Item 7. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS

NIKE designs, develops, markets and sells athletic footwear, apparel, equipment, accessories and services worldwide. We are the largest seller of athletic footwear and apparel in the world. We sell our products through NIKE-owned retail stores and through digital platforms (which we refer to collectively as our “NIKE Direct” operations), to retail accounts and to a mix of independent distributors, licensees and sales representatives in virtually all countries around the world. Our goal is to deliver value to our shareholders by building a profitable global portfolio of branded footwear, apparel, equipment and accessories businesses. Our strategy is to achieve long-term revenue growth by creating innovative, “must-have” products, building deep personal consumer connections with our brands and delivering compelling consumer experiences through digital platforms and at retail.

Since fiscal 2018, through the Consumer Direct Offense and our Triple Double strategy, we have focused on doubling the impact of innovation, increasing our speed and agility to market and growing our direct connections with consumers. In June 2020, we announced a new digitally empowered phase of the Consumer Direct Offense strategy: Consumer Direct Acceleration. This strategic acceleration will focus on three specific areas. First, creating the marketplace of the future through more premium, consistent and seamless consumer experiences that more closely align with what consumers want and need. This strategy will lead with NIKE Digital and our owned stores, as well as through select strategic partners who share our marketplace vision. Second, we will align our product creation and category organizations around a new consumer construct focused on Men’s, Women’s and Kids'. This approach is intended to allow us to create product that better meets individual consumer needs, including more specialization of our category approach, while re-aligning and simplifying our offense to accelerate our largest growth opportunities. In particular, we expect to reinvest in our Women’s and Kids’ businesses and also simplify our operating model across the remainder of the Company to optimize effectiveness. Third, we will unify investments in data and analytics, demand sensing, insight gathering, inventory management and other areas against an end-to-end technology foundation to accelerate our digital transformation. We believe this unified approach will accelerate growth and unlock more efficiency for our business, while driving speed and responsiveness as we serve consumers globally. As such, our new financial goals through fiscal 2025 are outlined below:

• High single-digit to low double-digit revenue growth;

• Gross margin rate in the high 40s by fiscal 2025;

• Earnings before interest and taxes as a percent of revenues ("EBIT Margin") in the high teens by fiscal 2025;

• Mid to high teens diluted earnings per share growth;

• Exceeding low 30% range rate of return on invested capital (ROIC); and

• Annual capital expenditures at roughly 3% of Revenues.

As a result of our strategic acceleration, management announced on July 22, 2020, a series of leadership and operating model changes to streamline and speed up our execution. These changes resulted in a net reduction of our global workforce and during fiscal 2021, we incurred pre-tax charges of $294 million, which relate to employee termination costs and, to a lesser extent, stock-based compensation expense. All related actions are now substantially complete, and we expect future annual wage-related savings will be reinvested to execute against this next phase of our strategy. For more information related to our organizational realignment and related costs, see Note 21 — Restructuring within the accompanying Notes to the Consolidated Financial Statements.

COVID-19 UPDATE

Throughout fiscal 2021, the COVID-19 pandemic impacted our business results and operations globally. Our business and wholesale partners experienced temporary store closures and stores operating on reduced hours, as a result of mandatory lockdowns across our North America, EMEA and APLA geographies. Additionally, disruption in the global supply chain due to container shortages, transportation delays and U.S. port congestion interrupted the flow of our inventory. Despite the disruption caused by the pandemic, we achieved record Revenues for fiscal 2021, which increased 19% to $44.5 billion, compared to the prior fiscal year, with gross margin expansion of 140 basis points. We ended the fiscal year with Inventories down 7% compared to May 31, 2020, and our liquidity position remains strong with $13.5 billion of Cash and equivalents and Short-term investments, an increase of $4.7 billion compared to May 31, 2020.

Our NIKE Direct business fueled our growth throughout the year as we navigated the pandemic, leveraging our digital platforms with our store footprint to connect directly with the consumer. NIKE Brand digital revenues grew 60% on a currency-neutral basis, with strong double-digit growth across each of our geographies. Despite temporary store closures throughout the year, due to COVID-19 safety-related measures, we experienced a 4% increase in comparable store sales, driven by growth in Greater China and North America, partially offset by declines in EMEA and APLA. As of July 15, 2021, approximately 99% of our owned stores were open with some operating on reduced hours.

2021 FORM 10-K 28

We continue to monitor the rapidly evolving situation, as well as guidance from international and domestic authorities, including federal, state and local public health authorities and may take additional actions based on their recommendations. In these circumstances, there may be developments outside our control requiring us to adjust our operating plan. There remains risk that COVID-19 could have material adverse impacts on our future revenue growth as well as our overall profitability and may lead to higher than normal inventory levels in various markets, adverse impacts on the global supply chain, revised payment terms with certain of our wholesale customers, higher sales-related reserves, factory cancellation costs and a volatile effective tax rate driven by changes in the mix of earnings across our jurisdictions.

FISCAL 2021 OVERVIEW

In fiscal 2021, NIKE, Inc. achieved record Revenues which increased 19% to $44.5 billion. The NIKE Brand, which represents over 90% of NIKE, Inc. Revenues, experienced growth of 19%, up 17% on a currency-neutral basis, driven by increases across all geographies. NIKE Direct grew 30% on a currency-neutral basis, driven by 60% growth in digital, with all geographies growing strong double digits, while wholesale revenues grew 10%. Revenues for Converse increased 19% and 16%, on a reported and currency-neutral basis, respectively, led by strong double-digit growth in digital.

