filings.toolsItem 8. Financial Statements and Supplementary Data
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Item 8. Financial Statements and Supplementary Data
Management of NIKE, Inc. is responsible for the information and representations contained in this report. The financial statements have been prepared in conformity with accounting principles generally accepted in the United States of America (“U.S. GAAP”) and include certain amounts based on our best estimates and judgments. Other financial information in this report is consistent with these financial statements.
Our accounting systems include controls designed to reasonably assure assets are safeguarded from unauthorized use or disposition and provide for the preparation of financial statements in conformity with U.S. GAAP. These systems are supplemented by the selection and training of qualified financial personnel and an organizational structure providing for appropriate segregation of duties.
An internal Corporate Audit department reviews the results of its work with the Audit Committee of the Board of Directors, presently comprised of four outside, independent directors. The Audit Committee is responsible for the appointment of the independent registered public accounting firm and reviews, with the independent registered public accounting firm, management and the internal audit staff, the scope and the results of the annual audit, the effectiveness of the accounting control system and other matters relating to the financial affairs of NIKE as the Audit Committee deems appropriate. The independent registered public accounting firm and the internal auditors have full access to the Audit Committee, with and without the presence of management, to discuss any appropriate matters.
| Management’s Annual Report on Internal Control Over Financial Reporting |
Management is responsible for establishing and maintaining adequate internal control over financial reporting, as such term is defined in Rule 13(a) - 15(f) and Rule 15(d) - 15(f) of the Securities Exchange Act of 1934, as amended. Internal control over financial reporting is a process designed to provide reasonable assurance regarding the reliability of financial reporting and the preparation of the financial statements for external purposes in accordance with generally accepted accounting principles in the United States of America. Internal control over financial reporting includes those policies and procedures that: (i) pertain to the maintenance of records that, in reasonable detail, accurately and fairly reflect the transactions and dispositions of assets of the Company; (ii) provide reasonable assurance that transactions are recorded as necessary to permit preparation of financial statements in accordance with generally accepted accounting principles, and that receipts and expenditures of the Company are being made only in accordance with authorizations of our management and directors; and (iii) provide reasonable assurance regarding prevention or timely detection of unauthorized acquisition, use or disposition of assets of the Company that could have a material effect on the financial statements.
While “reasonable assurance” is a high level of assurance, it does not mean absolute assurance. Because of its inherent limitations, internal control over financial reporting may not prevent or detect every misstatement and instance of fraud. Controls are susceptible to manipulation, especially in instances of fraud caused by the collusion of two or more people, including our senior management. Also, projections of any evaluation of effectiveness to future periods are subject to the risk that controls may become inadequate because of changes in conditions, or that the degree of compliance with the policies or procedures may deteriorate.
Under the supervision and with the participation of our Chief Executive Officer and Chief Financial Officer, our management conducted an evaluation of the effectiveness of our internal control over financial reporting based upon the framework in Internal Control — Integrated Framework (2013) issued by the Committee of Sponsoring Organizations of the Treadway Commission (COSO). Based on the results of our evaluation, our management concluded that our internal control over financial reporting was effective as of May 31, 2017.
PricewaterhouseCoopers LLP, an independent registered public accounting firm, has audited (1) the Consolidated Financial Statements and (2) the effectiveness of our internal control over financial reporting as of May 31, 2017, as stated in their report herein.
| Mark G. Parker | Andrew Campion |
| Chairman, President and Chief Executive Officer | Chief Financial Officer |
| Report of Independent Registered Public Accounting Firm |
To the Board of Directors and Shareholders of NIKE, Inc.:
In our opinion, the consolidated financial statements listed in the index appearing under Item 15(a)(1) present fairly, in all material respects, the financial position of NIKE, Inc. and its subsidiaries as of May 31, 2017 and 2016, and the results of their operations and their cash flows for each of the three years in the period ended May 31, 2017 in conformity with accounting principles generally accepted in the United States of America. In addition, in our opinion, the financial statement schedule listed in the index appearing under Item 15(a)(2) presents fairly, in all material respects, the information set forth therein when read in conjunction with the related consolidated financial statements. Also in our opinion, the Company maintained, in all material respects, effective internal control over financial reporting as of May 31, 2017, based on criteria established in Internal Control — Integrated Framework (2013) issued by the Committee of Sponsoring Organizations of the Treadway Commission (COSO). The Company’s management is responsible for these financial statements and financial statement schedule, for maintaining effective internal control over financial reporting and for its assessment of the effectiveness of internal control over financial reporting, included in Management’s Annual Report on Internal Control over Financial Reporting appearing under Item 8. Our responsibility is to express opinions on these financial statements, on the financial statement schedule and on the Company’s internal control over financial reporting based on our integrated audits. We conducted our audits in accordance with the standards of the Public Company Accounting Oversight Board (United States). Those standards require that we plan and perform the audits to obtain reasonable assurance about whether the financial statements are free of material misstatement and whether effective internal control over financial reporting was maintained in all material respects. Our audits of the financial statements included examining, on a test basis, evidence supporting the amounts and disclosures in the financial statements, assessing the accounting principles used and significant estimates made by management and evaluating the overall financial statement presentation. Our audit of internal control over financial reporting included obtaining an understanding of internal control over financial reporting, assessing the risk that a material weakness exists and testing and evaluating the design and operating effectiveness of internal control based on the assessed risk. Our audits also included performing such other procedures as we considered necessary in the circumstances. We believe that our audits provide a reasonable basis for our opinions.
A company’s internal control over financial reporting is a process designed to provide reasonable assurance regarding the reliability of financial reporting and the preparation of financial statements for external purposes in accordance with generally accepted accounting principles. A company’s internal control over financial reporting includes those policies and procedures that (i) pertain to the maintenance of records that, in reasonable detail, accurately and fairly reflect the transactions and dispositions of the assets of the company; (ii) provide reasonable assurance that transactions are recorded as necessary to permit preparation of financial statements in accordance with generally accepted accounting principles, and that receipts and expenditures of the company are being made only in accordance with authorizations of management and directors of the company; and (iii) provide reasonable assurance regarding prevention or timely detection of unauthorized acquisition, use, or disposition of the company’s assets that could have a material effect on the financial statements.
Because of its inherent limitations, internal control over financial reporting may not prevent or detect misstatements. Also, projections of any evaluation of effectiveness to future periods are subject to the risk that controls may become inadequate because of changes in conditions, or that the degree of compliance with the policies or procedures may deteriorate.
/S/ PRICEWATERHOUSECOOPERS LLP
Portland, Oregon
July 20, 2017
| NIKE, Inc. Consolidated Statements of Income |
| Year Ended May 31, | ||||||||||||
| (In millions, except per share data) | 2017 | 2016 | 2015 | |||||||||
| Revenues | $ | 34,350 | $ | 32,376 | $ | 30,601 | ||||||
| Cost of sales | 19,038 | 17,405 | 16,534 | |||||||||
| Gross profit | 15,312 | 14,971 | 14,067 | |||||||||
| Demand creation expense | 3,341 | 3,278 | 3,213 | |||||||||
| Operating overhead expense | 7,222 | 7,191 | 6,679 | |||||||||
| Total selling and administrative expense | 10,563 | 10,469 | 9,892 | |||||||||
| Interest expense (income), net | 59 | 19 | 28 | |||||||||
| Other (income) expense, net | (196 | ) | (140 | ) | (58 | ) | ||||||
| Income before income taxes | 4,886 | 4,623 | 4,205 | |||||||||
| Income tax expense | 646 | 863 | 932 | |||||||||
| NET INCOME | $ | 4,240 | $ | 3,760 | $ | 3,273 | ||||||
| Earnings per common share: | ||||||||||||
| Basic | $ | 2.56 | $ | 2.21 | $ | 1.90 | ||||||
| Diluted | $ | 2.51 | $ | 2.16 | $ | 1.85 | ||||||
| Dividends declared per common share | $ | 0.70 | $ | 0.62 | $ | 0.54 |
The accompanying Notes to the Consolidated Financial Statements are an integral part of this statement.
| NIKE, Inc. Consolidated Statements of Comprehensive Income |
| Year Ended May 31, | ||||||||||||
| (In millions) | 2017 | 2016 | 2015 | |||||||||
| Net income | $ | 4,240 | $ | 3,760 | $ | 3,273 | ||||||
| Other comprehensive income (loss), net of tax: | ||||||||||||
| Change in net foreign currency translation adjustment | 16 | (176 | ) | (20 | ) | |||||||
| Change in net gains (losses) on cash flow hedges | (515 | ) | (757 | ) | 1,188 | |||||||
| Change in net gains (losses) on other | (32 | ) | 5 | (7 | ) | |||||||
| Total other comprehensive income (loss), net of tax | (531 | ) | (928 | ) | 1,161 | |||||||
| TOTAL COMPREHENSIVE INCOME | $ | 3,709 | $ | 2,832 | $ | 4,434 |
The accompanying Notes to the Consolidated Financial Statements are an integral part of this statement.
| NIKE, Inc. Consolidated Balance Sheets |
| May 31, | ||||||||
| (In millions) | 2017 | 2016 | ||||||
| ASSETS | ||||||||
| Current assets: | ||||||||
| Cash and equivalents | $ | 3,808 | $ | 3,138 | ||||
| Short-term investments | 2,371 | 2,319 | ||||||
| Accounts receivable, net | 3,677 | 3,241 | ||||||
| Inventories | 5,055 | 4,838 | ||||||
| Prepaid expenses and other current assets | 1,150 | 1,489 | ||||||
| Total current assets | 16,061 | 15,025 | ||||||
| Property, plant and equipment, net | 3,989 | 3,520 | ||||||
| Identifiable intangible assets, net | 283 | 281 | ||||||
| Goodwill | 139 | 131 | ||||||
| Deferred income taxes and other assets | 2,787 | 2,422 | ||||||
| TOTAL ASSETS | $ | 23,259 | $ | 21,379 | ||||
| LIABILITIES AND SHAREHOLDERS’ EQUITY | ||||||||
| Current liabilities: | ||||||||
| Current portion of long-term debt | $ | 6 | $ | 44 | ||||
| Notes payable | 325 | 1 | ||||||
| Accounts payable | 2,048 | 2,191 | ||||||
| Accrued liabilities | 3,011 | 3,037 | ||||||
| Income taxes payable | 84 | 85 | ||||||
| Total current liabilities | 5,474 | 5,358 | ||||||
| Long-term debt | 3,471 | 1,993 | ||||||
| Deferred income taxes and other liabilities | 1,907 | 1,770 | ||||||
| Commitments and contingencies | ||||||||
| Redeemable preferred stock | — | — | ||||||
| Shareholders’ equity: | ||||||||
| Common stock at stated value: | ||||||||
| Class A convertible — 329 and 353 shares outstanding | — | — | ||||||
| Class B — 1,314 and 1,329 shares outstanding | 3 | 3 | ||||||
| Capital in excess of stated value | 8,638 | 7,786 | ||||||
| Accumulated other comprehensive (loss) income | (213 | ) | 318 | |||||
| Retained earnings | 3,979 | 4,151 | ||||||
| Total shareholders’ equity | 12,407 | 12,258 | ||||||
| TOTAL LIABILITIES AND SHAREHOLDERS’ EQUITY | $ | 23,259 | $ | 21,379 |
The accompanying Notes to the Consolidated Financial Statements are an integral part of this statement.
| NIKE, Inc. Consolidated Statements of Cash Flows |
| Year Ended May 31, | ||||||||||||
| (In millions) | 2017 | 2016 | 2015 | |||||||||
| Cash provided by operations: | ||||||||||||
| Net income | $ | 4,240 | $ | 3,760 | $ | 3,273 | ||||||
| Income charges (credits) not affecting cash: | ||||||||||||
| Depreciation | 706 | 649 | 606 | |||||||||
| Deferred income taxes | (273 | ) | (80 | ) | (113 | ) | ||||||
| Stock-based compensation | 215 | 236 | 191 | |||||||||
| Amortization and other | 10 | 13 | 43 | |||||||||
| Net foreign currency adjustments | (117 | ) | 98 | 424 | ||||||||
| Changes in certain working capital components and other assets and liabilities: | ||||||||||||
| (Increase) decrease in accounts receivable | (426 | ) | 60 | (216 | ) | |||||||
| (Increase) in inventories | (231 | ) | (590 | ) | (621 | ) | ||||||
| (Increase) in prepaid expenses and other current assets | (120 | ) | (161 | ) | (144 | ) | ||||||
| (Decrease) increase in accounts payable, accrued liabilities and income taxes payable | (364 | ) | (889 | ) | 1,237 | |||||||
| Cash provided by operations | 3,640 | 3,096 | 4,680 | |||||||||
| Cash used by investing activities: | ||||||||||||
| Purchases of short-term investments | (5,928 | ) | (5,367 | ) | (4,936 | ) | ||||||
| Maturities of short-term investments | 3,623 | 2,924 | 3,655 | |||||||||
| Sales of short-term investments | 2,423 | 2,386 | 2,216 | |||||||||
| Investments in reverse repurchase agreements | — | 150 | (150 | ) | ||||||||
| Additions to property, plant and equipment | (1,105 | ) | (1,143 | ) | (963 | ) | ||||||
| Disposals of property, plant and equipment | 13 | 10 | 3 | |||||||||
| Other investing activities | (34 | ) | 6 | — | ||||||||
| Cash used by investing activities | (1,008 | ) | (1,034 | ) | (175 | ) | ||||||
| Cash used by financing activities: | ||||||||||||
| Net proceeds from long-term debt issuance | 1,482 | 981 | — | |||||||||
| Long-term debt payments, including current portion | (44 | ) | (106 | ) | (7 | ) | ||||||
| Increase (decrease) in notes payable | 327 | (67 | ) | (63 | ) | |||||||
| Payments on capital lease and other financing obligations | (17 | ) | (7 | ) | (19 | ) | ||||||
| Proceeds from exercise of stock options and other stock issuances | 489 | 507 | 514 | |||||||||
| Excess tax benefits from share-based payment arrangements | 177 | 281 | 218 | |||||||||
| Repurchase of common stock | (3,223 | ) | (3,238 | ) | (2,534 | ) | ||||||
| Dividends — common and preferred | (1,133 | ) | (1,022 | ) | (899 | ) | ||||||
| Cash used by financing activities | (1,942 | ) | (2,671 | ) | (2,790 | ) | ||||||
| Effect of exchange rate changes on cash and equivalents | (20 | ) | (105 | ) | (83 | ) | ||||||
| Net increase (decrease) in cash and equivalents | 670 | (714 | ) | 1,632 | ||||||||
| Cash and equivalents, beginning of year | 3,138 | 3,852 | 2,220 | |||||||||
| CASH AND EQUIVALENTS, END OF YEAR | $ | 3,808 | $ | 3,138 | $ | 3,852 | ||||||
| Supplemental disclosure of cash flow information: | ||||||||||||
| Cash paid during the year for: | ||||||||||||
| Interest, net of capitalized interest | $ | 98 | $ | 70 | $ | 53 | ||||||
| Income taxes | 703 | 748 | 1,262 | |||||||||
| Non-cash additions to property, plant and equipment | 266 | 252 | 206 | |||||||||
| Dividends declared and not paid | 300 | 271 | 240 |
The accompanying Notes to the Consolidated Financial Statements are an integral part of this statement.
