fiscal 2017. These declines in cash used by investing activities were partly offset by the maturity of reverse repurchase agreements of
$150 million
in the first nine months of fiscal 2016 which did not recur in the first nine months of fiscal 2017.
Cash used by financing activities
was
$1,350 million
for the first nine months of fiscal 2017 compared to
$2,045 million
for the first nine months of fiscal 2016, primarily driven by increased proceeds from the issuance of debt and lower share repurchases, partially offset by higher dividends.
During the first nine months of fiscal 2017, we purchased
44.8 million
shares of NIKE's Class B Common Stock for
$2,429 million
(an average price of
$54.23
per share) under the four-year, $12 billion share repurchase program approved by the Board of Directors in November 2015. As of
February 28, 2017
, we had repurchased
64.9 million
shares at a cost of approximately
$3,617 million
(an average price of
$55.78
per share) under this program. We continue to expect funding of share repurchases will come from operating cash flows, excess cash and/or proceeds from debt. The timing and the amount of shares purchased will be dictated by our capital needs and stock market conditions.
Capital Resources
On July 21, 2016, we filed a shelf registration statement (the “Shelf”) with the SEC which permits us to issue an unlimited amount of debt securities. The Shelf expires on July 21, 2019. On October 21, 2016, we issued $1.5 billion of senior notes with tranches maturing in 2026 and 2046. The 2026 senior notes were issued in an initial aggregate principal amount of $1.0 billion at a 2.375% fixed, annual interest rate and will mature on November 1, 2026. The 2046 senior notes were issued in an initial aggregate principal amount of $500 million at a 3.375% fixed, annual interest rate and will mature on November 1, 2046. Interest on the senior notes is payable semi-annually on May 1 and November 1 of each year. The issuance resulted in proceeds before expenses of $1,493 million. Refer to
Note 5 — Long-Term Debt
in the accompanying Notes
to the Unaudited Condensed Consolidated Financial Statements
for additional detail on
Long-term debt
.
On August 28, 2015, we entered into a committed credit facility agreement with a syndicate of banks, which provides for up to $2 billion of borrowings. The facility matures August 28, 2020, with a one year extension option prior to any anniversary of the closing date, provided that in no event shall it extend beyond August 28, 2022. As of and for the
nine month period ended
February 28, 2017
, we had no amounts outstanding under the committed credit facility.
We currently have long-term debt ratings of AA- and A1 from Standard and Poor's Corporation and Moody's Investor Services, respectively. If our long-term debt rating were to decline, the facility fee and interest rate under our committed credit facility would increase. Conversely, if our long-term debt rating were to improve, the facility fee and interest rate would decrease. Changes in our long-term debt rating would not trigger acceleration of maturity of any then-outstanding borrowings or any future borrowings under the committed credit facility. Under this committed revolving credit facility, we have agreed to various covenants. These covenants include limits on our disposal of fixed assets and the amount of debt secured by liens we may incur, as well as limits on the indebtedness we can incur relative to our net worth. In the event we were to have any borrowings outstanding under this facility and failed to meet any covenant, and were unable to obtain a waiver from a majority of the banks in the syndicate, any borrowings would become immediately due and payable. As of
February 28, 2017
, we were in full compliance with each of these covenants and believe it is unlikely we will fail to meet any of these covenants in the foreseeable future.
Liquidity is also provided by our $2 billion commercial paper program.
During the nine months ended
February 28, 2017
, the maximum amount of commercial paper borrowings outstanding at any point was $919 million. As of
February 28, 2017
, there were no outstanding borrowings under this program. We may continue to issue commercial paper or other debt securities during
fiscal 2017
depending on general corporate needs.
We currently have short-term debt ratings of A1+ and P1 from Standard and Poor's Corporation and Moody's Investor Services, respectively.
As of
February 28, 2017
, we had cash, cash equivalents and short-term investments totaling
$6.2 billion
, of which $5.2 billion was held by our foreign subsidiaries. Cash equivalents and short-term investments consist primarily of deposits held at major banks, money market funds, commercial paper, corporate notes, U.S. Treasury obligations, U.S. government sponsored enterprise obligations and other investment grade fixed-income securities. Our fixed-income investments are exposed to both credit and interest rate risk. All of our investments are investment grade to minimize our credit risk. While individual securities have varying durations, as of
February 28, 2017
, the average duration of our cash equivalents and short-term investments portfolio was 61 days.
To date we have not experienced difficulty accessing the credit markets or incurred higher interest costs. Future volatility in the capital markets, however, may increase costs associated with issuing commercial paper or other debt instruments or affect our ability to access those markets. We believe that existing cash, cash equivalents, short-term investments and cash generated by operations, together with access to external sources of funds as described above, will 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 U.S. taxes have previously been provided. We also indefinitely reinvest a significant portion of our foreign earnings, and our current plans do not demonstrate a need to repatriate these earnings. Should we require additional capital in the United States, we may elect to repatriate indefinitely reinvested foreign funds or raise capital in the United States through debt. If we were to repatriate indefinitely reinvested foreign funds, we would be required to accrue and pay additional U.S. taxes less applicable foreign tax credits. If we elect to raise capital in the United States through debt, we would incur additional interest expense
.
Contractual Obligations
As a result of our October 2016 debt issuance, cash payments due on long-term debt have increased from what was reported in our Annual Report on Form 10-K for the fiscal year ended
May 31, 2016
.
Long-term debt obligations as of
February 28, 2017
are as follows:
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Description of Commitment
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Cash Payments Due During the Year Ending May 31,
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(In millions)
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Remainder of 2017
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2018
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2019
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2020
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2021
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Thereafter
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Total
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Long-Term Debt
(1)
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$
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55
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$
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115
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$
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115
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$
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115
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$
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112
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$
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5,432
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$
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5,944
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(1)
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The cash payments due for long-term debt include estimated interest payments. Estimates of interest payments are based on outstanding principal amounts, applicable fixed interest rates or currently effective interest rates as of
February 28, 2017
(if variable), timing of scheduled payments and the term of the debt obligations.
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Other than the changes reported above, there have been no significant changes to the contractual obligations reported in our Annual Report on Form 10-K for the fiscal year ended
May 31, 2016
.
Off-Balance Sheet Arrangements
As of
February 28, 2017
, we did not have any off-balance sheet arrangements that have, or are reasonably likely to have, a current or future effect on our financial condition, results of operations, liquidity, capital expenditures or capital resources.
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New Accounting Pronouncements
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Refer to
Note 1 — Summary of Significant Accounting Policies
in the accompanying Notes to the Unaudited Condensed Consolidated Financial Statements for recently adopted and recently issued accounting standards.
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Critical Accounting Policies
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Our discussion and analysis of our financial condition and results of operations are based upon our Unaudited Condensed Consolidated Financial Statements, which have been prepared in accordance with U.S. GAAP. The preparation of these financial statements requires us to make estimates and judgments that affect the reported amounts of assets, liabilities, revenues and expenses and related disclosure of contingent assets and liabilities.
We believe that the estimates, assumptions and judgments involved in the accounting policies described in the “Management’s Discussion and Analysis of Financial Condition and Results of Operations” section of our most recent Annual Report on Form 10-K have the greatest potential impact on our financial statements, so we consider these to be our critical accounting policies. Actual results could differ from the estimates we use in applying our critical accounting policies. We are not currently aware of any reasonably likely events or circumstances that would result in materially different amounts being reported.