Income (loss) before income taxes increased 131% for fiscal 2021, primarily due to higher revenues, gross margin expansion and selling and administrative expense leverage. NIKE, Inc. gross margin increased 140 basis points primarily due to annualizing the impacts of COVID-19 including lower factory cancellation charges, lower inventory obsolescence reserves as well as the favorable rate impact of fixed supply chain costs on a higher volume of wholesale shipments. The increase in gross margin also reflects higher full-price product margins across wholesale and NIKE Direct. Selling and administrative expense decreased due to lower Demand creation expense, partially offset by higher Operating overhead expense. Demand creation expense decreased primarily due to lower marketing and advertising expenses for our brand events and retail operations, as well as lower sports marketing expenses as sporting events were postponed due to COVID-19. These decreases were partially offset by higher digital marketing investments. Operating overhead expense increased primarily due to an increase in strategic technology investments, higher NIKE Direct variable costs and $255 million in restructuring-related costs, partially offset by lower bad debt expense and travel and related expenses. ROIC as of May 31, 2021, was 48.8% compared to 21.5% as of May 31, 2020. ROIC is considered a non-GAAP financial measure, see "Use of Non-GAAP Financial Measures" for further information.

During fiscal 2020, we entered into definitive agreements to sell our NIKE Brand businesses in Brazil, Argentina, Chile and Uruguay and to shift to a distributor operating model. During fiscal 2021, the transaction with Grupo SBF S.A. to purchase substantially all of our NIKE Brand operations in Brazil closed. Additionally, during the third quarter of fiscal 2021, we mutually agreed with Grupo Axo to terminate the sale and purchase agreement for the transition of NIKE’s businesses in Argentina, Chile and Uruguay to a distributor partnership. However, as we remain committed to selling the legal entities in all three countries and granting distribution rights to third-party distributors, the assets and liabilities of the entities have remained classified as held-for-sale on our Consolidated Balance Sheets as of May 31, 2021. For more information related to our planned distributor partnership transition within APLA, see Note 20 — Acquisitions and Divestitures within the accompanying Notes to the Consolidated Financial Statements. In future quarters, as we shift from a wholesale and direct to consumer operating model to a distributor operating model within these countries, we expect consolidated NIKE, Inc. and APLA revenue growth will be reduced due to differences in commercial terms. However, we expect the future operating model to have a favorable impact on our overall profitability as we reduce selling and administrative expenses, as well as lessen exposure to foreign exchange rate volatility.

While foreign currency markets remain volatile, in part due to geopolitical dynamics which may lead to a stronger U.S. Dollar, we continue to see opportunities to drive future growth and profitability. We remain committed to effectively managing our business and mitigating financial market risks to achieve our financial goals over the long-term by executing against the operational strategies outlined above.

For discussion related to the results of operations and changes in financial condition for fiscal 2020 compared to fiscal 2019 refer to Part II, Item 7. Management's Discussion and Analysis of Financial Condition and Results of Operations in our fiscal 2020 Form 10-K, which was filed with the United States Securities and Exchange Commission on July 24, 2020.

USE OF NON-GAAP FINANCIAL MEASURES

Throughout this Annual Report on Form 10-K, we discuss non-GAAP financial measures, including references to wholesale equivalent revenues, currency-neutral revenues, Total NIKE Brand earnings before interest and taxes (EBIT) and Total NIKE, Inc. EBIT, as well as EBIT Margin and ROIC, which should be considered in addition to, and not in lieu of, the financial measures calculated and presented in accordance with accounting principles generally accepted in the United States of America (“U.S. GAAP”). References to wholesale equivalent revenues are intended to provide context as to the total size of our NIKE Brand market footprint if we had no NIKE Direct operations. NIKE Brand wholesale equivalent revenues consist of (1) sales to external wholesale customers and (2) internal sales from our wholesale operations to our NIKE Direct operations, which are charged at prices comparable to those charged to external wholesale customers. Additionally, currency-neutral revenues are calculated using actual exchange rates in use during the comparative prior year period to enhance the visibility of the underlying business trends, excluding the impact of translation arising from foreign currency exchange rate fluctuations. EBIT is calculated as Net Income before Interest expense (income), net and Income tax expense in the Consolidated Statements of Income. EBIT Margin

2021 FORM 10-K 29

is calculated as EBIT divided by total NIKE Inc. Revenues. ROIC represents a performance measure that management believes is useful information in understanding the Company's ability to effectively manage invested capital, see the table below for how the Company calculates this measure.

Management uses these non-GAAP financial measures when evaluating the Company's performance, including when making financial and operating decisions. Additionally, management believes these non-GAAP financial measures provide investors with additional financial information that should be considered when assessing our underlying business performance and trends. However, references to wholesale equivalent revenues, currency-neutral revenues, ROIC and EBIT should not be considered in isolation or as a substitute for other financial measures calculated and presented in accordance with U.S. GAAP and may not be comparable to similarly titled non-GAAP measures used by other companies.