| NIKE, Inc. Consolidated Statements of Shareholders’ Equity |
| Common Stock | Capital in Excess of Stated Value | Accumulated Other Comprehensive Income | Retained Earnings | Total | ||||||||||||||||||||||||||
| Class A | Class B | |||||||||||||||||||||||||||||
| (In millions, except per share data) | Shares | Amount | Shares | Amount | ||||||||||||||||||||||||||
| Balance at May 31, 2014 | 355 | $ | — | 1,385 | $ | 3 | $ | 5,865 | $ | 85 | $ | 4,871 | $ | 10,824 | ||||||||||||||||
| Stock options exercised | 27 | 639 | 639 | |||||||||||||||||||||||||||
| Repurchase of Class B Common Stock | (58 | ) | (9 | ) | (2,525 | ) | (2,534 | ) | ||||||||||||||||||||||
| Dividends on common stock ($0.54 per share) and preferred stock ($0.10 per share) | (931 | ) | (931 | ) | ||||||||||||||||||||||||||
| Issuance of shares to employees, net of shares withheld for employee taxes | 3 | 87 | (3 | ) | 84 | |||||||||||||||||||||||||
| Stock-based compensation | 191 | 191 | ||||||||||||||||||||||||||||
| Net income | 3,273 | 3,273 | ||||||||||||||||||||||||||||
| Other comprehensive income (loss) | 1,161 | 1,161 | ||||||||||||||||||||||||||||
| Balance at May 31, 2015 | 355 | $ | — | 1,357 | $ | 3 | $ | 6,773 | $ | 1,246 | $ | 4,685 | $ | 12,707 | ||||||||||||||||
| Stock options exercised | 22 | 680 | 680 | |||||||||||||||||||||||||||
| Conversion to Class B Common Stock | (2 | ) | — | 2 | — | — | ||||||||||||||||||||||||
| Repurchase of Class B Common Stock | (55 | ) | (8 | ) | (3,230 | ) | (3,238 | ) | ||||||||||||||||||||||
| Dividends on common stock ($0.62 per share) and preferred stock ($0.10 per share) | (1,053 | ) | (1,053 | ) | ||||||||||||||||||||||||||
| Issuance of shares to employees, net of shares withheld for employee taxes | 3 | 105 | (11 | ) | 94 | |||||||||||||||||||||||||
| Stock-based compensation | 236 | 236 | ||||||||||||||||||||||||||||
| Net income | 3,760 | 3,760 | ||||||||||||||||||||||||||||
| Other comprehensive income (loss) | (928 | ) | (928 | ) | ||||||||||||||||||||||||||
| Balance at May 31, 2016 | 353 | $ | — | 1,329 | $ | 3 | $ | 7,786 | $ | 318 | $ | 4,151 | $ | 12,258 | ||||||||||||||||
| Stock options exercised | 17 | 525 | 525 | |||||||||||||||||||||||||||
| Conversion to Class B Common Stock | (24 | ) | — | 24 | — | — | ||||||||||||||||||||||||
| Repurchase of Class B Common Stock | (60 | ) | (9 | ) | (3,240 | ) | (3,249 | ) | ||||||||||||||||||||||
| Dividends on common stock ($0.70 per share) and preferred stock ($0.10 per share) | (1,159 | ) | (1,159 | ) | ||||||||||||||||||||||||||
| Issuance of shares to employees, net of shares withheld for employee taxes | 4 | 121 | (13 | ) | 108 | |||||||||||||||||||||||||
| Stock-based compensation | 215 | 215 | ||||||||||||||||||||||||||||
| Net income | 4,240 | 4,240 | ||||||||||||||||||||||||||||
| Other comprehensive income (loss) | (531 | ) | (531 | ) | ||||||||||||||||||||||||||
| Balance at May 31, 2017 | 329 | $ | — | 1,314 | $ | 3 | $ | 8,638 | $ | (213 | ) | $ | 3,979 | $ | 12,407 |
The accompanying Notes to the Consolidated Financial Statements are an integral part of this statement.
Notes to Consolidated Financial Statements
| NOTE 1 — Summary of Significant Accounting Policies |
Description of Business
NIKE, Inc. is a worldwide leader in the design, development and worldwide marketing and selling of athletic footwear, apparel, equipment, accessories and services. NIKE, Inc. portfolio brands include the NIKE Brand, Jordan Brand, Hurley and Converse. The NIKE Brand is focused on performance athletic footwear, apparel, equipment, accessories and services across a wide range of sport categories, amplified with sport-inspired sportswear products carrying the Swoosh trademark as well as other NIKE Brand trademarks. The Jordan Brand is focused on athletic and casual footwear, apparel and accessories using the Jumpman trademark. Sales and operating results of Jordan Brand products are reported within the respective NIKE Brand geographic operating segments. The Hurley brand is focused on surf and action sports and youth lifestyle footwear, apparel and accessories, using the Hurley trademark. Sales and operating results of Hurley brand products are reported within the NIKE Brand’s North America geographic operating segment. Converse designs, distributes, markets and sells casual sneakers, apparel and accessories under the Converse, Chuck Taylor, All Star, One Star, Star Chevron and Jack Purcell trademarks. In some markets outside the U.S., these trademarks are licensed to third parties who design, distribute, market and sell similar products. Operating results of the Converse brand are reported on a stand-alone basis.
Basis of Consolidation
The Consolidated Financial Statements include the accounts of NIKE, Inc. and its subsidiaries (the “Company”). All significant intercompany transactions and balances have been eliminated.
On November 19, 2015, the Company announced a two-for-one split of both NIKE Class A and Class B Common Stock. The stock split was in the form of a 100 percent stock dividend payable on December 23, 2015 to shareholders of record at the close of business on December 9, 2015. Common stock began trading at the split-adjusted price on December 24, 2015. All share and per share amounts presented reflect the stock split.
Reclassifications
Certain prior year amounts have been reclassified to conform to fiscal 2017 presentation.
Revenue Recognition
Wholesale revenues are recognized when title and the risks and rewards of ownership have passed to the customer, based on the terms of sale. This occurs upon shipment or upon receipt by the customer depending on the country of the sale and the agreement with the customer. Retail store revenues are recorded at the time of sale and online store revenues are recorded upon delivery to the customer. Provisions for post-invoice sales discounts, returns and miscellaneous claims from customers are estimated and recorded as a reduction to revenue at the time of sale. Post-invoice sales discounts consist of contractual programs with certain customers or discretionary discounts that are expected to be granted to certain customers at a later date. Estimates of discretionary discounts, returns and claims are based on (1) historical rates, (2) specific identification of outstanding claims and outstanding returns not yet received from customers and (3) estimated discounts, returns and claims expected, but not yet finalized with customers. As of May 31, 2017 and 2016, the Company’s reserve balances for post-invoice sales discounts, returns and miscellaneous claims were $643 million and $789 million, respectively.
Cost of Sales
Cost of sales consists primarily of inventory costs, as well as warehousing costs (including the cost of warehouse labor), third-party royalties, certain foreign currency hedge gains and losses and research, design and development costs. Outbound shipping and handling costs are expensed as incurred and included in Cost of sales.
Demand Creation Expense
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. Advertising production costs are expensed the first time an advertisement is run. Advertising communication costs are expensed when the advertisement appears. Costs related to brand events are expensed when the event occurs. Costs related to retail brand presentation are expensed when the presentation is completed and delivered.
A significant amount of the Company’s promotional expenses result from payments under endorsement contracts. Accounting for endorsement payments is based upon specific contract provisions. Generally, endorsement payments are expensed on a straight-line basis over the term of the contract after giving recognition to periodic performance compliance provisions of the contracts. Prepayments made under contracts are included in Prepaid expenses and other current assets or Deferred income taxes and other assets depending on the period to which the prepayment applies.
Certain contracts provide for contingent payments to endorsers based upon specific achievements in their sports (e.g., winning a championship). The Company records demand creation expense for these amounts when the endorser achieves the specific goal.
Certain contracts provide for variable payments based upon endorsers maintaining a level of performance in their sport over an extended period of time (e.g., maintaining a specified ranking in a sport for a year). When the Company determines payments are probable, the amounts are reported in Demand creation expense ratably over the contract period based on the Company’s best estimate of the endorser’s performance. In these instances, to the extent that actual payments to the endorser differ from the Company’s estimate due to changes in the endorser’s performance, increased or decreased demand creation expense may be recorded in a future period.
Certain contracts provide for royalty payments to endorsers based upon a predetermined percent of sales of particular products. The Company expenses these payments in Cost of sales as the related sales occur. In certain contracts, the Company offers minimum guaranteed royalty payments. For contracts for which the Company estimates it will not meet the minimum guaranteed amount of royalty fees through sales of product, the Company records the amount of the guaranteed payment in excess of that earned through sales of product in Demand creation expense uniformly over the contract period.
Through cooperative advertising programs, the Company reimburses customers for certain costs of advertising the Company’s products. The Company records these costs in Demand creation expense at the point in time when it is obligated to its customers for the costs. This obligation may arise prior to the related advertisement being run.
Total advertising and promotion expenses were $3,341 million, $3,278 million and $3,213 million for the years ended May 31, 2017, 2016 and 2015, respectively. Prepaid advertising and promotion expenses totaled $558 million and $540 million at May 31, 2017 and 2016, respectively, of which $311 million and $272 million, respectively, was recorded in Prepaid expenses and other current assets, and $247 million and $268 million, respectively, was recorded in Deferred income taxes and other assets, depending on the period to which the prepayment applies.
Operating Overhead Expense
Operating overhead expense consists primarily of wage and benefit-related expenses as well as other administrative costs, such as rent, depreciation and amortization, professional services and meetings and travel.
Cash and Equivalents
Cash and equivalents represent cash and short-term, highly liquid investments, that are both readily convertible to known amounts of cash, and so near their maturity that they present insignificant risk of changes in value because of changes in interest rates, including commercial paper, U.S. Treasury, U.S. Agency, money market funds, time deposits and corporate debt securities with maturities of 90 days or less at the date of purchase.
Short-Term Investments
Short-term investments consist of highly liquid investments, including commercial paper, U.S. Treasury, U.S. Agency, time deposits and corporate debt securities, with maturities over 90 days at the date of purchase. Debt securities that the Company has the ability and positive intent to hold to maturity are carried at amortized cost. At May 31, 2017 and 2016, the Company did not hold any short-term investments that were classified as trading or held-to-maturity.
At May 31, 2017 and 2016, Short-term investments consisted of available-for-sale securities. Available-for-sale securities are recorded at fair value with unrealized gains and losses reported, net of tax, in Accumulated other comprehensive income, unless unrealized losses are determined to be other than temporary. Realized gains and losses on the sale of securities are determined by specific identification. The Company considers all available-for-sale securities, including those with maturity dates beyond 12 months, as available to support current operational liquidity needs and therefore classifies all securities with maturity dates beyond 90 days at the date of purchase as current assets within Short-term investments on the Consolidated Balance Sheets.
Refer to Note 6 — Fair Value Measurements for more information on the Company’s short-term investments.
Allowance for Uncollectible Accounts Receivable
Accounts receivable, net consist primarily of amounts receivable from customers. The Company makes ongoing estimates relating to the collectability of its accounts receivable and maintains an allowance for estimated losses resulting from the inability of its customers to make required payments. In determining the amount of the allowance, the Company considers historical levels of credit losses and makes judgments about the creditworthiness of significant customers based on ongoing credit evaluations. Accounts receivable with anticipated collection dates greater than 12 months from the balance sheet date and related allowances are considered non-current and recorded in Deferred income taxes and other assets. The allowance for uncollectible accounts receivable was $19 million and $43 million at May 31, 2017 and 2016, respectively.
Inventory Valuation
Inventories are stated at lower of cost or market and valued on either an average or specific identification cost basis. For inventories in transit that represent direct shipments to customers, the related inventory and cost of sales are recognized on a specific identification basis. Inventory costs primarily consist of product cost from the Company's suppliers, as well as inbound freight, import duties, taxes, insurance and logistics and other handling fees.
Property, Plant and Equipment and Depreciation
Property, plant and equipment are recorded at cost. Depreciation is determined on a straight-line basis for land improvements, buildings and leasehold improvements over 2 to 40 years and for machinery and equipment over 2 to 15 years.
Depreciation and amortization of assets used in manufacturing, warehousing and product distribution are recorded in Cost of sales. Depreciation and amortization of all other assets are recorded in Operating overhead expense.
