Annual Report Analysis

Annual Report Analysis

Nike Inc.

Melody Price

ACCT-304

August 15, 2013

Professor MoniqueSmalling

DeVry University Online

Table of Contents

Introduction…………………………………………………………………………………………………3

Auditors……………………………………………………………………………………………………..3

Material Effects on the Financial Statements………………………………………………………………3

Trends in Total Assets and Total Liabilities………………………………………………………….…….4

Largest Assets………………………………………………………………………………………………4

Largest Liabilities…………………………………………………………………………………………..4

Company Stock……………………………………………………………………………………….…….5

Method Used for Income Statement………………………………………………………………….…….5

Extraordinary Items………………………………………………………………………………………...5

Trends in Net Income………………………………………………………………………………………6

Other Comprehensive Income……………………………………………………………………………...6

Method Used for the Statement of Cash Flows…………………………………………………………….6

Trends in Cash from Operations……………………………………………………………………………7

Cash from Investing Activities…………………………………………………………………………….7

Conclusion………………………………………………………………………………………………….7

Works Cited………………………………………………………………………………………………...8

Introduction

The purpose is to analyze annual report of NIKE, Inc. The company was established in 1968 and its main business is to design, develop, market and sell the athletic footwear, apparel, equipment, accessories and services throughout the world. It was listed on NYSE in 1990 and its symbol is NKE. It belongs to Footwear industry. It has around 890 millions of common stock outstanding with market capitalization of around $58 billion. The report covers various aspects of annual report for the year ended 2013 and 2012, which includes auditor’s opinion, assets, liabilities, income statement, statement of cash flows, common stock and material effects on financial statements.

Auditors

PRICEWATERHOUSECOOPERS LLP is the external auditor of the company. It is the responsibility of the external auditor to make sure that the company financial statements gives a true and fair view of the financial position of the company and it is the responsibility of the auditor t make sure that the management has taken every step to make sure to present fair financial statements. The auditor has given the clean opinion on this report and has verified the fact that the financial statements present a fair view of the financial position of the company and they are in accordance with the generally accepted accounting principles being followed in USA. The auditor has also verified the fact that the company has applied internal control over financial reporting, but at the same time it has also been admitted that there is inherent limitation over internal control, due to which some of the misstatements cannot be detected.

Material Effects on the Financial Statements

The company is committed to pay minimum lease payment under operating lease and capital lease. The amount of minimum payment of non cancellable lease for next years from 2014 to 2018 are $403millioon, $340million, $304 million, $272million, $225million and $816 million after 2018. The company is committed to pay minimum lease payment under capital lease for next four years till 2017 amounted to $23million, $28million, $21million and $9 million in each of the four years respectively. The letter of credit outstanding at the yearend May 31, 2013 is around $149 million. There any many legal proceeding in the court related to contractual and employment relationship, product liability claim, trademark rights and variety of other matters. The outcomes of these proceedings are unknown, but it might have negative impact in the future and which may reduce the profitability of the company.

Trends in Total Assets and Total Liabilities

in billions in $ / 2013 / 2012 / Difference / % Change
Total Assets / 17.6 / 15.5 / 2.1 / 13.5%
Total Liabilities / 6.4 / 5.1 / 1.3 / 25.5%

The above table shows that the trend of total assets and total liabilities for the year ended 2013 was increasing as compared to the year ended 2012. Total assets were around $2.1 billion higher and total liabilities were around $1.3 billion higher in 2013 as compared to 2012. It shows an increase of around 14% in total assets and around 26% in total liabilities in 2013 as compared to 2012. The amount of increase in total assets was more than increase in total liabilities, but in percentage term it is vice versa. It shows that the company has used more debt financing than equity financing, to provide the assets in 2013.

Largest Assets

in billions in $ / 2013
Inventories / 3.4
Cash & Cash Equivalents / 3.3
Account Receivable / 3.1
Total / 9.8

The above are the three largest assets of the company for the year ended 2013. These three belongs to current assets and they are the main components of working capital of the business. They are around $9.8 billion in total and comprise around 56% of total assets. It shows that the company heavily relies on these current assets to run its operation.

Largest Liabilities

in billions in $ / 2013
Accrued Liabilities / 2
Account Payable / 1.6
Deferred Income taxes and other Liabilities / 1.3
Total / 4.9

The above are the three largest liabilities for the year ended 2013. Accrued liabilities and accounts payable belong to current liabilities and deferred income taxes and other liabilities belong to long term liabilities. They are around $4.9 billion and comprise around 77% of total liabilities of the company for the year ended 2013. But they are around 50% of three largest assets shown above.

Company Stock

The company has following types of stocks:

• Redeemable Preferred Stock
• Common Stock Convertible Class A
• Common Stock Class B

The 300000 shares of redeemable preferred stock is only hold by Sojitz America amounted to $0.3 million, with a right to receive $0.10 per share as dividend annually. The stocks are redeemable at the option of Sojitz America or NIKE.

The class A of common stock convertible to common stock class B. Both classes of common stock do not have any par value. The number of shares outstanding for class A is 178 million shares and 716 million shares, respectively.