Our ROIC calculation as of May 31, 2021 and 2020 is as follows:

			FOR THE TRAILING FOUR QUARTERS ENDED
(Dollars in millions)			MAY 31, 2021			MAY 31, 2020
Numerator
Net income			$	5,727		$	2,539
Add: Interest expense (income), net			262			89
Add: Income tax expense			934			348
Earnings before interest and taxes			6,923			2,976
Income tax adjustment(1)			(970)			(352)
Earnings before interest and after taxes			$	5,953		$	2,624
			AVERAGE FOR THE TRAILING FIVE QUARTERS ENDED
			MAY 31, 2021			MAY 31, 2020
Denominator
Total debt(2),(3)			$	12,890		$	8,022
Add: Shareholders' equity			10,523			8,938
Less: Cash and equivalents and Short-term investments			11,217			4,756
Total invested capital			$	12,196		$	12,204
RETURN ON INVESTED CAPITAL			48.8		%	21.5		%

*(1)*Equals Earnings before interest and taxes multiplied by the effective tax rate as of the respective quarter end.

*(2)*Total debt includes the following: 1) Current portion of long-term debt, 2) Notes Payable, 3) Current portion of operating lease liabilities, 4) Long-term debt and 5) Operating lease liabilities.

*(3)*The Company adopted Accounting Standards Codification No. 842, Leases, on June 1, 2019. For comparability, total debt for each quarter prior to adoption includes approximately $3.2 billion, which represents the current and long-term portion of the Company's operating lease liabilities as of June 1, 2019.

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RESULTS OF OPERATIONS

(Dollars in millions, except per share data)			FISCAL 2021			FISCAL 2020			% CHANGE			FISCAL 2019			% CHANGE
Revenues			$	44,538		$	37,403		19		%	$	39,117		-4		%
Cost of sales			24,576			21,162			16		%	21,643			-2		%
Gross profit			19,962			16,241			23		%	17,474			-7		%
Gross margin			44.8		%	43.4		%				44.7		%
Demand creation expense			3,114			3,592			-13		%	3,753			-4		%
Operating overhead expense			9,911			9,534			4		%	8,949			7		%
Total selling and administrative expense			13,025			13,126			-1		%	12,702			3		%
% of revenues			29.2		%	35.1		%				32.5		%
Interest expense (income), net			262			89			—			49			—
Other (income) expense, net			14			139			—			(78)			—
Income before income taxes			6,661			2,887			131		%	4,801			-40		%
Income tax expense			934			348			168		%	772			-55		%
Effective tax rate			14.0		%	12.1		%				16.1		%
NET INCOME			$	5,727		$	2,539		126		%	$	4,029		-37		%
Diluted earnings per common share			$	3.56		$	1.60		123		%	$	2.49		-36		%

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CONSOLIDATED OPERATING RESULTS

REVENUES

(Dollars in millions)			FISCAL 2021			FISCAL 2020			% CHANGE			% CHANGE EXCLUDING CURRENCY CHANGES**(1)**			FISCAL 2019			% CHANGE			% CHANGE EXCLUDING CURRENCY CHANGES**(1)**
NIKE, Inc. Revenues:
NIKE Brand Revenues by:
Footwear			$	28,021		$	23,305		20		%	18		%	$	24,222		-4		%	-2		%
Apparel			12,865			10,953			17		%	15		%	11,550			-5		%	-3		%
Equipment			1,382			1,280			8		%	7		%	1,404			-9		%	-6		%
Global Brand Divisions(2)			25			30			-17		%	-17		%	42			-29		%	-26		%
Total NIKE Brand Revenues			42,293			35,568			19		%	17		%	37,218			-4		%	-2		%
Converse			2,205			1,846			19		%	16		%	1,906			-3		%	-1		%
Corporate(3)			40			(11)			—			—			(7)			—			—
TOTAL NIKE, INC. REVENUES			$	44,538		$	37,403		19		%	17		%	$	39,117		-4		%	-2		%
Supplemental NIKE Brand Revenues Details:
NIKE Brand Revenues by:
Sales to Wholesale Customers			$	25,898		$	23,156		12		%	10		%	$	25,423		-9		%	-7		%
Sales through NIKE Direct			16,370			12,382			32		%	30		%	11,753			5		%	8		%
Global Brand Divisions(2)			25			30			-17		%	-17		%	42			-29		%	-26		%
TOTAL NIKE BRAND REVENUES			$	42,293		$	35,568		19		%	17		%	$	37,218		-4		%	-2		%
NIKE Brand Revenues on a Wholesale Equivalent Basis:****(1)
Sales to Wholesale Customers			$	25,898		$	23,156		12		%	10		%	$	25,423		-9		%	-7		%
Sales from our Wholesale Operations to NIKE Direct Operations			9,872			7,452			32		%	30		%	7,127			5		%	7		%
TOTAL NIKE BRAND WHOLESALE EQUIVALENT REVENUES			$	35,770		$	30,608		17		%	15		%	$	32,550		-6		%	-4		%
NIKE Brand Wholesale Equivalent Revenues by:****(1)
Men's			$	18,883		$	16,694		13		%	11		%	$	17,737		-6		%	-4		%
Women's			8,555			6,999			22		%	20		%	7,380			-5		%	-3		%
NIKE Kids'			5,884			5,033			17		%	15		%	5,283			-5		%	-3		%
Others(4)			2,448			1,882			30		%	26		%	2,150			-12		%	-10		%
TOTAL NIKE BRAND WHOLESALE EQUIVALENT REVENUES			$	35,770		$	30,608		17		%	15		%	$	32,550		-6		%	-4		%
NIKE Brand Wholesale Equivalent Revenues by:****(1)
Running			$	3,987		$	3,830		4		%	3		%	$	4,488		-15		%	-12		%
NIKE Basketball			1,692			1,508			12		%	10		%	1,597			-6		%	-4		%
Jordan Brand			4,711			3,609			31		%	28		%	3,138			15		%	16		%
Football (Soccer)			1,682			1,575			7		%	4		%	1,894			-17		%	-14		%
Training			2,907			2,688			8		%	7		%	3,137			-14		%	-13		%
Sportswear			15,053			12,285			23		%	20		%	12,442			-1		%	1		%
Others(5)			5,738			5,113			12		%	11		%	5,854			-13		%	-10		%
TOTAL NIKE BRAND WHOLESALE EQUIVALENT REVENUES			$	35,770		$	30,608		17		%	15		%	$	32,550		-6		%	-4		%