Software Development Costs
Internal Use Software: Expenditures for major software purchases and software developed for internal use are capitalized and amortized over a 2 to 12 year period on a straight-line basis. The Company’s policy provides for the capitalization of external direct costs of materials and services associated with developing or obtaining internal use computer software. In addition, the Company also capitalizes certain payroll and payroll-related costs for employees who are directly associated with internal use computer software projects. The amount of capitalizable payroll costs with respect to these employees is limited to the time directly spent on such projects. Costs associated with preliminary project stage activities, training, maintenance and all other post-implementation stage activities are expensed as incurred.
Computer Software to be Sold, Leased or Otherwise Marketed: Development costs of computer software to be sold, leased or otherwise marketed as an integral part of a product are subject to capitalization beginning when a product’s technological feasibility has been established and ending when a product is available for general release to customers. In most instances, the Company’s products are released soon after technological feasibility has been established. Therefore, software development costs incurred subsequent to achievement of technological feasibility are usually not significant, and generally most software development costs have been expensed as incurred.
Impairment of Long-Lived Assets
The Company reviews the carrying value of long-lived assets or asset groups to be used in operations whenever events or changes in circumstances indicate that the carrying amount of the assets might not be recoverable. Factors that would necessitate an impairment assessment include a significant adverse change in the extent or manner in which an asset is used, a significant adverse change in legal factors or the business climate that could affect the value of the asset or a significant decline in the observable market value of an asset, among others. If such facts indicate a potential impairment, the Company would assess the recoverability of an asset group by determining if the carrying value of the asset group exceeds the sum of the projected undiscounted cash flows expected to result from the use and eventual disposition of the assets over the remaining economic life of the primary asset in the asset group. If the recoverability test indicates that the carrying value of the asset group is not recoverable, the Company will estimate the fair value of the asset group using appropriate valuation methodologies, which would typically include an estimate of discounted cash flows. Any impairment would be measured as the difference between the asset group’s carrying amount and its estimated fair value.
Goodwill and Indefinite-Lived Intangible Assets
The Company performs annual impairment tests on goodwill and intangible assets with indefinite lives in the fourth quarter of each fiscal year or when events occur or circumstances change that would, more likely than not, reduce the fair value of a reporting unit or an intangible asset with an indefinite life below its carrying value. Events or changes in circumstances that may trigger interim impairment reviews include significant changes in business climate, operating results, planned investments in the reporting unit, planned divestitures or an expectation that the carrying amount may not be recoverable, among other factors. The Company may first assess qualitative factors to determine whether it is more likely than not that the fair value of a reporting unit is less than its carrying amount. If, after assessing the totality of events and circumstances, the Company determines that it is more likely than not that the fair value of the reporting unit is greater than its carrying amount, the two-step impairment test is unnecessary. The two-step impairment test first requires the Company to estimate the fair value of its reporting units. If the carrying value of a reporting unit exceeds its fair value, the goodwill of that reporting unit is potentially impaired and the Company proceeds to step two of the impairment analysis. In step two of the analysis, the Company measures and records an impairment loss equal to the excess of the carrying value of the reporting unit's goodwill over its implied fair value, if any.
Indefinite-lived intangible assets primarily consist of acquired trade names and trademarks. The Company may first perform a qualitative assessment to determine whether it is more likely than not that an indefinite-lived intangible asset is impaired. If, after assessing the totality of events and circumstances, the Company determines that it is more likely than not that the indefinite-lived intangible asset is not impaired, no quantitative fair value measurement is necessary. If a quantitative fair value measurement calculation is required for these intangible assets, the Company utilizes the relief-from-royalty method. This method assumes that trade names and trademarks have value to the extent that their owner is relieved of the obligation to pay royalties for the benefits received from them. This method requires the Company to estimate the future revenue for the related brands, the appropriate royalty rate and the weighted average cost of capital.
Operating Leases
The Company leases retail store space, certain distribution and warehouse facilities, office space and other non-real estate assets under operating leases. Operating lease agreements may contain rent escalation clauses, renewal options, rent holidays or certain landlord incentives, including tenant improvement allowances. Rent expense for non-cancelable operating leases with scheduled rent increases or landlord incentives are recognized on a straight-line basis over the lease term, beginning with the effective lease commencement date, which is generally the date in which the Company takes possession of or controls the physical use of the property. Certain leases also provide for contingent rent, which is generally determined as a percent of sales in excess of specified levels. A contingent rent liability is recognized together with the corresponding rent expense when specified levels have been achieved or when the Company determines that achieving the specified levels during the period is probable.
Fair Value Measurements
The Company measures certain financial assets and liabilities at fair value on a recurring basis, including derivatives and available-for-sale securities. Fair value is the price the Company would receive to sell an asset or pay to transfer a liability in an orderly transaction with a market participant at the measurement date. The Company uses a three-level hierarchy established by the Financial Accounting Standards Board (FASB) that prioritizes fair value measurements based on the types of inputs used for the various valuation techniques (market approach, income approach and cost approach).
The levels of the fair value hierarchy are described below:
| • | Level 1: Quoted prices in active markets for identical assets or liabilities. |
| • | Level 2: Inputs other than quoted prices that are observable for the asset or liability, either directly or indirectly; these include quoted prices for similar assets or liabilities in active markets and quoted prices for identical or similar assets or liabilities in markets that are not active. |
| • | Level 3: Unobservable inputs for which there is little or no market data available, which require the reporting entity to develop its own assumptions. |
The Company’s assessment of the significance of a particular input to the fair value measurement in its entirety requires judgment and considers factors specific to the asset or liability. Financial assets and liabilities are classified in their entirety based on the most conservative level of input that is significant to the fair value measurement.
Pricing vendors are utilized for a majority of Level 1 and Level 2 investments. These vendors either provide a quoted market price in an active market or use observable inputs without applying significant adjustments in their pricing. Observable inputs include broker quotes, interest rates and yield curves observable at commonly quoted intervals, volatilities and credit risks. The fair value of derivative contracts is determined using observable market inputs such as the daily market foreign currency rates, forward pricing curves, currency volatilities, currency correlations and interest rates and considers nonperformance risk of the Company and that of its counterparties.
Level 1 investments include U.S. Treasury securities. Assets and liabilities included within Level 2 include commercial paper, U.S. Agency securities, money market funds, time deposits, corporate debt securities and derivative contracts. Level 3 investments are valued using internally developed models with unobservable inputs and are an immaterial portion of our portfolio.
The Company’s fair value measurement process includes comparing fair values to another independent pricing vendor to ensure appropriate fair values are recorded.
Refer to Note 6 — Fair Value Measurements for additional information.
Foreign Currency Translation and Foreign Currency Transactions
Adjustments resulting from translating foreign functional currency financial statements into U.S. Dollars are included in the foreign currency translation adjustment, a component of Accumulated other comprehensive income in Total shareholders’ equity.
The Company’s global subsidiaries have various assets and liabilities, primarily receivables and payables, which are denominated in currencies other than their functional currency. These balance sheet items are subject to re-measurement, the impact of which is recorded in Other (income) expense, net, within the Consolidated Statements of Income.
Accounting for Derivatives and Hedging Activities
The Company uses derivative financial instruments to reduce its exposure to changes in foreign currency exchange rates and interest rates. All derivatives are recorded at fair value on the Consolidated Balance Sheets and changes in the fair value of derivative financial instruments are either recognized in Accumulated other comprehensive income (a component of Total shareholders’ equity), Long-term debt or Net income depending on the nature of the underlying exposure, whether the derivative is formally designated as a hedge and, if designated, the extent to which the hedge is effective. The Company classifies the cash flows at settlement from derivatives in the same category as the cash flows from the related hedged items. For undesignated hedges and designated cash flow hedges, this is primarily within the Cash provided by operations component of the Consolidated Statements of Cash Flows. For designated net investment hedges, this is within the Cash used by investing activities component of the Consolidated Statements of Cash Flows. For the Company’s fair value hedges, which are interest rate swaps used to mitigate the change in fair value of its fixed-rate debt attributable to changes in interest rates, the related cash flows from periodic interest payments are reflected within the Cash provided by operations component of the Consolidated Statements of Cash Flows. Refer to Note 16 — Risk Management and Derivatives for more information on the Company’s risk management program and derivatives.
Stock-Based Compensation
The Company estimates the fair value of options and stock appreciation rights granted under the NIKE, Inc. Stock Incentive Plan and employees’ purchase rights under the Employee Stock Purchase Plans (ESPPs) using the Black-Scholes option pricing model. The Company recognizes this fair value, net of estimated forfeitures, as Operating overhead expense in the Consolidated Statements of Income over the vesting period using the straight-line method.
Refer to Note 11 — Common Stock and Stock-Based Compensation for more information on the Company’s stock-based compensation programs.
Income Taxes
The Company accounts for income taxes using the asset and liability method. This approach requires the recognition of deferred tax assets and liabilities for the expected future tax consequences of temporary differences between the carrying amounts and the tax basis of assets and liabilities. The Company records a valuation allowance to reduce deferred tax assets to the amount management believes is more likely than not to be realized. United States income taxes are provided currently on financial statement earnings of non-U.S. subsidiaries that are expected to be repatriated. The Company determines annually the amount of undistributed non-U.S. earnings to invest indefinitely in its non-U.S. operations.
The Company recognizes a tax benefit from uncertain tax positions in the financial statements only when it is more likely than not that the position will be sustained upon examination by relevant tax authorities. The Company recognizes interest and penalties related to income tax matters in Income tax expense.
Refer to Note 9 — Income Taxes for further discussion.
Earnings Per Share
Basic earnings per common share is calculated by dividing Net income by the weighted average number of common shares outstanding during the year. Diluted earnings per common share is calculated by adjusting weighted average outstanding shares, assuming conversion of all potentially dilutive stock options and awards.
Refer to Note 12 — Earnings Per Share for further discussion.
Management Estimates
The preparation of financial statements in conformity with generally accepted accounting principles requires management to make estimates, including estimates relating to assumptions that affect the reported amounts of assets and liabilities and disclosure of contingent assets and liabilities at the date of financial statements and the reported amounts of revenues and expenses during the reporting period. Actual results could differ from these estimates.
Recently Adopted Accounting Standards
In April 2015, the FASB issued Accounting Standards Update (ASU) No. 2015-03, Interest — Imputation of Interest (Subtopic 835-30): Simplifying the Presentation of Debt Issuance Costs. The updated guidance requires debt issuance costs to be presented as a direct deduction from the carrying amount of the corresponding debt liability on the balance sheet. The Company adopted the standard on a retrospective basis in the first quarter of fiscal 2017. The adoption of this standard reduced both Deferred income taxes and other assets and Long-term debt by $17 million on the Consolidated Balance Sheet as of May 31, 2016.
Recently Issued Accounting Standards
In October 2016, the FASB issued ASU No. 2016-16, Income Taxes (Topic 740): Intra-Entity Transfers of Assets Other Than Inventory. The updated guidance requires companies to recognize the income tax consequences of an intra-entity transfer of an asset other than inventory when the transfer occurs. Income tax effects of intra-entity transfers of inventory will continue to be deferred until the inventory has been sold to a third party. The ASU is effective for the Company beginning June 1, 2018, using a modified retrospective approach, with the cumulative effect recognized through retained earnings at the date of adoption. Early adoption is permitted as of the beginning of an annual reporting period for which interim or annual financial statements have not been issued. The Company is evaluating the impact this update will have on its existing accounting policies and the Consolidated Financial Statements. The Company anticipates the updated guidance could have a material impact on the Consolidated Financial Statements at adoption through the recognition of a cumulative-effect adjustment to retained earnings of previously deferred charges.
In March 2016, the FASB issued ASU No. 2016-09, Compensation — Stock Compensation (Topic 718): Improvements to Employee Share-Based Payment Accounting, which changes how companies account for certain aspects of share-based payment awards to employees. The updated guidance requires excess tax benefits and deficiencies from share-based payment awards to be recorded in income tax expense in the income statement. Currently, excess tax benefits and deficiencies are recognized in shareholders’ equity on the balance sheet. This change is required to be applied prospectively. In addition, the updated guidance also changes the accounting for statutory tax withholding requirements, classification in the statement of cash flows and provides an option to continue to estimate forfeitures or account for forfeitures as they occur. The Company will adopt the standard on June 1, 2017 and will elect to continue to estimate forfeitures. The ASU is expected to result in increased volatility to the Company’s income tax expense in future periods dependent upon, among other variables, the price of its common stock and the timing and volume of share-based payment award activity, such as employee exercises of stock options and vesting of restricted stock awards.
In February 2016, the FASB issued ASU No. 2016-02, Leases (Topic 842), that replaces existing lease accounting guidance. The new standard is intended to provide enhanced transparency and comparability by requiring lessees to record right-of-use assets and corresponding lease liabilities on the balance sheet. The new guidance will require the Company to continue to classify leases as either operating or financing, with classification affecting the pattern of expense recognition in the income statement. The Company will adopt the standard on June 1, 2019. The ASU is required to be applied using a modified retrospective approach at the beginning of the earliest period presented, with optional practical expedients. The Company is in the process of evaluating the effect the guidance will have on its existing accounting policies and the Consolidated Financial Statements, but expects there will be an increase in assets and liabilities on the Consolidated Balance Sheets at adoption due to the recording of right-of-use assets and corresponding lease liabilities, which may be material. Refer to Note 15 — Commitments and Contingencies for information about the Company’s lease obligations.
In January 2016, the FASB issued ASU No. 2016-01, Financial Instruments — Overall (Subtopic 825-10): Recognition and Measurement of Financial Assets and Financial Liabilities. The updated guidance enhances the reporting model for financial instruments, which includes amendments to address aspects of recognition, measurement, presentation and disclosure. The update to the standard is effective for the Company beginning June 1, 2018. The Company does not expect the adoption to have a material impact on the Consolidated Financial Statements.
