Financial Analysis Of Nike's Performance For FY2017 Essay.

1. What was Nike’s total revenue during the fiscal year ending on 5/31/2017?

2. What were the total gross and net accounts receivables for Nike on 5/31/2017?

3. Was Nike’s bad debt expense higher, equal or lower than actual write off of accounts receivable during the fiscal year ending on 5/31/2017? Briefly explain your answer.

4. What was the total inventory for Nike on 5/31/2017?

5. What was Nike’s Gross Profit Margin during the fiscal year ending on 5/31/2017? How do you interpret this number?

6. One of Nike’s main competitors reported the following information for the 2017 fiscal year:
   Revenue under LIFO (in millions):                $3,963
   COGS under LIFO (in millions):                    $2,259
   LIFO Reserve: $422 (in millions) in 2016, $518 (in millions) in 2017
   
   Was Nike’s Gross Profit Margin higher, the same or lower than its competitor’s during the fiscal year ending on 5/31/2017? Provide the calculations to support your answer.

7. What were the total gross and net Property, Plant and Equipment (PPE) for Nike on 5/31/2017? How do you interpret these amounts?
   
   In answering questions 8-12, assume that the transactions described below are in addition to those in the financial statements you have. For example, Nike shows $3,808 million in cash and equivalents on 5/31/2017.  Any cash generated/used by the following transactions are in addition to this $3,808 million.
   
   Suppose Nike was considering one of the two alternatives to finance a set of machines for its Flyknit shoe lines. Also assume the decision is made on the very first day of the following fiscal year (that is, on 6/1/2017).
   
   Issue a par bond with a face value of $50 million and a coupon rate of 2%. The face value is due at the end of year 5. Invest the proceeds from the bond to purchase the machines (recorded as Property, Plant and Equipment). The machines have a useful life of five years and zero salvage value.
   
   Sign a rental agreement of five payments of $10.06 million per year. The lease will be treated as an operating lease for accounting purposes.

8. Use the Balance Sheet Equation (BSE) to identify the transactions Nike would record to reflect the issuance of the bond and the acquisition of the PPE (option A) at the decision date. That is, at the beginning of the 2018 fiscal year on 6/1/2017.

9. Use the Balance Sheet Equation (BSE) to identify the transactions Nike would record to reflect the issuance of the bond and the acquisition of the PPE (option A) at the end of the next fiscal year on 5/31/2018.

10. Use the Balance Sheet Equation (BSE) to identify the transactions Nike would record to reflect the rental agreement (option B) at the decision date. That is, at the beginning of the 2018 fiscal year on 6/1/2017.

11. Use the Balance Sheet Equation (BSE) to identify the transactions Nike would record to reflect the rental agreement (option B) at the end of the next fiscal year on 5/31/2018.

12. Suppose that the bonus plan for Nike’s employees is partially tied to a performance metric such as return on assets (ROA). How would the two options above affect the return on assets (ROA), and ultimately the bonus plan, during the 2018 fiscal year? In 1-2 sentences explain your answer. Ignore taxes.

13. What was the total net identifiable intangible assets for Nike on 5/31/2017? What do these intangibles consist of?

14. What was the total goodwill for Nike on 5/31/2017?

15. Did Nike impair its goodwill during the fiscal year ending on 5/31/2017? If so, by how much?
    
    In answering questions 16-20, assume that the transactions described below are in addition to those in the financial statements you have. For example, Nike shows $3,808 million in cash and equivalents on 5/31/2017.  Any cash generated/used by the following transactions are in addition to this $3,808 million.
    
    Suppose Nike was considering one of the two alternatives to invest in a new technology of its Dry Fit shirts. Also assume the decision is made on the very first day of the following fiscal year (that is, on 6/1/2017).
    
    Spend $10 million per year over the next three years. This decision would be treated as Research and Development for accounting purpose
    
    Acquire a startup that has developed a recent Dry Fit technology for $40 million. The acquisition cost consists of a patent worth of $32 million and $8 million of acquisition synergies. The patent has a useful life of four years.

16. Use the Balance Sheet Equation (BSE) to identify the transactions Nike would record to reflect the R&D investment (option A) at the decision date. That is, at the beginning of the 2018 fiscal year on 6/1/2017.

17. Use the Balance Sheet Equation (BSE) to identify the transactions Nike would record to reflect the R&D investment (option A) at the end of the next fiscal year on 5/31/2018.

18. Use the Balance Sheet Equation (BSE) to identify the transactions Nike would record to reflect the acquisition (option B) at the decision date. That is, at the beginning of the 2018 fiscal year on 6/1/2017.