Method Used for Income Statement

The single step income statement does not provide detail of income for each segment of business, while it can be done by using multiple step income statement. The company income statement has apparently used the multiple step income statement approach, but does not show the operating income or earnings before interest and taxes. The company has shows the gross profit earned by the business after deducting cost of goods sold from sales. Then operating expenses, interest expenses and other income have been adjusted to arrive at the income before taxes to make sure that company is earning enough to make payment for taxes. Finally the taxes are deducted from income before taxes to arrive at net income from continuing operation. The net income from discontinued operation was added to arrive at overall net income. But it would be better for the company to show operating income after deducting selling and administration expenses from gross profit to arrive at operating income or earnings before interest and taxes, but it seems that it has been done intentionally as the amount of interest expenses and other income is very small and immaterial.

Extraordinary Items

There is no extra ordinary item, but there is net income or net loss from discontinued operation for the year ended 2013 and 2012, being analyzed. The company has shown net income of around $21 million in 2013 and net loss of around $46 million from discontinued operation. During the year ended 2013, the company divested Umbro and Cole Haan. These disinvestment generated revenue of around $508 million and income before taxes of around $108 million. Out of this income $87 million were paid as taxes, therefore net income after taxes from discontinued operation amounted to $21 million in 2013.

Trends in Net Income

in billions in $ / 2013 / 2012 / Difference / % Change
Revenues / 25.3 / 23.3 / 2 / 8.6%
Cost of goods sold / 14.3 / 13.2 / 1.1 / 8.3%
Gross Profit / 11 / 10.1 / 0.9 / 8.9%
Less Operating overhead / 7.7 / 7.1 / 0.6 / 8.5%
Income before taxes / 3.3 / 3 / 0.3 / 10.0%
less taxes / 0.8 / 0.7 / 0.1 / 14.3%
Income from continuingoperation / 2.5 / 2.3 / 0.2 / 8.7%
Net income (loss) from discontinued operation / 0.21 / -0.46 / 0.67 / 145.7%
Net income / 2.5 / 2.2 / 0.3 / 13.6%

The above table suggests that the trend of net income was increasing. It went up by around 14% in 2013 as compared to 2012. It was mainly due to increase in revenues of 9% in 2013 as compared to 2012. All expense including cost of goods sold and operating overhead have shown the same trend and have increased by almost the same percentage as the revenue increased. However the net income from discontinued operation in 2013 as compared to loss from discontinued operation in 2012 has increased the net income at faster pace than increase in revenue.

Other Comprehensive Income

The other comprehensive do exist in annual report. It was around $125 million in 2013. It comprises of $30 million from foreign currency translation and other, $117 million from gain on cash flow hedges, $83 million from release of translation loss of Umbro and $105 million of reclassification of losses from derivative hedge instruments.

Method Used for the Statement of Cash Flows

The company has prepared cash flow statement using the indirect method. The difference in direct and indirect method can be known by looking at operating activities cash flow, when non cash item and changes in working capital is adjusted to net income, it is called indirect method. There is no difference in the presentation of other two activities related to cash flow, whichever method is used. As the company has made adjustments to net income therefore it can be easily said that company has used indirect method.

Trends in Cash from Operations

in billions in $ / 2013 / 2012 / Difference / % Change
Net Income / 2.5 / 2.2 / 0.3 / 13.6%
Non Cash Items / 0.64 / 0.5 / 0.14 / 28.0%
Items not related to operating activities / -0.1 / 0 / -0.1 / NA
Changes in Working Capital / -0.04 / -0.8 / 0.76 / 95.0%
Cash flow from operating activities / 3 / 1.9 / 1.1 / 57.9%

The cash flow form operation is showing an increasing trend. It went up by around $1.1 billion in 2013 as compared to 2012 and it was around 58% higher than 2012. The increase was due to increase in net income of around 14% and adjustment for working capital which was around $0.76 billion lower than 2012.

Cash from Investing Activities

The two largest items in investing activities are Purchase of Short Term Investment and Maturities of Short Term Investment. The purchases show an outflow of around $3.7billion and $2.7billion in 2013 and 2012, respectively. The maturities show an inflow of around $1.5 billion and $2.6 billion in 2013 and 2012, respectively.

Conclusion

The above analysis shows that the company is very old in the business; it is a reputable firm and listed on New York Stock Exchange since 1990. The annual report is reliable as it has been made in accordance with the generally accepted accounting principles and gives a true and fair view of the financial position of the company. The fact has been verified by the external auditor. It seems that the company is not exposed to any significant commitments or events which may create problem for the company in future. All trends in assets, liabilities, net income and operating cash flow suggest that they are on increasing trend in the year 2013 as compared to 2012. The increase in assets and liabilities suggests that company is growing and expanding its business. However, the company has also divested some of its investment, but it is also for the good purpose of concentrating on core business activities. The increase in net income suggests that company has used its resources efficiently and effectively. The increase in operating cash flow shows the strength of the company to meet any future obligation or contingency or dividend payment. The two largest items of investing activities suggest that company has enough surplus cash to invest in short term investment. Finally, it can be concluded that the overall financial position of the company is good and it may be expected that the future will also be better.

Works Cited

NYSE. (2013).Profile. Retrieved from

NYSE. (2013). Data. Retrieved from

NYSE. (2013). 10-K Report. Retrieved from