*(1)*The percent change excluding currency changes and the presentation of wholesale equivalent revenues represent non-GAAP financial measures. See "Use of Non-GAAP Financial Measures" for further information.

*(2)*Global Brand Divisions revenues include NIKE Brand licensing and other miscellaneous revenues that are not part of a geographic operating segment.

*(3)*Corporate revenues primarily consist of foreign currency hedge gains and losses related to revenues generated by entities within the NIKE Brand geographic operating segments and Converse, but managed through our central foreign exchange risk management program.

*(4)*Others include all unisex products, equipment and other products not allocated to Men's, Women's and NIKE Kids', as well as certain adjustments that are not allocated to products designated by gender or age.

*(5)*Others include all other categories and certain adjustments that are not allocated at the category level.

2021 FORM 10-K 32

FISCAL 2021 NIKE BRAND REVENUE HIGHLIGHTS

The following tables present NIKE Brand revenues disaggregated by reportable operating segment, distribution channel and major product line:

FISCAL 2021 COMPARED TO FISCAL 2020

On a currency-neutral basis, NIKE, Inc. Revenues increased 17% for fiscal 2021, driven by growth in both the NIKE Brand and Converse. Higher revenues in North America contributed approximately 7 percentage points to NIKE, Inc. Revenues, with EMEA and Greater China each contributing approximately 4 percentage points of growth and APLA and Converse each contributing approximately 1 percentage point of growth.

On a currency-neutral basis, NIKE Brand footwear revenues increased 18% for fiscal 2021, driven by growth in nearly all key categories, primarily Sportswear and the Jordan Brand. Unit sales of footwear increased 11%, while higher average selling price (ASP), on a wholesale equivalent basis, per pair contributed approximately 7 percentage points of footwear revenue growth. The increase in ASP was primarily due to higher full-price ASP, in part reflecting lower discounts, as well as higher NIKE Direct ASP and the favorable impact of growth in our NIKE Direct business.

Currency-neutral NIKE Brand apparel revenues increased 15% for fiscal 2021, due to growth in all key categories, primarily Sportswear, Football (Soccer) and the Jordan Brand. Unit sales of apparel increased 14%, while higher ASP per unit contributed approximately 1 percentage point of apparel revenue growth. The increase in ASP was primarily due to the favorable impact of growth in our NIKE Direct business, as well as higher NIKE Direct ASP, partially offset by lower full-price ASP.

On a reported basis, NIKE Direct revenues represented approximately 39% of our total NIKE Brand revenues for fiscal 2021 compared to 35% for fiscal 2020. Digital commerce sales were $9.1 billion for fiscal 2021 compared to $5.5 billion for fiscal 2020. On a currency-neutral basis, NIKE Direct revenues increased 30% for fiscal 2021, driven by strong digital commerce sales growth of 60%, comparable store sales growth of 4% and the addition of new stores. Comparable store sales, which exclude digital commerce sales, comprises revenues from NIKE-owned in-line and factory stores for which all three of the following requirements have been met: (1) the store has been open at least one year, (2) square footage has not changed by more than 15% within the past year and (3) the store has not been permanently repositioned within the past year. Comparable store sales includes revenues from stores that were temporarily closed during the period as a result of COVID-19. Comparable store sales represents a performance measure that we believe is useful information for management and investors in understanding the performance of our established NIKE-owned in-line and factory stores. Management considers this metric when making financial and operating decisions. The method of calculating comparable store sales varies across the retail industry. As a result, our calculation of this metric may not be comparable to similarly titled measures used by other companies.

On a currency-neutral basis, fiscal 2021 NIKE Brand Men's and Women's revenues increased 11% and 20%, respectively. Higher NIKE Brand Men's revenues were driven by growth in nearly all key categories, primarily Sportswear, the Jordan Brand and Football (Soccer). Higher NIKE Brand Women's revenues were driven by growth in all key categories, primarily Sportswear, the Jordan Brand, Training and Running. Revenues for our NIKE Kids' business increased 15%, due to growth primarily in the Jordan Brand and Football (Soccer).