In May 2014, the FASB issued ASU No. 2014-09, Revenue from Contracts with Customers (Topic 606), that replaces existing revenue recognition guidance. The updated guidance requires companies to recognize revenue in a way that depicts the transfer of promised goods or services to customers in an amount that reflects the consideration to which the entity expects to be entitled in exchange for those goods or services. In addition, the new standard requires that reporting companies disclose the nature, amount, timing and uncertainty of revenue and cash flows arising from contracts with customers. The Company will adopt the standard on June 1, 2018 using a modified retrospective approach with the cumulative effective of initially applying the new standard recognized in retained earnings at the date of initial application. The Company is in the process of evaluating the new standard against its existing accounting policies, including the timing of revenue recognition, and its contracts with customers, to determine the effect the guidance will have on the Consolidated Financial Statements.
| NOTE 2 — Inventories |
Inventory balances of $5,055 million and $4,838 million at May 31, 2017 and 2016, respectively, were substantially all finished goods.
| NOTE 3 — Property, Plant and Equipment |
Property, plant and equipment, net included the following:
| As of May 31, | ||||||||
| (In millions) | 2017 | 2016 | ||||||
| Land and improvements | $ | 285 | $ | 286 | ||||
| Buildings | 1,564 | 1,467 | ||||||
| Machinery, equipment and internal-use software | 3,867 | 3,510 | ||||||
| Leasehold improvements | 1,484 | 1,338 | ||||||
| Construction in process | 758 | 437 | ||||||
| Total property, plant and equipment, gross | 7,958 | 7,038 | ||||||
| Less accumulated depreciation | 3,969 | 3,518 | ||||||
| TOTAL PROPERTY, PLANT AND EQUIPMENT, NET | $ | 3,989 | $ | 3,520 |
Capitalized interest was not material for the years ended May 31, 2017, 2016 and 2015.
| NOTE 4 — Identifiable Intangible Assets and Goodwill |
Identifiable intangible assets, net consist of indefinite-lived trademarks, which are not subject to amortization, and acquired trademarks and other intangible assets, which are subject to amortization. Indefinite-lived trademarks were $281 million at May 31, 2017 and 2016. Gross acquired trademarks and other intangible assets were $19 million and $16 million at May 31, 2017 and 2016, respectively, and the related accumulated amortization was $17 million and $16 million, respectively. Goodwill was $139 million and $131 million at May 31, 2017 and 2016, respectively, of which $65 million was included in the Converse segment for each of the respective periods. The remaining amounts were included in Global Brand Divisions for segment reporting purposes. There were no accumulated impairment balances for goodwill as of either period end.
| NOTE 5 — Accrued Liabilities |
Accrued liabilities included the following:
| As of May 31, | ||||||||
| (In millions) | 2017 | 2016 | ||||||
| Compensation and benefits, excluding taxes | $ | 871 | $ | 943 | ||||
| Endorsement compensation | 396 | 393 | ||||||
| Dividends payable | 300 | 271 | ||||||
| Import and logistics costs | 257 | 198 | ||||||
| Taxes other than income taxes payable | 196 | 159 | ||||||
| Fair value of derivatives | 168 | 162 | ||||||
| Advertising and marketing | 125 | 119 | ||||||
| Collateral received from counterparties to hedging instruments | — | 105 | ||||||
| Other(1) | 698 | 687 | ||||||
| TOTAL ACCRUED LIABILITIES | $ | 3,011 | $ | 3,037 |
| (1) | Other consists of various accrued expenses with no individual item accounting for more than 5% of the total Accrued liabilities balance at May 31, 2017 and 2016. |
| NOTE 6 — Fair Value Measurements |
The following tables present information about the Company's financial assets and liabilities measured at fair value on a recurring basis as of May 31, 2017 and 2016, and indicate the fair value hierarchy of the valuation techniques utilized by the Company to determine such fair value. Refer to Note 1 — Summary of Significant Accounting Policies for additional detail regarding the Company’s fair value measurement methodology.
| As of May 31, 2017 | ||||||||||||||||
| (In millions) | Assets at Fair Value | Cash Equivalents | Short-term Investments | Other Long-term Assets | ||||||||||||
| Cash | $ | 505 | $ | 505 | $ | — | $ | — | ||||||||
| Level 1: | ||||||||||||||||
| U.S. Treasury securities | 1,545 | 159 | 1,386 | — | ||||||||||||
| Level 2: | ||||||||||||||||
| Time deposits | 813 | 769 | 44 | — | ||||||||||||
| U.S. Agency securities | 522 | 150 | 372 | — | ||||||||||||
| Commercial paper and bonds | 820 | 251 | 569 | — | ||||||||||||
| Money market funds | 1,974 | 1,974 | — | — | ||||||||||||
| Total level 2 | 4,129 | 3,144 | 985 | — | ||||||||||||
| Level 3: | ||||||||||||||||
| Non-marketable preferred stock | 10 | — | — | 10 | ||||||||||||
| TOTAL | $ | 6,189 | $ | 3,808 | $ | 2,371 | $ | 10 |
| As of May 31, 2016 | ||||||||||||||||
| (In millions) | Assets at Fair Value | Cash Equivalents | Short-term Investments | Other Long-term Assets | ||||||||||||
| Cash | $ | 774 | $ | 774 | $ | — | $ | — | ||||||||
| Level 1: | ||||||||||||||||
| U.S. Treasury securities | 1,265 | 100 | 1,165 | — | ||||||||||||
| Level 2: | ||||||||||||||||
| Time deposits | 831 | 827 | 4 | — | ||||||||||||
| U.S. Agency securities | 679 | — | 679 | — | ||||||||||||
| Commercial paper and bonds | 733 | 262 | 471 | — | ||||||||||||
| Money market funds | 1,175 | 1,175 | — | — | ||||||||||||
| Total level 2 | 3,418 | 2,264 | 1,154 | — | ||||||||||||
| Level 3: | ||||||||||||||||
| Non-marketable preferred stock | 10 | — | — | 10 | ||||||||||||
| TOTAL | $ | 5,467 | $ | 3,138 | $ | 2,319 | $ | 10 |
The Company elects to record the gross assets and liabilities of its derivative financial instruments on the Consolidated Balance Sheets. The Company’s derivative financial instruments are subject to master netting arrangements that allow for the offset of assets and liabilities in the event of default or early termination of the contract. Any amounts of cash collateral received related to these instruments associated with the Company's credit-related contingent features are recorded in Cash and equivalents and Accrued liabilities, the latter of which would further offset against the Company’s derivative asset balance (refer to Note 16 — Risk Management and Derivatives). Any amounts of cash collateral posted related to these instruments associated with the Company's credit-related contingent features are recorded in Prepaid expenses and other current assets, which would further offset against the Company's derivative liability balance (refer to Note 16 — Risk Management and Derivatives). Cash collateral received or posted related to the Company's credit related contingent features is presented in the Cash provided by operations component of the Consolidated Statements of Cash Flows. Any amounts of non-cash collateral received, such as securities, are not recorded on the Consolidated Balance Sheets pursuant to U.S. GAAP.
The following tables present information about the Company’s derivative assets and liabilities measured at fair value on a recurring basis as of May 31, 2017 and 2016, and indicate the level in the fair value hierarchy in which the Company classifies the fair value measurement.
| As of May 31, 2017 | ||||||||||||||||||||||||
| Derivative Assets | Derivative Liabilities | |||||||||||||||||||||||
| (In millions) | Assets at Fair Value | Other Current Assets | Other Long-term Assets | Liabilities at Fair Value | Accrued Liabilities | Other Long-term Liabilities | ||||||||||||||||||
| Level 2: | ||||||||||||||||||||||||
| Foreign exchange forwards and options(1) | $ | 231 | $ | 216 | $ | 15 | $ | 246 | $ | 166 | $ | 80 | ||||||||||||
| Embedded derivatives | 10 | 1 | 9 | 8 | 2 | 6 | ||||||||||||||||||
| Interest rate swaps | — | — | — | — | — | — | ||||||||||||||||||
| TOTAL | $ | 241 | $ | 217 | $ | 24 | $ | 254 | $ | 168 | $ | 86 |
| (1) | If the foreign exchange derivative instruments had been netted in the Consolidated Balance Sheets, the asset and liability positions each would have been reduced by $187 million as of May 31, 2017. As of that date, no amount of cash collateral had been received or posted on the derivative asset and liability balances related to these foreign exchange derivative instruments. |
| As of May 31, 2016 | ||||||||||||||||||||||||
| Derivative Assets | Derivative Liabilities | |||||||||||||||||||||||
| (In millions) | Assets at Fair Value | Other Current Assets | Other Long-term Assets | Liabilities at Fair Value | Accrued Liabilities | Other Long-term Liabilities | ||||||||||||||||||
| Level 2: | ||||||||||||||||||||||||
| Foreign exchange forwards and options(1) | $ | 603 | $ | 487 | $ | 116 | $ | 145 | $ | 115 | $ | 30 | ||||||||||||
| Embedded derivatives | 7 | 2 | 5 | 9 | 2 | 7 | ||||||||||||||||||
| Interest rate swaps(2) | 7 | 7 | — | 45 | 45 | — | ||||||||||||||||||
| TOTAL | $ | 617 | $ | 496 | $ | 121 | $ | 199 | $ | 162 | $ | 37 |
| (1) | If the foreign exchange derivative instruments had been netted in the Consolidated Balance Sheets, the asset and liability positions each would have been reduced by $136 million as of May 31, 2016. As of that date, the Company had received $105 million of cash collateral from various counterparties related to these foreign exchange derivative instruments. No amount of collateral was posted on the Company’s derivative liability balance as of May 31, 2016. |
| (2) | As of May 31, 2016, no amount of cash collateral had been received or posted on the derivative asset and liability balances related to its interest rate swaps. |
Available-for-sale securities comprise investments in U.S. Treasury and Agency securities, time deposits, money market funds, corporate commercial paper and bonds. These securities are valued using market prices on both active markets (Level 1) and less active markets (Level 2). As of May 31, 2017, the Company held $2,125 million of available-for-sale securities with maturity dates within one year and $246 million with maturity dates over one year and less than five years within Short-term investments on the Consolidated Balance Sheets. The gross realized gains and losses on sales of available-for-sale securities were immaterial for the fiscal years ended May 31, 2017 and 2016. Unrealized gains and losses on available-for-sale securities included in Accumulated other comprehensive income were immaterial as of May 31, 2017 and 2016. The Company regularly reviews its available-for-sale securities for other-than-temporary impairment. For the years ended May 31, 2017 and 2016, the Company did not consider its securities to be other-than-temporarily impaired and accordingly, did not recognize any impairment losses.
Included in Interest expense (income), net was interest income related to the Company's available-for-sale securities of $27 million, $12 million and $6 million for the years ended May 31, 2017, 2016 and 2015, respectively.
The Company’s Level 3 assets comprise investments in certain non-marketable preferred stock. These Level 3 investments are an immaterial portion of the Company's portfolio. Changes in Level 3 investment assets were immaterial during the years ended May 31, 2017 and 2016.
No transfers among the levels within the fair value hierarchy occurred during the years ended May 31, 2017 or 2016.
Derivative financial instruments include foreign exchange forwards and options, embedded derivatives and interest rate swaps. Refer to Note 16 — Risk Management and Derivatives for additional detail. For fair value information regarding Notes payable and Long-term debt, refer to Note 7 — Short-Term Borrowings and Credit Lines and Note 8 — Long-Term Debt, respectively. The carrying amounts of other current financial assets and other current financial liabilities approximate fair value.
As of May 31, 2017 and 2016, assets or liabilities that were required to be measured at fair value on a non-recurring basis were immaterial.
| NOTE 7 — Short-Term Borrowings and Credit Lines |
Notes payable and interest-bearing accounts payable to Sojitz Corporation of America (“Sojitz America”) as of May 31, 2017 and 2016 are summarized below:
| As of May 31, | ||||||||||||||||
| 2017 | 2016 | |||||||||||||||
| (Dollars in millions) | Borrowings | Interest Rate | Borrowings | Interest Rate | ||||||||||||
| Notes payable: | ||||||||||||||||
| Commercial paper | $ | 325 | 0.86 | % | $ | — | 0.00 | % | ||||||||
| U.S. operations | — | 0.00 | % | (1) | — | 0.00 | % | (1) | ||||||||
| Non-U.S. operations | — | 0.00 | % | (1) | 1 | 13.00 | % | (1) | ||||||||
| TOTAL NOTES PAYABLE | $ | 325 | $ | 1 | ||||||||||||
| Interest-bearing accounts payable: | ||||||||||||||||
| Sojitz America | $ | 51 | 1.78 | % | $ | 39 | 1.27 | % |
| (1) | Weighted average interest rate includes non-interest bearing overdrafts. |
The carrying amounts reflected in the Consolidated Balance Sheets for Notes payable approximate fair value.
The Company purchases through Sojitz America certain NIKE Brand products it acquires from non-U.S. suppliers. These purchases are for products sold in certain countries in the Company's Emerging Markets geographic operating segment and Canada, excluding products produced and sold in the same country. Accounts payable to Sojitz America are generally due up to 60 days after shipment of goods from the foreign port. The interest rate on such accounts payable is the 60-day London Interbank Offered Rate (“LIBOR”) as of the beginning of the month of the invoice date, plus 0.75%.
As of May 31, 2017, the Company had $325 million outstanding under its $2 billion commercial paper program at a weighted average interest rate of 0.86%. No borrowings were outstanding at May 31, 2016.