19. Use the Balance Sheet Equation (BSE) to identify the transactions Nike would record to reflect the acquisition (option B) at the end of the next fiscal year on 5/31/2018. Assume that the value of the goodwill was impaired by $1 million during the 2018 fiscal year.

20. Which of the two options would result in a higher net income during the 2018 fiscal year? In 1-2 sentences explain your answer. Ignore taxes.

21. Use the DuPont decomposition learned in class to decompose Nike’s return on equity (ROE) into (i) Profit Margin, (ii) Asset Turnover and (iii) Leverage. For this question use the numbers as reported in the financial statements without any adjustments.

22. One of Nike’s main competitors reported the following information for the 2017 fiscal year:
    
    ROE:                                     15.35%
    ROA:                                      9.36%
    Profit Margin:                          5.85%
    Asset Turnover:                      1.60
    Leverage:                              1.64
    
    How do you compare Nike to its competitors? Use different metrics to substantiate your answer.

23. What was Nike’s effective tax rate during the fiscal year ending on 5/31/2017? Which factor contributed to the largest difference between the effective tax rate and the statutory rate?

24. Provide an example of Nike’s accrued liabilities during the fiscal year ending on 5/31/2017? Use the Balance Sheet Equation (BSE) to record this transaction.

25. How much cash did Nike return to its investors in the form of dividends and share repurchases during the fiscal year ending on 5/31/2017?

26. Did Nike buy/sell marketable securities in the form of short-term investments using cash during the fiscal year ending on 5/31/2017? If so, by how much?

27. What was Nike’s total advertising and promotion expenses (or demand creation expense) during the fiscal year ending on 5/31/2017

28. What were Nike’s cash flow from operations (CFO), cash flow from investment (CFI) and cash flow from financing (CFF) during the fiscal year ending on 5/31/2017? Based on these numbers which stage of life cycle is Nike in?

1.

Revenue for FY2017 was $34,350 million.

2.

The net accounts receivables for Nike for the year ending on May 31, 2017 was $ 3,677 million.

The gross accounts receivables for Nike for the year ending on May 31, 2017 was $3,696 million

3.

The write off during the FY2017 for bad debts was $ 17 million while the actual bed debt expense at $ 13 million was smaller than that written off.

4.

The inventory as on May 31, 2017 was $ 5,055 million.

5.

Gross profit (FY2017) = $15,312 million

Revenue (FY2017) = $34,350 million

Gross profit margin = (15312/34350)*100 = 44.58%

The gross profit margin implies that 44.58% of the sales amount would be gross profit.

6.

In the given case, conversion would first need to be done into FIFO considering that Nike uses the FIFO method to measure costs.

COGS under FIFO = COGS under LIFO + Change in LIFO Reserve = 2259 + (518-422)= $ 2,355 million

Revenue = $3,963 million

Gross profit = 3963-2355 = $1,608 million

Gross profit (%) = (1608/3963)*100 = 40.58%

Clearly Nike’s gross margin is higher than the competitor.

7.

Total gross PPE as on May 31, 2017 = $7.958 million

Net PPE as on May 31, 2017 = $3.989 million

The difference between the two is attributed to accumulated depreciation.

8.

The balance sheet equation for the issue of bonds is indicated below

Assets (+$50 million) = Liabilities (+50 million) + Equity (No change)

There would be an increase in cash by $ 50 million owing to bonds which issued which lead to non-current liability for bonds payable to the same amount.

The balance sheet equation for the purchase of PPE is indicated below

Assets (No change) = Liabilities (No change) + Equity (No change)

The cash in the current asset is now used to buy PPE and hence indicated as fixed assets.

9.

The balance sheet equation for the issue of bonds one year later is indicated below

Assets (-$1 million) = Liabilities (No effect) + Equity (-$1 million)

There is an interest payment of $ 1 million (i.e. 2% of $ 50 million) resulting in cash reduction and this would reduce the net profit to the same extent and adversely impact the retained earnings.

The balance sheet equation for the purchase of PPE one year later is indicated below.

Assets (-$ 10 million) = Liabilities (No effect) + Equity (-$10 million)

Inventory

There is a depreciation to the tune of $ 10 million (50/5 =10 million) which would reduce the value of the fixed assets and this depreciation would lead to lower profits and lower increase in retained earnings.

10.

The balance sheet equation for the rental agreement on the decision date is indicated below

Assets (No effect) = Liabilities (No effect) + Equity (No effect)

Since the given transaction is an operating lease, hence asset would not be recognised in the balance sheet and corresponding no liability also recorded.

11.