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GROSS MARGIN

FISCAL 2021 COMPARED TO FISCAL 2020

For fiscal 2021, our consolidated gross profit increased 23% to $19,962 million compared to $16,241 million for fiscal 2020, as the prior fiscal year was significantly impacted by lower shipments to our wholesale customers and store closures within our NIKE Direct operations due to COVID-19. Gross margin increased 140 basis points to 44.8% for fiscal 2021 compared to 43.4% for fiscal 2020 due to the following:

*Wholesale equivalent

Favorable NIKE Brand full-price product margins across both our wholesale and NIKE Direct businesses primarily reflect higher full-price ASP, net of discounts. Additionally, the favorable impact of growth in our higher margin NIKE Direct business, led by NIKE owned Digital, was more than offset by higher promotions in our factory stores during the first half of fiscal 2021 to reduce excess inventory as a result of COVID-19. Lower other costs are due to annualizing certain impacts of COVID-19 from fiscal 2020, including lower factory cancellation charges, lower inventory obsolescence reserves as well as the favorable rate impact of fixed supply chain costs on a higher volume of wholesale shipments.

TOTAL SELLING AND ADMINISTRATIVE EXPENSE

(Dollars in millions)			FISCAL 2021			FISCAL 2020			% CHANGE			FISCAL 2019			% CHANGE
Demand creation expense(1)			$	3,114		$	3,592		-13		%	$	3,753		-4		%
Operating overhead expense			9,911			9,534			4		%	8,949			7		%
Total selling and administrative expense			$	13,025		$	13,126		-1		%	$	12,702		3		%
% of revenues			29.2		%	35.1		%	(590)		bps	32.5		%	260		bps

*(1)*Demand creation expense consists of advertising and promotion costs, including costs of endorsement contracts, complimentary product, television, digital and print advertising and media costs, brand events and retail brand presentation.

FISCAL 2021 COMPARED TO FISCAL 2020

Demand creation expense decreased 13% for fiscal 2021, due to lower marketing and advertising expenses for our brand events and retail operations, as well as lower sports marketing expense as sporting events were postponed due to COVID-19. This activity was partially offset by higher digital marketing investments. Changes in foreign currency exchange rates increased Demand creation expense by approximately 2 percentage points for fiscal 2021.

Operating overhead expense increased 4% for fiscal 2021, due to an increase in strategic technology investments, higher NIKE Direct variable costs, and approximately $255 million in restructuring-related costs, partially offset by lower bad debt expense and lower travel and related expenses. Changes in foreign currency exchange rates increased Operating overhead expense by approximately 1 percentage point for fiscal 2021.

OTHER (INCOME) EXPENSE, NET

(Dollars in millions)						FISCAL 2021						FISCAL 2020						FISCAL 2019
Other (income) expense, net						$	14					$	139					$	(78)

Other (income) expense, net comprises foreign currency conversion gains and losses from the remeasurement of monetary assets and liabilities denominated in non-functional currencies and the impact of certain foreign currency derivative instruments, as well as unusual or non-operating transactions that are outside the normal course of business.

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FISCAL 2021 COMPARED TO FISCAL 2020

Other (income) expense, net decreased from $139 million of other expense, net in fiscal 2020 to $14 million of other expense, net in the current year, primarily due to the non-recurring impairment charge of $405 million incurred in the prior year associated with our planned, strategic distributor partnership transition within APLA, partially offset by a $241 million net detrimental change in foreign currency conversion gains and losses, including hedges.

For more information related to our distributor partnership transition within APLA, see Note 20 — Acquisitions and Divestitures within the accompanying Notes to the Consolidated Financial Statements.

We estimate the combination of the translation of foreign currency-denominated profits from our international businesses, and the year-over-year change in foreign currency-related gains and losses included in Other (income) expense, net had a favorable impact on our Income before income taxes of $19 million for fiscal 2021.

INCOME TAXES

			FISCAL 2021			FISCAL 2020			% CHANGE			FISCAL 2019			% CHANGE
Effective tax rate			14.0		%	12.1		%	190 bps			16.1		%	(400) bps

FISCAL 2021 COMPARED TO FISCAL 2020

Our effective tax rate was 14.0% for fiscal 2021, compared to 12.1% for fiscal 2020 due to a change in the proportion of earnings taxed in the U.S. related to the recovery from the impact of the COVID-19 pandemic and less favorable impacts from discrete items such as stock-based compensation.

OPERATING SEGMENTS

Our operating segments are evidence of the structure of the Company's internal organization. The NIKE Brand segments are defined by geographic regions for operations participating in NIKE Brand sales activity.

Each NIKE Brand geographic segment operates predominantly in one industry: the design, development, marketing and selling of athletic footwear, apparel and equipment. The Company's reportable operating segments for the NIKE Brand are: North America; Europe, Middle East & Africa (EMEA); Greater China; and Asia Pacific & Latin America (APLA), and include results for the NIKE and Jordan brands, with results for the Hurley brand, prior to its divestiture in fiscal 2020, included in North America. Refer to Note 20 — Acquisitions and Divestitures within the accompanying Notes to the Consolidated Financial Statements for additional information. The Company's NIKE Direct operations are managed within each geographic operating segment. Converse is also a reportable operating segment for the Company and operates predominately in one industry: the design, marketing, licensing and selling of athletic lifestyle sneakers, apparel and accessories.