On August 28, 2015, the Company 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. Based on the Company’s current long-term senior unsecured debt ratings of AA- and A1 from Standard and Poor’s Corporation and Moody’s Investor Services, respectively, the interest rate charged on any outstanding borrowings would be the prevailing LIBOR plus 0.455%. The facility fee is 0.045% of the total commitment. Under this committed credit facility, the Company must maintain certain financial ratios, among other things, with which the Company was in compliance at May 31, 2017. No amounts were outstanding under the committed credit facility as of May 31, 2017 or 2016.
| NOTE 8 — Long-Term Debt |
Long-term debt, net of unamortized premiums, discounts and debt issuance costs, comprises the following:
| Book Value Outstanding as of May 31, | |||||||||||||||||
| Scheduled Maturity (Dollars and Yen in millions) | Original Principal | Interest Rate | Interest Payments | 2017 | 2016 | ||||||||||||
| Corporate Bond Payables:(1)(2) | |||||||||||||||||
| May 1, 2023 | $ | 500 | 2.25 | % | Semi-Annually | 497 | 497 | ||||||||||
| November 1, 2026 | $ | 1,000 | 2.38 | % | Semi-Annually | 993 | — | ||||||||||
| May 1, 2043 | $ | 500 | 3.63 | % | Semi-Annually | 495 | 494 | ||||||||||
| November 1, 2045 | $ | 1,000 | 3.88 | % | Semi-Annually | 981 | 981 | ||||||||||
| November 1, 2046 | $ | 500 | 3.38 | % | Semi-Annually | 490 | — | ||||||||||
| Promissory Notes: | |||||||||||||||||
| April 1, 2017 | $ | 40 | 6.20 | % | Monthly | — | 38 | ||||||||||
| Japanese Yen Notes:(3) | |||||||||||||||||
| August 20, 2001 through November 20, 2020 | ¥ | 9,000 | 2.60 | % | Quarterly | 14 | 18 | ||||||||||
| August 20, 2001 through November 20, 2020 | ¥ | 4,000 | 2.00 | % | Quarterly | 7 | 9 | ||||||||||
| Total | 3,477 | 2,037 | |||||||||||||||
| Less current maturities | 6 | 44 | |||||||||||||||
| TOTAL LONG-TERM DEBT | $ | 3,471 | $ | 1,993 |
| (1) | These senior unsecured obligations rank equally with the Company’s other unsecured and unsubordinated indebtedness. |
| (2) | The bonds are redeemable at the Company’s option up to three months prior to the scheduled maturity date for the bonds maturing in 2023 and 2026, and up to six months prior to the scheduled maturity date for the bonds maturing in 2043, 2045 and 2046, at a price equal to the greater of (i) 100% of the aggregate principal amount of the notes to be redeemed or (ii) the sum of the present values of the remaining scheduled payments, plus in each case, accrued and unpaid interest. Within three and six months to scheduled maturity, respectively, the bonds also feature a par call provision, which allows for the bonds to be redeemed at a price equal to 100% of the aggregate principal amount of the notes being redeemed, plus accrued and unpaid interest. |
| (3) | NIKE Logistics YK assumed a total of ¥13.0 billion in loans as part of its agreement to purchase a distribution center in Japan, which serves as collateral for the loans. These loans mature in equal quarterly installments during the period August 20, 2001 through November 20, 2020. |
The scheduled maturity of Long-term debt in each of the years ending May 31, 2018 through 2022 are $6 million, $6 million, $6 million, $3 million and $0 million, respectively, at face value.
The Company's Long-term debt is recorded at adjusted cost, net of unamortized premiums, discounts and debt issuance costs. The fair value of Long-term debt is estimated based upon quoted prices for similar instruments or quoted prices for identical instruments in inactive markets (Level 2). The fair value of the Company’s Long-term debt, including the current portion, was approximately $3,401 million at May 31, 2017 and $2,125 million at May 31, 2016.
| NOTE 9 — Income Taxes |
Income before income taxes is as follows:
| Year Ended May 31, | ||||||||||||
| (In millions) | 2017 | 2016 | 2015 | |||||||||
| Income before income taxes: | ||||||||||||
| United States | $ | 1,240 | $ | 956 | $ | 1,967 | ||||||
| Foreign | 3,646 | 3,667 | 2,238 | |||||||||
| TOTAL INCOME BEFORE INCOME TAXES | $ | 4,886 | $ | 4,623 | $ | 4,205 |
The provision for income taxes is as follows:
| Year Ended May 31, | ||||||||||||
| (In millions) | 2017 | 2016 | 2015 | |||||||||
| Current: | ||||||||||||
| United States | ||||||||||||
| Federal | $ | 398 | $ | 304 | $ | 596 | ||||||
| State | 82 | 71 | 80 | |||||||||
| Foreign | 439 | 568 | 369 | |||||||||
| Total | 919 | 943 | 1,045 | |||||||||
| Deferred: | ||||||||||||
| United States | ||||||||||||
| Federal | (279 | ) | (57 | ) | (66 | ) | ||||||
| State | (9 | ) | (16 | ) | (11 | ) | ||||||
| Foreign | 15 | (7 | ) | (36 | ) | |||||||
| Total | (273 | ) | (80 | ) | (113 | ) | ||||||
| TOTAL INCOME TAX EXPENSE | $ | 646 | $ | 863 | $ | 932 |
A reconciliation from the U.S. statutory federal income tax rate to the effective income tax rate is as follows:
| Year Ended May 31, | |||||||||
| 2017 | 2016 | 2015 | |||||||
| Federal income tax rate | 35.0 | % | 35.0 | % | 35.0 | % | |||
| State taxes, net of federal benefit | 1.1 | % | 1.1 | % | 0.9 | % | |||
| Foreign earnings | -20.7 | % | -18.2 | % | -14.8 | % | |||
| Resolution of a U.S. tax matter | -3.2 | % | — | % | — | % | |||
| Other, net | 1.0 | % | 0.8 | % | 1.1 | % | |||
| EFFECTIVE INCOME TAX RATE | 13.2 | % | 18.7 | % | 22.2 | % |
The effective tax rate for the year ended May 31, 2017 was 550 basis points lower than the effective tax rate for the year ended May 31, 2016 primarily due to a one-time benefit in the first quarter of the fiscal year related to the resolution with the U.S. Internal Revenue Service (IRS) of a foreign tax credit matter and a decrease in foreign earnings taxed in the United States.
The effective tax rate for the year ended May 31, 2016 was 350 basis points lower than the effective tax rate for the year ended May 31, 2015 primarily due to an increase in the proportion of earnings from operations outside of the United States, which are generally subject to a lower tax rate.
Deferred tax assets and liabilities comprise the following:
| As of May 31, | ||||||||
| (In millions) | 2017 | 2016 | ||||||
| Deferred tax assets: | ||||||||
| Allowance for doubtful accounts | $ | 4 | $ | 5 | ||||
| Inventories | 90 | 88 | ||||||
| Sales return reserves | 130 | 182 | ||||||
| Deferred compensation | 348 | 274 | ||||||
| Stock-based compensation | 225 | 206 | ||||||
| Reserves and accrued liabilities | 84 | 78 | ||||||
| Net operating loss carry-forwards | 84 | 44 | ||||||
| Foreign tax credit carry-forwards | 208 | — | ||||||
| Undistributed earnings of foreign subsidiaries | 173 | 179 | ||||||
| Other | 106 | 72 | ||||||
| Total deferred tax assets | 1,452 | 1,128 | ||||||
| Valuation allowance | (82 | ) | (52 | ) | ||||
| Total deferred tax assets after valuation allowance | 1,370 | 1,076 | ||||||
| Deferred tax liabilities: | ||||||||
| Property, plant and equipment | (254 | ) | (268 | ) | ||||
| Intangibles | (90 | ) | (92 | ) | ||||
| Other | (2 | ) | (4 | ) | ||||
| Total deferred tax liability | (346 | ) | (364 | ) | ||||
| NET DEFERRED TAX ASSET | $ | 1,024 | $ | 712 |
The following is a reconciliation of the changes in the gross balance of unrecognized tax benefits:
| As of May 31, | ||||||||||||
| (In millions) | 2017 | 2016 | 2015 | |||||||||
| Unrecognized tax benefits, beginning of the period | $ | 506 | $ | 438 | $ | 506 | ||||||
| Gross increases related to prior period tax positions | 31 | 49 | 32 | |||||||||
| Gross decreases related to prior period tax positions | (163 | ) | (20 | ) | (123 | ) | ||||||
| Gross increases related to current period tax positions | 115 | 81 | 82 | |||||||||
| Gross decreases related to current period tax positions | — | — | (9 | ) | ||||||||
| Settlements | (12 | ) | (13 | ) | (27 | ) | ||||||
| Lapse of statute of limitations | (21 | ) | (17 | ) | (10 | ) | ||||||
| Changes due to currency translation | 5 | (12 | ) | (13 | ) | |||||||
| UNRECOGNIZED TAX BENEFITS, END OF THE PERIOD | $ | 461 | $ | 506 | $ | 438 |
As of May 31, 2017, total gross unrecognized tax benefits, excluding related interest and penalties, were $461 million, $230 million of which would affect the Company's effective tax rate if recognized in future periods.
The Company recognizes interest and penalties related to income tax matters in Income tax expense. The liability for payment of interest and penalties decreased by $38 million during the year ended May 31, 2017, increased by $45 million during the year ended May 31, 2016 and decreased by $3 million during the year ended May 31, 2015. As of May 31, 2017 and 2016, accrued interest and penalties related to uncertain tax positions were $171 million and $209 million, respectively (excluding federal benefit).
The Company is subject to taxation in the United States as well as various state and foreign jurisdictions. As previously disclosed, the Company received statutory notices of deficiency from the IRS for fiscal 2011 and fiscal 2012 proposing a total increase in tax of $254 million, subject to interest, related to a foreign tax credit matter. The Company contested these deficiencies by filing petitions with the U.S Tax Court. During the three months ended August 31, 2016, the Company reached a resolution with the IRS on this matter. Decisions were subsequently filed in U.S. District Tax Court stating there is no deficiency in income tax due from the Company. In the current period, the Company closed all U.S. federal income tax matters for fiscal years 2013 and 2014, with the exception of certain transfer pricing adjustments. The Company is currently under audit by the IRS for fiscal years 2015 and 2016.
The Company’s major foreign jurisdictions, China and the Netherlands, have concluded substantially all income tax matters through calendar 2006 and fiscal 2010, respectively. Although the timing of resolution of audits is not certain, the Company evaluates all domestic and foreign audit issues in the aggregate, along with the expiration of applicable statutes of limitations, and estimates that it is reasonably possible the total gross unrecognized tax benefits could decrease by up to $69 million within the next 12 months.
The Company provides for U.S. income taxes on the undistributed earnings of foreign subsidiaries unless they are considered indefinitely reinvested outside the United States. At May 31, 2017, the indefinitely reinvested earnings in foreign subsidiaries upon which United States income taxes have not been provided were approximately $12.2 billion. If these undistributed earnings were repatriated to the United States or if the shares of the relevant foreign subsidiaries were sold or otherwise transferred, they would generate foreign tax credits that would reduce the federal tax liability associated with the foreign dividend or the otherwise taxable transaction. Assuming a full utilization of the foreign tax credits, the potential net deferred tax liability associated with these temporary differences of undistributed earnings would be approximately $4.1 billion at May 31, 2017.
A portion of the Company's foreign operations are benefiting from a tax holiday, which is set to expire in 2021. This tax holiday may be extended when certain conditions are met or may be terminated early if certain conditions are not met. The tax benefit attributable to this tax holiday was $187 million, $173 million and $174 million for the fiscal years ended May 31, 2017, 2016 and 2015, respectively. The benefit of the tax holiday on diluted earnings per common share was $0.11, $0.10 and $0.10 for the fiscal years ended May 31, 2017, 2016 and 2015, respectively.
Deferred tax assets at May 31, 2017 and 2016 were reduced by a valuation allowance primarily relating to tax benefits of certain entities with operating losses. There was a $30 million net increase in the valuation allowance for the year ended May 31, 2017, compared to a net increase of $43 million for the year ended May 31, 2016 and no net change for the year ended May 31, 2015.
The Company has recorded deferred tax assets of $208 million at May 31, 2017 for foreign tax credit carry-forwards which expire in 2027.
The Company has available domestic and foreign loss carry-forwards of $266 million at May 31, 2017. Such losses will expire as follows:
| Year Ending May 31, | ||||||||||||||||||||||||||||
| (In millions) | 2018 | 2019 | 2020 | 2021 | 2022-2035 | Indefinite | Total | |||||||||||||||||||||
| Net operating losses | $ | 5 | $ | 1 | $ | 1 | $ | 1 | $ | 62 | $ | 196 | $ | 266 |
During the years ended May 31, 2017, 2016 and 2015, income tax benefits attributable to employee stock-based compensation transactions of $177 million, $281 million and $224 million, respectively, were allocated to Total shareholders’ equity.
| NOTE 10 — Redeemable Preferred Stock |
Sojitz America is the sole owner of the Company’s authorized redeemable preferred stock, $1 par value, which is redeemable at the option of Sojitz America or the Company at par value aggregating $0.3 million. A cumulative dividend of $0.10 per share is payable annually on May 31 and no dividends may be declared or paid on the common stock of the Company unless dividends on the redeemable preferred stock have been declared and paid in full. There have been no changes in the redeemable preferred stock in the three years ended May 31, 2017, 2016 and 2015. As the holder of the redeemable preferred stock, Sojitz America does not have general voting rights, but does have the right to vote as a separate class on the sale of all or substantially all of the assets of the Company and its subsidiaries, on merger, consolidation, liquidation or dissolution of the Company or on the sale or assignment of the NIKE trademark for athletic footwear sold in the United States. The redeemable preferred stock has been fully issued to Sojitz America and is not blank check preferred stock. The Company's articles of incorporation do not permit the issuance of additional preferred stock.
| NOTE 11 — Common Stock and Stock-Based Compensation |
The authorized number of shares of Class A Common Stock, no par value, and Class B Common Stock, no par value, are 400 million and 2,400 million, respectively. Each share of Class A Common Stock is convertible into one share of Class B Common Stock. Voting rights of Class B Common Stock are limited in certain circumstances with respect to the election of directors. There are no differences in the dividend and liquidation preferences or participation rights of the holders of Class A and Class B Common Stock.