The balance sheet equation for the rental agreement after one year from decision date is indicated below

Assets (-$10.06 million) = Liabilities (No effect) + Equity (-$10.06 million)

There is a rental payment of $ 10.06 million  leading to reduction of cash and this would reduce the net profit to the same extent and adversely impact the retained earnings.

12.

Owing to the given transactions, it is apparent that there would be a decrease in the net income by $21.06 million owing to rental payment, interest payment and incremental depreciation. The same amount of decline would also be observed in the total assets. But since total assets are greater than net income, hence the % decrease in net income would be greater than the % decrease in total assets, leading to decline of ROA.

13.

Total net identifiable intangible assets for Nike as on May31, 2017 = $283 million.

These primarily constitute of trademarks and goodwill.

14.

The goodwill for the company as on May 31, 2017 is $139 million.

15.

There was no impairment in the goodwill as on May 31, 2017 as specified in Note 4 dealing with intangible assets and goodwill.

16.

The balance sheet equation for the decision to invest in R&D at the decision date is indicated below

Assets (No effect) = Liabilities (No effect) + Equity (No effect)

No asset would be created till any money is spent on R&D. Only decision has been taken to invest.

17.

The balance sheet equation for the decision to invest in R&D one year later is indicated below.

Assets (No effect) = Liabilities (No effect) + Equity (No effect)

$ 10 million would be decreased in cash and $ 10 million would be invested in fixed assets. Hence, no net effect on asset. Liabilities and equity remain un-impacted.

18.

The balance sheet equation for the decision to acquire the firm on the acquisition date is indicated below.

Gross Profit Margin

Assets (No effect) = Liabilities (No effect) + Equity (No effect)

$ 40 million would be decreased in cash but $ 32 million would be recorded as patent and $ 8 million as goodwill. Thus, assuming all payment in cash for the acquisition, there would be no net change in the total assets. Liabilities and equity remain un-impacted.

19.

The balance sheet equation for the decision to acquire the firm after one year from the acquisition date is indicated below.

Assets (-$9 million) = Liabilities (No effect) + Equity (-$ 9 million)

An impairment of $ 1 million is recorded for goodwill. Also, an impairment for patent to the extent of (32/4) = $ 8 million would be recorded. Hence, the fixed assets would decline by $ 9 million. This impairment charges would be reflected in the income statement and hence would impact retained earnings to the same extent.

20.

Option 1 where the spending is on R&D would result in higher income considering that the amortization liability does not exist which is not the case with the second option.

21.

As per DuPont decomposition, ROE can be computed as follows.

ROE = Profit Margin * Asset Turnover * Leverage

Profit Margin = (Net income/Sales) = (4240/34350) = 0.1234 or 12.34%

Asser Turnover = (Sales/Average Assets) = (34350/(23259+21379)/2) = 1.54

Leverage = (Average Assets/Average Equity) = ((23259+21379)/2)/((12407+12258)/2) =1.81

Hence, ROE = 12.34*1.54*1.81 = 34.38%

22.

The profit margin of Nike at 12.34% is significantly superior in comparison to the competitor which has a profit margin of only 5.85%.  Additionally, the ROE for Nike is also comparatively much superior to the competitor. However, asset turnover is marginally lower in comparison to the competitor.

23.

Effective tax rate = Income tax expense/Profit before tax = (646/4886) = 13.22%

Clearly, this is significantly lower than the statutory rate of 35%. The factor which contributed to the largest difference between the effective and statutory tax rate is the foreign earnings which led to drop by about 20.7%.

24.

An example of accrued liabilities is in the form of dividends payable to the extent of $ 300 million for FY2017. The requisite balance sheet equation is as highlighted below.

Assets (+300 million) = Liabilities (+300 million) + Equity (No effect)

Owing to dividends not being paid, the cash would be higher by $ 300 million which would balance the liability increase by the same amount.

25.

Total dividends paid for FY2017 = $1,133 million

Share repurchases in FY2017 = $ 3,223 million

26.

The company has bought incremental marketable securities to the extent of $ 52 million in the year FY2017 which is apparent based on the comparison for the corresponding figure with value for FY2016.

27..

Demand creation expense for FY2017 = $ 3,341 million

28..

Cash flow from Operations (FY2017) = $3,640 million

Cash flow from Investment (FY2017) = -$1,008 million

Cash flow from Financing (FY2017) = -$1,942 million

The company seems to be in maturity phase owing to the cash flow from operations being significant. However, the company is still investing and raising cash which means that the company is not in the decline phase. Also, there is an increase in the net cash balance for FY2017 which does not happen in the growth phase.