As part of our centrally managed foreign exchange risk management program, standard foreign currency exchange rates are assigned twice per year to each NIKE Brand entity in our geographic operating segments and Converse. These rates are set approximately nine and twelve months in advance of the future selling seasons to which they relate (specifically, for each currency, one standard rate applies to the fall and holiday selling seasons and one standard rate applies to the spring and summer selling seasons) based on average market spot rates in the calendar month preceding the date they are established. Inventories and Cost of sales for geographic operating segments and Converse reflect the use of these standard rates to record non-functional currency product purchases into the entity's functional currency. Differences between assigned standard foreign currency exchange rates and actual market rates are included in Corporate, together with foreign currency hedge gains and losses generated from our centrally managed foreign exchange risk management program and other conversion gains and losses.

2021 FORM 10-K 35

The breakdown of Revenues is as follows:

(Dollars in millions)			FISCAL 2021			FISCAL 2020			% CHANGE			% CHANGE EXCLUDING CURRENCY CHANGES**(1)**			FISCAL 2019			% CHANGE			% CHANGE EXCLUDING CURRENCY CHANGES**(1)**
North America			$	17,179		$	14,484		19		%	19		%	$	15,902		-9		%	-9		%
Europe, Middle East & Africa			11,456			9,347			23		%	17		%	9,812			-5		%	-1		%
Greater China			8,290			6,679			24		%	19		%	6,208			8		%	11		%
Asia Pacific & Latin America(2)			5,343			5,028			6		%	8		%	5,254			-4		%	1		%
Global Brand Divisions(3)			25			30			-17		%	-17		%	42			-29		%	-26		%
TOTAL NIKE BRAND			42,293			35,568			19		%	17		%	37,218			-4		%	-2		%
Converse			2,205			1,846			19		%	16		%	1,906			-3		%	-1		%
Corporate(4)			40			(11)			—			—			(7)			—			—
TOTAL NIKE, INC. REVENUES			$	44,538		$	37,403		19		%	17		%	$	39,117		-4		%	-2		%

(1) The percent change excluding currency changes represents a non-GAAP financial measure. See "Use of Non-GAAP Financial Measures" for further information.

(2) Refer to Note 20 — Acquisitions and Divestitures within the accompanying Notes to the Consolidated Financial Statements for additional information on the transition of our NIKE Brand business in Brazil to a third-party distributor.

(3) Global Brand Divisions revenues include NIKE Brand licensing and other miscellaneous revenues that are not part of a geographic operating segment.

(4) Corporate revenues primarily consist of foreign currency hedge gains and losses related to revenues generated by entities within the NIKE Brand geographic operating segments and Converse, but managed through our central foreign exchange risk management program.

The primary financial measure used by the Company to evaluate performance of individual operating segments is EBIT, which represents Net income before Interest expense (income), net and Income tax expense in the Consolidated Statements of Income. As discussed in Note 17 — Operating Segments and Related Information in the accompanying Notes to the Consolidated Financial Statements, certain corporate costs are not included in EBIT of our operating segments.

The breakdown of earnings before interest and taxes is as follows:

(Dollars in millions)			FISCAL 2021						FISCAL 2020						% CHANGE						FISCAL 2019						% CHANGE
North America			$	5,089					$	2,899					76		%				$	3,925					-26		%
Europe, Middle East & Africa			2,435						1,541						58		%				1,995						-23		%
Greater China			3,243						2,490						30		%				2,376						5		%
Asia Pacific & Latin America			1,530						1,184						29		%				1,323						-11		%
Global Brand Divisions			(3,656)						(3,468)						-5		%				(3,262)						-6		%
TOTAL NIKE BRAND**(1)**			$	8,641					$	4,646					86		%				$	6,357					-27		%
Converse			543						297						83		%				303						-2		%
Corporate			(2,261)						(1,967)						-15		%				(1,810)						-9		%
TOTAL NIKE, INC. EARNINGS BEFORE INTEREST AND TAXES**(1)**			$	6,923					$	2,976					133		%				$	4,850					-39		%
EBIT margin*(1)*			15.5		%				8.0		%										12.4		%
Interest expense (income), net			262						89						—						49						—
TOTAL NIKE, INC. INCOME BEFORE INCOME TAXES			$	6,661					$	2,887					131		%				$	4,801					-40		%

(1) Total NIKE Brand EBIT, Total NIKE, Inc. EBIT and EBIT Margin, represent non-GAAP financial measures. See "Use of Non-GAAP Financial Measures" for further information.

2021 FORM 10-K 36

NORTH AMERICA

(Dollars in millions)			FISCAL 2021			FISCAL 2020			% CHANGE			% CHANGE EXCLUDING CURRENCY CHANGES			FISCAL 2019			% CHANGE			% CHANGE EXCLUDING CURRENCY CHANGES
Revenues by:
Footwear			$	11,644		$	9,329		25		%	25		%	$	10,045		-7		%	-7		%
Apparel			5,028			4,639			8		%	8		%	5,260			-12		%	-12		%
Equipment			507			516			-2		%	-2		%	597			-14		%	-14		%
TOTAL REVENUES			$	17,179		$	14,484		19		%	19		%	$	15,902		-9		%	-9		%
Revenues by:
Sales to Wholesale Customers			$	10,186		$	9,371		9		%	9		%	$	10,875		-14		%	-14		%
Sales through NIKE Direct			6,993			5,113			37		%	37		%	5,027			2		%	2		%
TOTAL REVENUES			$	17,179		$	14,484		19		%	19		%	$	15,902		-9		%	-9		%
EARNINGS BEFORE INTEREST AND TAXES			$	5,089		$	2,899		76		%				$	3,925		-26		%