The NIKE, Inc. Stock Incentive Plan (the “Stock Incentive Plan”) provides for the issuance of up to 718 million previously unissued shares of Class B Common Stock in connection with stock options and other awards granted under the Stock Incentive Plan. The Stock Incentive Plan authorizes the grant of non-statutory stock options, incentive stock options, stock appreciation rights, restricted stock, restricted stock units and performance-based awards. The exercise price for stock options and stock appreciation rights may not be less than the fair market value of the underlying shares on the date of grant. A committee of the Board of Directors administers the Stock Incentive Plan. The committee has the authority to determine the employees to whom awards will be made, the amount of the awards and the other terms and conditions of the awards. Substantially all stock option grants outstanding under the Stock Incentive Plan are granted in the first quarter of each fiscal year, vest ratably over four years and expire ten years from the date of grant.
The following table summarizes the Company’s total stock-based compensation expense recognized in Operating overhead expense:
| Year Ended May 31, | ||||||||||||
| (In millions) | 2017 | 2016 | 2015 | |||||||||
| Stock options(1) | $ | 145 | $ | 171 | $ | 136 | ||||||
| ESPPs | 36 | 31 | 24 | |||||||||
| Restricted stock | 34 | 34 | 31 | |||||||||
| TOTAL STOCK-BASED COMPENSATION EXPENSE | $ | 215 | $ | 236 | $ | 191 |
| (1) | Expense for stock options includes the expense associated with stock appreciation rights. Accelerated stock option expense is recorded for employees eligible for accelerated stock option vesting upon retirement. Accelerated stock option expense was $14 million, $30 million and $19 million for the years ended May 31, 2017, 2016 and 2015, respectively. |
As of May 31, 2017, the Company had $201 million of unrecognized compensation costs from stock options, net of estimated forfeitures, to be recognized in Operating overhead expense over a weighted average remaining period of 1.9 years.
The weighted average fair value per share of the options granted during the years ended May 31, 2017, 2016 and 2015, computed as of the grant date using the Black-Scholes pricing model, was $9.38, $12.66 and $8.48, respectively. The weighted average assumptions used to estimate these fair values are as follows:
| Year Ended May 31, | |||||||||
| 2017 | 2016 | 2015 | |||||||
| Dividend yield | 1.1 | % | 1.0 | % | 1.2 | % | |||
| Expected volatility | 17.4 | % | 23.6 | % | 23.6 | % | |||
| Weighted average expected life (in years) | 6.0 | 5.8 | 5.8 | ||||||
| Risk-free interest rate | 1.3 | % | 1.7 | % | 1.7 | % |
The Company estimates the expected volatility based on the implied volatility in market traded options on the Company’s common stock with a term greater than one year, along with other factors. The weighted average expected life of options is based on an analysis of historical and expected future exercise patterns. The interest rate is based on the U.S. Treasury (constant maturity) risk-free rate in effect at the date of grant for periods corresponding with the expected term of the options.
The following summarizes the stock option transactions under the plan discussed above:
| Shares(1) | Weighted Average Option Price | ||||||
| (In millions) | |||||||
| Options outstanding May 31, 2014 | 127.1 | $ | 19.64 | ||||
| Exercised | (27.2 | ) | 15.39 | ||||
| Forfeited | (2.1 | ) | 29.51 | ||||
| Granted | 18.4 | 38.84 | |||||
| Options outstanding May 31, 2015 | 116.2 | 23.50 | |||||
| Exercised | (22.5 | ) | 17.75 | ||||
| Forfeited | (2.3 | ) | 39.96 | ||||
| Granted | 20.6 | 56.41 | |||||
| Options outstanding May 31, 2016 | 112.0 | 30.38 | |||||
| Exercised | (17.1 | ) | 20.42 | ||||
| Forfeited | (2.3 | ) | 49.47 | ||||
| Granted | 12.2 | 57.81 | |||||
| Options outstanding May 31, 2017 | 104.8 | $ | 34.79 | ||||
| Options exercisable at May 31, | |||||||
| 2015 | 68.6 | $ | 18.26 | ||||
| 2016 | 66.5 | 21.48 | |||||
| 2017 | 67.9 | 26.03 |
| (1) | Includes stock appreciation rights transactions. |
The weighted average contractual life remaining for options outstanding and options exercisable at May 31, 2017 was 5.7 years and 4.5 years, respectively. The aggregate intrinsic value for options outstanding and exercisable at May 31, 2017 was $2,027 million and $1,846 million, respectively. The aggregate intrinsic value was the amount by which the market value of the underlying stock exceeded the exercise price of the options. The total intrinsic value of the options exercised during the years ended May 31, 2017, 2016 and 2015 was $594 million, $946 million and $795 million, respectively.
In addition to the Stock Incentive Plan, the Company gives employees the right to purchase shares at a discount to the market price under employee stock purchase plans (ESPPs). Subject to the annual statutory limit, employees are eligible to participate through payroll deductions of up to 10% of their compensation. At the end of each six-month offering period, shares are purchased by the participants at 85% of the lower of the fair market value at the beginning or the end of the offering period. Employees purchased 3.1 million, 2.5 million and 2.7 million shares during each of the three years ended May 31, 2017, 2016 and 2015, respectively.
From time to time, the Company grants restricted stock and restricted stock units to key employees under the Stock Incentive Plan. The number of shares underlying such awards granted to employees during the years ended May 31, 2017, 2016 and 2015 were 0.4 million, 1.0 million and 0.5 million, respectively, with weighted average values per share of $57.59, $54.87 and $39.69, respectively. Recipients of restricted stock are entitled to cash dividends and to vote their respective shares throughout the period of restriction. Recipients of restricted stock units are entitled to dividend equivalent cash payments upon vesting. The value of all grants of restricted stock and restricted stock units was established by the market price on the date of grant. During the years ended May 31, 2017, 2016 and 2015, the aggregate fair value of restricted stock and restricted stock units vested was $60 million, $49 million and $20 million, respectively, determined as of the date of vesting. As of May 31, 2017, the Company had $43 million of unrecognized compensation costs from restricted stock and restricted stock units to be recognized in Operating overhead expense over a weighted average period of 2.4 years.
| NOTE 12 — Earnings Per Share |
The following is a reconciliation from basic earnings per common share to diluted earnings per common share. The computations of diluted earnings per common share excluded options, including shares under employee stock purchase plans, to purchase an additional 30.5 million, 0.2 million and 1.7 million shares of common stock outstanding for the years ended May 31, 2017, 2016 and 2015, respectively, because the options were anti-dilutive.
| Year Ended May 31, | ||||||||||||
| (In millions, except per share data) | 2017 | 2016 | 2015 | |||||||||
| Determination of shares: | ||||||||||||
| Weighted average common shares outstanding | 1,657.8 | 1,697.9 | 1,723.5 | |||||||||
| Assumed conversion of dilutive stock options and awards | 34.2 | 44.6 | 45.3 | |||||||||
| DILUTED WEIGHTED AVERAGE COMMON SHARES OUTSTANDING | 1,692.0 | 1,742.5 | 1,768.8 | |||||||||
| Earnings per common share: | ||||||||||||
| Basic | $ | 2.56 | $ | 2.21 | $ | 1.90 | ||||||
| Diluted | $ | 2.51 | $ | 2.16 | $ | 1.85 |
| NOTE 13 — Benefit Plans |
The Company has a qualified 401(k) Savings and Profit Sharing Plan, in which all U.S. employees are able to participate. The Company matches a portion of employee contributions to the savings plan. Company contributions to the savings plan were $75 million, $72 million and $58 million and included in Operating overhead expense for the years ended May 31, 2017, 2016 and 2015, respectively. The terms of the plan also allow for annual discretionary profit sharing contributions, as determined by the Board of Directors, to the accounts of eligible U.S. employees who work at least 1,000 hours in a year. Profit sharing contributions of $68 million, $64 million and $58 million were made to the plan and included in Operating overhead expense for the years ended May 31, 2017, 2016 and 2015, respectively.
The Company also has a Long-Term Incentive Plan (LTIP) that was adopted by the Board of Directors and approved by shareholders in September 1997 and later amended and approved in fiscal 2007 and fiscal 2012. The Company recognized $21 million, $85 million and $68 million of Operating overhead expense related to cash awards under the LTIP during the years ended May 31, 2017, 2016 and 2015, respectively.
The Company allows certain highly compensated employees and non-employee directors of the Company to defer compensation under a nonqualified deferred compensation plan. Deferred compensation plan liabilities were $569 million and $475 million at May 31, 2017 and 2016, respectively, and primarily classified as long-term in Deferred income taxes and other liabilities.
The Company has pension plans in various countries worldwide. The pension plans are only available to local employees and are generally government mandated. The liability related to the unfunded pension liabilities of the plans was $107 million and $93 million at May 31, 2017 and 2016, respectively, and primarily classified as long-term in Deferred income taxes and other liabilities.
| NOTE 14 — Accumulated Other Comprehensive Income |
The changes in Accumulated other comprehensive income, net of tax, were as follows:
| (In millions) | Foreign Currency Translation Adjustment(1) | Cash Flow Hedges | Net Investment Hedges(1) | Other | Total | |||||||||||||||
| Balance at May 31, 2016 | $ | (207 | ) | $ | 463 | $ | 115 | $ | (53 | ) | $ | 318 | ||||||||
| Other comprehensive gains (losses) before reclassifications(2) | 15 | 118 | — | (14 | ) | 119 | ||||||||||||||
| Reclassifications to net income of previously deferred (gains) losses(3) | 1 | (633 | ) | — | (18 | ) | (650 | ) | ||||||||||||
| Other comprehensive income (loss) | 16 | (515 | ) | — | (32 | ) | (531 | ) | ||||||||||||
| Balance at May 31, 2017 | $ | (191 | ) | $ | (52 | ) | $ | 115 | $ | (85 | ) | $ | (213 | ) |
| (1) | The accumulated foreign currency translation adjustment and net investment hedge gains/losses related to an investment in a foreign subsidiary are reclassified to Net income upon sale or upon complete or substantially complete liquidation of the respective entity. |
| (2) | Net of tax benefit (expense) of $0 million, $24 million, $0 million, $3 million and $27 million, respectively. |
| (3) | Net of tax (benefit) expense of $0 million, $(3) million, $0 million, $(3) million and $(6) million, respectively. |
| (In millions) | Foreign Currency Translation Adjustment(1) | Cash Flow Hedges | Net Investment Hedges(1) | Other | Total | |||||||||||||||
| Balance at May 31, 2015 | $ | (31 | ) | $ | 1,220 | $ | 115 | $ | (58 | ) | $ | 1,246 | ||||||||
| Other comprehensive gains (losses) before reclassifications(2) | (178 | ) | (47 | ) | — | 6 | (219 | ) | ||||||||||||
| Reclassifications to net income of previously deferred (gains) losses(3) | 2 | (710 | ) | — | (1 | ) | (709 | ) | ||||||||||||
| Other comprehensive income (loss) | (176 | ) | (757 | ) | — | 5 | (928 | ) | ||||||||||||
| Balance at May 31, 2016 | $ | (207 | ) | $ | 463 | $ | 115 | $ | (53 | ) | $ | 318 |
| (1) | The accumulated foreign currency translation adjustment and net investment hedge gains/losses related to an investment in a foreign subsidiary are reclassified to Net income upon sale or upon complete or substantially complete liquidation of the respective entity. |
| (2) | Net of tax benefit (expense) of $0 million, $28 million, $0 million, $(2) million and $26 million, respectively. |
| (3) | Net of tax (benefit) expense of $0 million, $7 million, $0 million, $2 million and $9 million, respectively. |
The following table summarizes the reclassifications from Accumulated other comprehensive income to the Consolidated Statements of Income:
| Amount of Gain (Loss) Reclassified from Accumulated Other Comprehensive Income into Income | Location of Gain (Loss) Reclassified from Accumulated Other Comprehensive Income into Income | ||||||||
| Year Ended May 31, | |||||||||
| (In millions) | 2017 | 2016 | |||||||
| Gains (losses) on foreign currency translation adjustment | (1 | ) | (2 | ) | Other (income) expense, net | ||||
| Total before tax | (1 | ) | (2 | ) | |||||
| Tax (expense) benefit | — | — | |||||||
| Gain (loss) net of tax | (1 | ) | (2 | ) | |||||
| Gains (losses) on cash flow hedges: | |||||||||
| Foreign exchange forwards and options | 96 | (88 | ) | Revenues | |||||
| Foreign exchange forwards and options | 339 | 586 | Cost of sales | ||||||
| Foreign exchange forwards and options | — | — | Total selling and administrative expense | ||||||
| Foreign exchange forwards and options | 199 | 219 | Other (income) expense, net | ||||||
| Interest rate swaps | (4 | ) | — | Interest expense (income), net | |||||
| Total before tax | 630 | 717 | |||||||
| Tax (expense) benefit | 3 | (7 | ) | ||||||
| Gain (loss) net of tax | 633 | 710 | |||||||
| Gains (losses) on other | 15 | 3 | Other (income) expense, net | ||||||
| Total before tax | 15 | 3 | |||||||
| Tax (expense) benefit | 3 | (2 | ) | ||||||
| Gain (loss) net of tax | 18 | 1 | |||||||
| Total net gain (loss) reclassified for the period | $ | 650 | $ | 709 |
Refer to Note 16 — Risk Management and Derivatives for more information on the Company's risk management program and derivatives.
| NOTE 15 — Commitments and Contingencies |
The Company leases retail store space, certain distribution and warehouse facilities, and office space and other non-real estate assets under operating leases expiring from 1 to 17 years after May 31, 2017. Rent expense was $731 million, $661 million and $594 million for the years ended May 31, 2017, 2016 and 2015, respectively. Amounts of minimum future annual commitments under non-cancelable operating and capital leases are as follows (in millions):
| 2018 | 2019 | 2020 | 2021 | 2022 | Thereafter | Total | ||||||||||||||||||||||
| Operating leases | $ | 537 | $ | 509 | $ | 438 | $ | 399 | $ | 350 | $ | 1,672 | $ | 3,905 | ||||||||||||||
| Capital leases and other financing obligations(1) | $ | 34 | $ | 32 | $ | 28 | $ | 25 | $ | 26 | $ | 225 | $ | 370 |
| (1) | Capital leases and other financing obligations include payments related to build-to-suit lease arrangements. |
As of May 31, 2017 and 2016, the Company had letters of credit outstanding totaling $152 million and $157 million, respectively. These letters of credit were generally issued for the purchase of inventory and guarantees of the Company’s performance under certain self-insurance and other programs.