We believe there continues to be a meaningful shift in the way consumers shop for product and make purchasing decisions across each of our geographies. Consumers are demanding a constant flow of fresh and innovative product, and have an expectation for superior service and rapid delivery, all fueled by the shift toward digital and mono-brand experiences in NIKE Direct. We anticipate continued evolution within the retail landscape, driven by shifting consumer traffic patterns across digital and physical channels. Specifically in North America, we remain focused on building long-term momentum with our strategic wholesale customers, which offer a differentiated retail experience. Additionally, over the last three years we have significantly reduced the number of undifferentiated wholesale accounts. During fiscal 2021, we took further steps towards account and channel consolidation by reprioritizing product allocation to benefit NIKE Direct and our differentiated strategic wholesale customers. We expect that over the next two fiscal years, we will more aggressively accelerate these changes as we work to reprofile the shape of the marketplace and recapture wholesale revenue declines over time.

FISCAL 2021 COMPARED TO FISCAL 2020

On a currency-neutral basis, North America revenues increased 19%, driven by growth in nearly all key categories, led by Sportswear and the Jordan Brand. NIKE Direct revenues increased 37%, driven by strong digital sales growth of 73%, comparable store sales growth of 5% and the addition of new stores.

Footwear revenues increased 25% on a currency-neutral basis due to higher revenues in several key categories, led by Sportswear and the Jordan Brand. Unit sales of footwear increased 17%, while higher ASP per pair contributed approximately 8 percentage points of footwear revenue growth. Higher ASP per pair was primarily due to higher NIKE Direct and full-price ASPs, in part reflecting lower-discounts, as well as the favorable impact of growth in our NIKE Direct business.

On a currency-neutral basis, apparel revenues increased 8% for fiscal 2021 driven by growth in all key categories, led by Sportswear. Unit sales of apparel increased 8%, while ASP per unit was flat, as the favorable impact of growth in our NIKE Direct business was offset by lower full-price ASP.

Reported EBIT increased 76% driven by higher revenues, lower selling and administrative expense as a percent of revenues and gross margin expansion. Gross margin increased approximately 430 basis points, primarily due to lower other costs, higher full-price ASP, reflecting lower discounts, the favorable impact of growth in our NIKE Direct business and lower product costs. The decrease in other costs was primarily due to annualizing the impacts of COVID-19 from fiscal 2020, including lower factory cancellation charges, lower inventory obsolescence reserves and the favorable rate impact of fixed supply chain costs on a higher volume of wholesale shipments. Selling and administrative expense decreased due to lower operating overhead and demand creation expense. Operating overhead expense decreased primarily as a result of lower bad debt and wage-related expenses, partially offset by higher NIKE Direct variable costs. The decrease in demand creation expense was primarily due to lower advertising and marketing expense for brand events and our retail operations, as well as lower sports marketing expense, partially offset by continued investments in digital marketing to support heightened digital demand.

2021 FORM 10-K 37

EUROPE, MIDDLE EAST & AFRICA

(Dollars in millions)			FISCAL 2021			FISCAL 2020			% CHANGE			% CHANGE EXCLUDING CURRENCY CHANGES			FISCAL 2019			% CHANGE			% CHANGE EXCLUDING CURRENCY CHANGES
Revenues by:
Footwear			$	6,970		$	5,892		18		%	13		%	$	6,293		-6		%	-3		%
Apparel			3,996			3,053			31		%	25		%	3,087			-1		%	2		%
Equipment			490			402			22		%	19		%	432			-7		%	-3		%
TOTAL REVENUES			$	11,456		$	9,347		23		%	17		%	$	9,812		-5		%	-1		%
Revenues by:
Sales to Wholesale Customers			$	7,812		$	6,574		19		%	14		%	$	7,076		-7		%	-4		%
Sales through NIKE Direct			3,644			2,773			31		%	25		%	2,736			1		%	5		%
TOTAL REVENUES			$	11,456		$	9,347		23		%	17		%	$	9,812		-5		%	-1		%
EARNINGS BEFORE INTEREST AND TAXES			$	2,435		$	1,541		58		%				$	1,995		-23		%

FISCAL 2021 COMPARED TO FISCAL 2020

On a currency-neutral basis, EMEA revenues for fiscal 2021 grew 17%, driven by higher revenues across nearly all territories, led by UK & Ireland and Central Europe, which grew 34% and 20%, respectively. Revenues increased in all key categories, led by Sportswear and the Jordan Brand. NIKE Direct revenues increased 25%, driven by strong digital sales growth of 67%, partially offset by a 10% decline in comparable store sales, primarily due to reduced physical retail traffic, in part resulting from temporary store closures and safety-related measures in response to COVID-19.

Currency-neutral footwear revenues increased 13%, driven by higher revenues in nearly all key categories, led by Sportswear and the Jordan Brand. Unit sales of footwear increased 9% and higher ASP per pair contributed approximately 4 percentage points, resulting from higher full-price ASP and the favorable impact of growth in our NIKE Direct business.