In connection with various contracts and agreements, the Company provides routine indemnification relating to the enforceability of intellectual property rights, coverage for legal issues that arise and other items where the Company is acting as the guarantor. Currently, the Company has several such agreements in place. However, based on the Company’s historical experience and the estimated probability of future loss, the Company has determined that the fair value of such indemnification is not material to the Company’s financial position or results of operations.
In the ordinary course of its business, the Company is involved in various legal proceedings involving contractual and employment relationships, product liability claims, trademark rights and a variety of other matters. While the Company cannot predict the outcome of its pending legal matters with certainty, the Company does not believe any currently identified claim, proceeding or litigation, either individually or in aggregate, will have a material impact on the Company’s results of operations, financial position or cash flows.
| NOTE 16 — Risk Management and Derivatives |
The Company is exposed to global market risks, including the effect of changes in foreign currency exchange rates and interest rates, and uses derivatives to manage financial exposures that occur in the normal course of business. The Company does not hold or issue derivatives for trading or speculative purposes.
The Company may elect to designate certain derivatives as hedging instruments under the accounting standards for derivatives and hedging. The Company formally documents all relationships between designated hedging instruments and hedged items as well as its risk management objectives and strategies for undertaking hedge transactions. This process includes linking all derivatives designated as hedges to either recognized assets or liabilities or forecasted transactions.
The majority of derivatives outstanding as of May 31, 2017 are designated as foreign currency cash flow hedges, primarily for Euro/U.S. Dollar, British Pound/Euro and Japanese Yen/U.S. Dollar currency pairs. All derivatives are recognized on the Consolidated Balance Sheets at fair value and classified based on the instrument’s maturity date.
The following table presents the fair values of derivative instruments included within the Consolidated Balance Sheets as of May 31, 2017 and 2016:
| Asset Derivatives | Liability Derivatives | |||||||||||||||||||
| (In millions) | Balance Sheet Location | 2017 | 2016 | Balance Sheet Location | 2017 | 2016 | ||||||||||||||
| Derivatives formally designated as hedging instruments: | ||||||||||||||||||||
| Foreign exchange forwards and options | Prepaid expenses and other current assets | $ | 113 | $ | 447 | Accrued liabilities | $ | 59 | $ | 38 | ||||||||||
| Interest rate swaps | Prepaid expenses and other current assets | — | 7 | Accrued liabilities | — | 45 | ||||||||||||||
| Foreign exchange forwards and options | Deferred income taxes and other assets | 13 | 90 | Deferred income taxes and other liabilities | 73 | 12 | ||||||||||||||
| Interest rate swaps | Deferred income taxes and other assets | — | — | Deferred income taxes and other liabilities | — | — | ||||||||||||||
| Total derivatives formally designated as hedging instruments | 126 | 544 | 132 | 95 | ||||||||||||||||
| Derivatives not designated as hedging instruments: | ||||||||||||||||||||
| Foreign exchange forwards and options | Prepaid expenses and other current assets | 103 | 40 | Accrued liabilities | 107 | 76 | ||||||||||||||
| Embedded derivatives | Prepaid expenses and other current assets | 1 | 2 | Accrued liabilities | 2 | 2 | ||||||||||||||
| Foreign exchange forwards and options | Deferred income taxes and other assets | 2 | 26 | Deferred income taxes and other liabilities | 7 | 19 | ||||||||||||||
| Embedded derivatives | Deferred income taxes and other assets | 9 | 5 | Deferred income taxes and other liabilities | 6 | 7 | ||||||||||||||
| Total derivatives not designated as hedging instruments | 115 | 73 | 122 | 104 | ||||||||||||||||
| TOTAL DERIVATIVES | $ | 241 | $ | 617 | $ | 254 | $ | 199 |
The following tables present the amounts affecting the Consolidated Statements of Income for the years ended May 31, 2017, 2016 and 2015:
| (In millions) | Amount of Gain (Loss) Recognized in Other Comprehensive Income on Derivatives(1) | Amount of Gain (Loss) Reclassified from Accumulated Other Comprehensive Income into Income(1) | ||||||||||||||||||||||||
| Year Ended May 31, | Location of Gain (Loss) Reclassified From Accumulated Other Comprehensive Income into Income | Year Ended May 31, | ||||||||||||||||||||||||
| 2017 | 2016 | 2015 | 2017 | 2016 | 2015 | |||||||||||||||||||||
| Derivatives designated as cash flow hedges: | ||||||||||||||||||||||||||
| Foreign exchange forwards and options | $ | 72 | $ | 90 | $ | (202 | ) | Revenues | $ | 96 | $ | (88 | ) | $ | (95 | ) | ||||||||||
| Foreign exchange forwards and options | 43 | (57 | ) | 1,109 | Cost of sales | 339 | 586 | 220 | ||||||||||||||||||
| Foreign exchange forwards and options | (4 | ) | — | — | Total selling and administrative expense | — | — | — | ||||||||||||||||||
| Foreign exchange forwards and options | 37 | (25 | ) | 497 | Other (income) expense, net | 199 | 219 | 136 | ||||||||||||||||||
| Interest rate swaps | (54 | ) | (83 | ) | 76 | Interest expense (income), net | (4 | ) | — | — | ||||||||||||||||
| Total designated cash flow hedges | 94 | (75 | ) | 1,480 | 630 | 717 | 261 |
| (1) | For the years ended May 31, 2017, 2016 and 2015, the amounts recorded in Other (income) expense, net as a result of hedge ineffectiveness and the discontinuance of cash flow hedges because the forecasted transactions were no longer probable of occurring were immaterial. |
| Amount of Gain (Loss) Recognized in Income on Derivatives | Location of Gain (Loss) Recognized in Income on Derivatives | |||||||||||||
| Year Ended May 31, | ||||||||||||||
| (In millions) | 2017 | 2016 | 2015 | |||||||||||
| Derivatives designated as fair value hedges: | ||||||||||||||
| Interest rate swaps(1) | $ | — | $ | 2 | $ | 5 | Interest expense (income), net | |||||||
| Derivatives not designated as hedging instruments: | ||||||||||||||
| Foreign exchange forwards and options | (44 | ) | (68 | ) | 611 | Other (income) expense, net | ||||||||
| Embedded derivatives | $ | (2 | ) | $ | (2 | ) | $ | (1 | ) | Other (income) expense, net |
| (1) | All interest rate swaps designated as fair value hedges meet the shortcut method requirements under the accounting standards for derivatives and hedging. Accordingly, changes in the fair values of the interest rate swaps are considered to exactly offset changes in the fair value of the underlying long-term debt. Refer to “Fair Value Hedges” in this note for additional detail. |
Refer to Note 6 — Fair Value Measurements for a description of how the above financial instruments are valued and Note 14 — Accumulated Other Comprehensive Income and the Consolidated Statements of Shareholders’ Equity for additional information on changes in Accumulated other comprehensive income for the years ended May 31, 2017, 2016 and 2015.
Cash Flow Hedges
The purpose of the Company's foreign exchange risk management program is to lessen both the positive and negative effects of currency fluctuations on the Company's consolidated results of operations, financial position and cash flows. Foreign currency exposures that the Company may elect to hedge in this manner include product cost exposures, non-functional currency denominated external and intercompany revenues, selling and administrative expenses, investments in U.S. Dollar-denominated available-for-sale debt securities and certain other intercompany transactions.
Product cost exposures are primarily generated through non-functional currency denominated product purchases and the foreign currency adjustment program described below. NIKE entities primarily purchase products in two ways: (1) Certain NIKE entities purchase product from the NIKE Trading Company (“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 product 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. (2) 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.
The Company 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 the Company's existing foreign currency exposures. Under this program, the Company’s 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 portion of the indices denominated in the local or functional currency of the factory, the Company may elect to place formally designated cash flow hedges. For all currencies within the indices, excluding the U.S. Dollar and the local or functional currency of the factory, an embedded derivative contract is created upon the factory’s acceptance of NIKE’s purchase order. Embedded derivative contracts are separated from the related purchase order, as further described within the Embedded Derivatives section below.
The Company’s policy permits the utilization of derivatives to reduce its foreign currency exposures where internal netting or other strategies cannot be effectively employed. Typically, the Company may enter into hedge contracts starting up to 12 to 24 months in advance of the forecasted transaction and may place incremental hedges up to 100% of the exposure by the time the forecasted transaction occurs. The total notional amount of outstanding foreign currency derivatives designated as cash flow hedges was $11.1 billion as of May 31, 2017.
During the second quarter of fiscal 2017, the Company terminated all forward-starting interest rate swap agreements with a total notional amount of $1.5 billion in connection with the October 21, 2016 debt issuance (refer to Note 8 - Long-Term Debt). Upon termination of these forward-starting swaps, the Company made cash payments to the related counterparties of $92 million, which was recorded in Accumulated other comprehensive
income and will be released through Interest expense (income), net as interest expense is incurred over the term of the issued debt. During the second quarter of fiscal 2016, the Company terminated certain forward-starting interest rate swaps with a total notional amount of $1 billion in connection with the October 29, 2015 debt issuance (refer to Note 8 — Long-Term Debt). Upon termination of these forward-starting swaps, the Company received cash payments from the related counterparties of $34 million, which was recorded in Accumulated other comprehensive income and will be released through Interest expense (income), net as interest expense is incurred over the term of the issued debt.
All changes in fair value of derivatives designated as cash flow hedges, excluding any ineffective portion, are recorded in Accumulated other comprehensive income until Net income is affected by the variability of cash flows of the hedged transaction. In most cases, amounts recorded in Accumulated other comprehensive income will be released to Net income in periods following the maturity of the related derivative, rather than at maturity. Effective hedge results are classified within the Consolidated Statements of Income in the same manner as the underlying exposure. The results of hedges of non-functional currency denominated revenues and product cost exposures, excluding embedded derivatives, are recorded in Revenues or Cost of sales when the underlying hedged transaction affects consolidated Net income. Results of hedges of selling and administrative expense are recorded together with those costs when the related expense is recorded. Amounts recorded in Accumulated other comprehensive income related to forward-starting interest rate swaps will be released through Interest expense (income), net as interest expense is incurred over the term of the issued debt. Results of hedges of anticipated purchases and sales of U.S. Dollar-denominated available-for-sale securities are recorded in Other (income) expense, net when the securities are sold. Results of hedges of certain anticipated intercompany transactions are recorded in Other (income) expense, net when the transaction occurs. The Company classifies the cash flows at settlement from these designated cash flow hedge derivatives in the same category as the cash flows from the related hedged items, primarily within the Cash provided by operations component of the Consolidated Statements of Cash Flows.
Premiums paid or received on options are initially recorded as deferred charges or deferred credits, respectively. The Company assesses the effectiveness of options based on the total cash flows method and records total changes in the options’ fair value to Accumulated other comprehensive income to the degree they are effective.
The Company formally assesses, both at a hedge’s inception and on an ongoing basis, whether the derivatives that are used in the hedging transaction have been highly effective in offsetting changes in the cash flows of hedged items and whether those derivatives may be expected to remain highly effective in future periods. Effectiveness for cash flow hedges is assessed based on changes in forward rates. Ineffectiveness was immaterial for the years ended May 31, 2017, 2016 and 2015.
The Company discontinues hedge accounting prospectively when: (1) it determines that the derivative is no longer highly effective in offsetting changes in the cash flows of a hedged item (including hedged items such as firm commitments or forecasted transactions); (2) the derivative expires or is sold, terminated or exercised; (3) it is no longer probable that the forecasted transaction will occur; or (4) management determines that designating the derivative as a hedging instrument is no longer appropriate.
When the Company discontinues hedge accounting because it is no longer probable that the forecasted transaction will occur in the originally expected period, but is expected to occur within an additional two-month period of time thereafter, the gain or loss on the derivative remains in Accumulated other comprehensive income and is reclassified to Net income when the forecasted transaction affects consolidated Net income. However, if it is probable that a forecasted transaction will not occur by the end of the originally specified time period or within an additional two-month period of time thereafter, the gains and losses that were in Accumulated other comprehensive income will be recognized immediately in Other (income) expense, net. In all situations in which hedge accounting is discontinued and the derivative remains outstanding, the Company will carry the derivative at its fair value on the Consolidated Balance Sheets, recognizing future changes in the fair value in Other (income) expense, net. For the years ended May 31, 2017, 2016 and 2015, the amounts recorded in Other (income) expense, net as a result of the discontinuance of cash flow hedging because the forecasted transaction was no longer probable of occurring were immaterial.
As of May 31, 2017, $100 million of deferred net gains (net of tax) on both outstanding and matured derivatives in Accumulated other comprehensive income are expected to be reclassified to Net income during the next 12 months concurrent with the underlying hedged transactions also being recorded in Net income. Actual amounts ultimately reclassified to Net income are dependent on the exchange rates in effect when derivative contracts that are currently outstanding mature. As of May 31, 2017, the maximum term over which the Company is hedging exposures to the variability of cash flows for its forecasted transactions was 24 months.
Fair Value Hedges
The Company has, in the past, been exposed to the risk of changes in the fair value of certain fixed-rate debt attributable to changes in interest rates. Derivatives used by the Company to hedge this risk are receive-fixed, pay-variable interest rate swaps. All interest rate swaps designated as fair value hedges of the related long-term debt meet the shortcut method requirements under U.S. GAAP. Accordingly, changes in the fair values of the interest rate swaps are considered to exactly offset changes in the fair value of the underlying long-term debt. The cash flows associated with the Company’s fair value hedges are periodic interest payments while the swaps are outstanding, which are reflected within the Cash provided by operations component of the Consolidated Statements of Cash Flows. The Company recorded no ineffectiveness from its interest rate swaps designated as fair value hedges for the years ended May 31, 2017, 2016 or 2015. On October 15, 2015, the Company repaid the long-term debt which had previously been hedged with these interest rate swaps. Accordingly, as of May 31, 2017, the Company had no interest rate swaps designated as fair value hedges.
Net Investment Hedges
The Company has, in the past, hedged and may, in the future, hedge the risk of variability in foreign-currency-denominated net investments in wholly-owned international operations. All changes in fair value of the derivatives designated as net investment hedges, except ineffective portions, are reported in Accumulated other comprehensive income along with the foreign currency translation adjustments on those investments. The Company classifies the cash flows at settlement of its net investment hedges within the Cash used by investing activities component of the Consolidated Statements of Cash Flows. The Company assesses hedge effectiveness based on changes in forward rates. The Company recorded no ineffectiveness from net investment hedges for the years ended May 31, 2017, 2016 or 2015. The Company had no outstanding net investment hedges as of May 31, 2017.
Undesignated Derivative Instruments
The Company may elect to enter into foreign exchange forwards to mitigate the change in fair value of specific assets and liabilities on the Consolidated Balance Sheets and/or the embedded derivative contracts. These forwards are not designated as hedging instruments under U.S. GAAP. Accordingly, these undesignated instruments are recorded at fair value as a derivative asset or liability on the Consolidated Balance Sheets with their corresponding change in fair value recognized in Other (income) expense, net, together with the re-measurement gain or loss from the hedged balance sheet position or embedded derivative contract. The Company classifies the cash flows at settlement from undesignated instruments in the same category as the cash flows from the related hedged items, primarily within the Cash provided by operations component of the Consolidated Statements of Cash Flows. The total notional amount of outstanding undesignated derivative instruments was $10.5 billion as of May 31, 2017.
Embedded Derivatives
As part of the foreign currency adjustment program described above, an embedded derivative contract is created upon the factory’s acceptance of NIKE’s purchase order for currencies within the factory currency exposure indices that are neither the U.S. Dollar nor the local or functional currency of the factory. Embedded derivative contracts are treated as foreign currency forward contracts that are bifurcated from the related purchase order and recorded at fair value as a derivative asset or liability on the Consolidated Balance Sheets with their corresponding change in fair value recognized in Other (income) expense, net, from the date a purchase order is accepted by a factory through the date the purchase price is no longer subject to foreign currency fluctuations.
In addition, the Company has entered into certain other contractual agreements which have payments that are indexed to currencies that are not the functional currency of either substantial party to the contracts. These payment terms expose NIKE to variability in foreign exchange rates and create embedded derivative contracts that must be bifurcated from the related contract and recorded at fair value as derivative assets or liabilities on the Consolidated Balance Sheets with their corresponding changes in fair value recognized in Other (income) expense, net until each payment is settled.
At May 31, 2017, the total notional amount of all embedded derivatives outstanding was approximately $265 million.
Credit Risk
The Company is exposed to credit-related losses in the event of nonperformance by counterparties to hedging instruments. The counterparties to all derivative transactions are major financial institutions with investment grade credit ratings. However, this does not eliminate the Company’s exposure to credit risk with these institutions. This credit risk is limited to the unrealized gains in such contracts should any of these counterparties fail to perform as contracted. To manage this risk, the Company has established strict counterparty credit guidelines that are continually monitored.
The Company’s derivative contracts contain credit risk-related contingent features designed to protect against significant deterioration in counterparties’ creditworthiness and their ultimate ability to settle outstanding derivative contracts in the normal course of business. The Company’s bilateral credit-related contingent features generally require the owing entity, either the Company or the derivative counterparty, to post collateral for the portion of the fair value in excess of $50 million should the fair value of outstanding derivatives per counterparty be greater than $50 million. Additionally, a certain level of decline in credit rating of either the Company or the counterparty could also trigger collateral requirements. As of May 31, 2017, the Company was in compliance with all credit risk-related contingent features and had derivative instruments with credit risk-related contingent features in a net liability position of $59 million. However, no derivative instruments with credit risk-related contingent features in a net liability position were greater than $50 million by counterparty. Accordingly, the Company was not required to post any collateral as a result of these contingent features. Further, as of May 31, 2017, the Company had received no cash collateral from various counterparties to its derivative contracts (refer to Note 6 — Fair Value Measurements). Given the considerations described above, the Company considers the impact of the risk of counterparty default to be immaterial.
| NOTE 17 — Operating Segments and Related Information |
The Company’s 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.
In June 2017, NIKE, Inc. announced a new company alignment designed to allow NIKE to better serve the consumer personally, at scale. As a result of this organizational realignment, beginning in fiscal 2018, the Company's reportable operating segments for the NIKE Brand will be: North America; Europe, Middle East and Africa; Greater China; and Asia Pacific and Latin America.
The Company’s NIKE Brand Direct to Consumer (DTC) operations are, and will continue to be, 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.
Global Brand Divisions is included within the NIKE Brand for presentation purposes to align with the way management views the Company. Global Brand Divisions primarily represents NIKE Brand licensing businesses that are not part of a geographic operating segment, and demand creation, operating overhead and product creation and design expenses that are centrally managed for the NIKE Brand.
Corporate consists largely of unallocated general and administrative expenses, including expenses associated with centrally managed departments; depreciation and amortization related to the Company’s headquarters; unallocated insurance, benefit and compensation programs, including stock-based compensation; and certain foreign currency gains and losses, including certain hedge gains and losses.
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 Consolidated Statements of Income.
As part of the Company's centrally managed foreign exchange risk management program, standard foreign currency rates are assigned twice per year to each NIKE Brand entity in the Company's geographic operating segments and to 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 in 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 the Company's centrally managed foreign exchange risk management program and other conversion gains and losses.
Accounts receivable, net, Inventories and Property, plant and equipment, net for operating segments are regularly reviewed by management and are therefore provided below. Additions to long-lived assets as presented in the following table represent capital expenditures.
| Year Ended May 31, | ||||||||||||
| (In millions) | 2017 | 2016 | 2015 | |||||||||
| REVENUES | ||||||||||||
| North America | $ | 15,216 | $ | 14,764 | $ | 13,740 | ||||||
| Western Europe | 6,211 | 5,884 | 5,705 | |||||||||
| Central & Eastern Europe | 1,487 | 1,431 | 1,421 | |||||||||
| Greater China | 4,237 | 3,785 | 3,067 | |||||||||
| Japan | 1,014 | 869 | 755 | |||||||||
| Emerging Markets | 3,995 | 3,701 | 3,898 | |||||||||
| Global Brand Divisions | 73 | 73 | 115 | |||||||||
| Total NIKE Brand | 32,233 | 30,507 | 28,701 | |||||||||
| Converse | 2,042 | 1,955 | 1,982 | |||||||||
| Corporate | 75 | (86 | ) | (82 | ) | |||||||
| TOTAL NIKE, INC. REVENUES | $ | 34,350 | $ | 32,376 | $ | 30,601 | ||||||
| EARNINGS BEFORE INTEREST AND TAXES | ||||||||||||
| North America | $ | 3,875 | $ | 3,763 | $ | 3,645 | ||||||
| Western Europe | 1,203 | 1,434 | 1,275 | |||||||||
| Central & Eastern Europe | 244 | 289 | 249 | |||||||||
| Greater China | 1,507 | 1,372 | 993 | |||||||||
| Japan | 224 | 174 | 100 | |||||||||
| Emerging Markets | 816 | 892 | 818 | |||||||||
| Global Brand Divisions | (2,677 | ) | (2,596 | ) | (2,267 | ) | ||||||
| Total NIKE Brand | 5,192 | 5,328 | 4,813 | |||||||||
| Converse | 477 | 487 | 517 | |||||||||
| Corporate | (724 | ) | (1,173 | ) | (1,097 | ) | ||||||
| Total NIKE, Inc. Earnings Before Interest and Taxes | 4,945 | 4,642 | 4,233 | |||||||||
| Interest expense (income), net | 59 | 19 | 28 | |||||||||
| TOTAL NIKE, INC. INCOME BEFORE INCOME TAXES | $ | 4,886 | $ | 4,623 | $ | 4,205 | ||||||
| ADDITIONS TO LONG-LIVED ASSETS | ||||||||||||
| North America | $ | 223 | $ | 242 | $ | 208 | ||||||
| Western Europe | 162 | 215 | 216 | |||||||||
| Central & Eastern Europe | 10 | 17 | 20 | |||||||||
| Greater China | 51 | 44 | 69 | |||||||||
| Japan | 21 | 13 | 15 | |||||||||
| Emerging Markets | 39 | 51 | 37 | |||||||||
| Global Brand Divisions | 278 | 258 | 225 | |||||||||
| Total NIKE Brand | 784 | 840 | 790 | |||||||||
| Converse | 30 | 39 | 69 | |||||||||
| Corporate | 387 | 312 | 144 | |||||||||
| TOTAL ADDITIONS TO LONG-LIVED ASSETS | $ | 1,201 | $ | 1,191 | $ | 1,003 | ||||||
| DEPRECIATION | ||||||||||||
| North America | $ | 140 | $ | 133 | $ | 121 | ||||||
| Western Europe | 91 | 72 | 75 | |||||||||
| Central & Eastern Europe | 13 | 12 | 12 | |||||||||
| Greater China | 54 | 48 | 46 | |||||||||
| Japan | 18 | 18 | 22 | |||||||||
| Emerging Markets | 38 | 25 | 27 | |||||||||
| Global Brand Divisions | 233 | 230 | 210 | |||||||||
| Total NIKE Brand | 587 | 538 | 513 | |||||||||
| Converse | 28 | 27 | 18 | |||||||||
| Corporate | 91 | 84 | 75 | |||||||||
| TOTAL DEPRECIATION | $ | 706 | $ | 649 | $ | 606 |
| As of May 31, | ||||||||
| (In millions) | 2017 | 2016 | ||||||
| ACCOUNTS RECEIVABLE, NET | ||||||||
| North America | $ | 1,798 | $ | 1,689 | ||||
| Western Europe | 410 | 378 | ||||||
| Central & Eastern Europe | 228 | 194 | ||||||
| Greater China | 102 | 74 | ||||||
| Japan | 151 | 129 | ||||||
| Emerging Markets | 594 | 409 | ||||||
| Global Brand Divisions | 86 | 76 | ||||||
| Total NIKE Brand | 3,369 | 2,949 | ||||||
| Converse | 297 | 270 | ||||||
| Corporate | 11 | 22 | ||||||
| TOTAL ACCOUNTS RECEIVABLE, NET | $ | 3,677 | $ | 3,241 | ||||
| INVENTORIES | ||||||||
| North America | $ | 2,218 | $ | 2,363 | ||||
| Western Europe | 1,035 | 929 | ||||||
| Central & Eastern Europe | 251 | 210 | ||||||
| Greater China | 463 | 375 | ||||||
| Japan | 127 | 146 | ||||||
| Emerging Markets | 608 | 478 | ||||||
| Global Brand Divisions | 68 | 35 | ||||||
| Total NIKE Brand | 4,770 | 4,536 | ||||||
| Converse | 286 | 306 | ||||||
| Corporate | (1 | ) | (4 | ) | ||||
| TOTAL INVENTORIES | $ | 5,055 | $ | 4,838 | ||||
| PROPERTY, PLANT AND EQUIPMENT, NET | ||||||||
| North America | $ | 819 | $ | 742 | ||||
| Western Europe | 658 | 589 | ||||||
| Central & Eastern Europe | 48 | 50 | ||||||
| Greater China | 225 | 234 | ||||||
| Japan | 223 | 223 | ||||||
| Emerging Markets | 120 | 109 | ||||||
| Global Brand Divisions | 533 | 511 | ||||||
| Total NIKE Brand | 2,626 | 2,458 | ||||||
| Converse | 125 | 125 | ||||||
| Corporate | 1,238 | 937 | ||||||
| TOTAL PROPERTY, PLANT AND EQUIPMENT, NET | $ | 3,989 | $ | 3,520 |
Revenues by Major Product Lines
Revenues from external customers for NIKE Brand products are attributable to sales of footwear, apparel and equipment. Other revenues from external customers consist primarily of sales by Converse.
| Year Ended May 31, | ||||||||||||
| (In millions) | 2017 | 2016 | 2015 | |||||||||
| Footwear | $ | 21,081 | $ | 19,871 | $ | 18,318 | ||||||
| Apparel | 9,654 | 9,067 | 8,637 | |||||||||
| Equipment | 1,425 | 1,496 | 1,631 | |||||||||
| Other | 2,190 | 1,942 | 2,015 | |||||||||
| TOTAL NIKE, INC. REVENUES | $ | 34,350 | $ | 32,376 | $ | 30,601 |
Revenues and Long-Lived Assets by Geographic Area
After allocation of revenues for Global Brand Divisions, Converse and Corporate to geographical areas based on the location where the sales originated, revenues by geographical area are essentially the same as reported above for the NIKE Brand operating segments with the exception of the United States. Revenues derived in the United States were $15,778 million, $15,304 million and $14,180 million for the years ended May 31, 2017, 2016 and 2015, respectively. The Company’s largest concentrations of long-lived assets primarily consist of the Company’s world headquarters and distribution facilities in the United States and distribution facilities in Belgium, China and Japan. Long-lived assets attributable to operations in the United States, which are primarily composed of net property, plant & equipment, were $2,629 million and $2,241 million at May 31, 2017 and 2016, respectively. Long-lived assets attributable to operations in Belgium were $390 million and $348 million at May 31, 2017 and 2016, respectively. Long-lived assets attributable to operations in China were $232 million and $240 million at May 31, 2017 and 2016, respectively. Long-lived assets attributable to operations in Japan were $223 million and $223 million at May 31, 2017 and 2016, respectively.
Major Customers
No customer accounted for 10% or more of the Company’s net revenues during the years ended May 31, 2017, 2016 and 2015.
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