Currency-neutral apparel revenues increased 25% due to growth in all key categories, led by Sportswear and Football (Soccer). Unit sales of apparel increased 26%, while lower ASP per unit reduced apparel revenues by approximately 1 percentage point. Lower ASP per unit was primarily due to a lower mix of NIKE Direct sales, partially offset by higher full-price ASP, in part reflecting lower discounts.

Reported EBIT increased 58% as higher revenues and lower selling and administrative expense more than offset a decline in gross margin. Gross margin decreased approximately 110 basis points primarily due to lower NIKE Direct margins and unfavorable changes in standard foreign currency exchange rates, which more than offset lower product costs and lower other costs. The decrease in other costs was primarily due to annualizing the impacts of COVID-19, including lower inventory obsolescence reserves, as well as the favorable rate impact of fixed supply chain costs on a higher volume of wholesale shipments. Selling and administrative expense decreased due to lower demand creation and operating overhead expense. The decrease in demand creation expense was primarily driven by lower retail brand presentation costs and lower sports marketing expense. Lower operating overhead expense was primarily due to lower bad debt and travel and related expenses, partially offset by higher NIKE Direct variable costs.

2021 FORM 10-K 38

GREATER CHINA

(Dollars in millions)			FISCAL 2021			FISCAL 2020			% CHANGE			% CHANGE EXCLUDING CURRENCY CHANGES			FISCAL 2019			% CHANGE			% CHANGE EXCLUDING CURRENCY CHANGES
Revenues by:
Footwear			$	5,748		$	4,635		24		%	19		%	$	4,262		9		%	12		%
Apparel			2,347			1,896			24		%	19		%	1,808			5		%	8		%
Equipment			195			148			32		%	26		%	138			7		%	11		%
TOTAL REVENUES			$	8,290		$	6,679		24		%	19		%	$	6,208		8		%	11		%
Revenues by:
Sales to Wholesale Customers			$	4,513		$	3,803		19		%	14		%	$	3,726		2		%	6		%
Sales through NIKE Direct			3,777			2,876			31		%	26		%	2,482			16		%	20		%
TOTAL REVENUES			$	8,290		$	6,679		24		%	19		%	$	6,208		8		%	11		%
EARNINGS BEFORE INTEREST AND TAXES			$	3,243		$	2,490		30		%				$	2,376		5		%

FISCAL 2021 COMPARED TO FISCAL 2020

On a currency-neutral basis, Greater China revenues for fiscal 2021 increased 19%, driven by higher revenues in all key categories, led by Sportswear, the Jordan Brand and NIKE Basketball. NIKE Direct revenues increased 26%, driven by digital sales growth of 26%, comparable store sales growth of 22% and the addition of new stores.

Currency-neutral footwear revenues increased 19%, driven by growth in all key categories, led by Sportswear, the Jordan Brand and NIKE Basketball. Unit sales of footwear increased 20%, while lower ASP per pair reduced footwear revenues by approximately 1 percentage point, driven by an unfavorable full-price mix, partially offset by higher full-price ASP, due to lower discounts.

Currency-neutral apparel revenue growth of 19% was fueled by higher revenues in nearly all key categories, most notably Sportswear. Unit sales of apparel increased 18%, while higher ASP per unit contributed approximately 1 percentage point of apparel revenue growth. Higher ASP was driven by higher off-price ASP, partially offset by lower NIKE Direct ASP due to higher levels of promotion to liquidate excess inventory through our factory stores.

Reported EBIT increased 30% as higher revenues and lower selling and administrative expense more than offset a decline in gross margin. Gross margin decreased approximately 200 basis points primarily due to unfavorable changes in standard foreign currency exchange rates and higher product costs. Selling and administrative expense decreased due to lower demand creation expense, partially offset by higher operating overhead expense. Demand creation expense decreased primarily due to lower advertising and marketing, as well as digital marketing expenses. Growth in operating overhead expense was driven by higher investments within our NIKE Direct operations.

2021 FORM 10-K 39

ASIA PACIFIC & LATIN AMERICA

(Dollars in millions)			FISCAL 2021			FISCAL 2020			% CHANGE			% CHANGE EXCLUDING CURRENCY CHANGES			FISCAL 2019			% CHANGE			% CHANGE EXCLUDING CURRENCY CHANGES
Revenues by:
Footwear			$	3,659		$	3,449		6		%	8		%	$	3,622		-5		%	0		%
Apparel			1,494			1,365			9		%	10		%	1,395			-2		%	3		%
Equipment			190			214			-11		%	-9		%	237			-10		%	-4		%
TOTAL REVENUES			$	5,343		$	5,028		6		%	8		%	$	5,254		-4		%	1		%
Revenues by:
Sales to Wholesale Customers			$	3,387		$	3,408		-1		%	2		%	$	3,746		-9		%	-4		%
Sales through NIKE Direct			1,956			1,620			21		%	22		%	1,508			7		%	12		%
TOTAL REVENUES			$	5,343		$	5,028		6		%	8		%	$	5,254		-4		%	1		%
EARNINGS BEFORE INTEREST AND TAXES			$	1,530		$	1,184		29		%				$	1,323		-11		%

As discussed previously, our NIKE Brand business in Brazil transitioned to a distributor operating model during the third quarter of fiscal 2021 and our NIKE Brand businesses in Argentina, Chile and Uruguay have remained classified as held-for-sale. The impacts of closing the Brazil transaction as well as entering into agreements to transition these entities in the prior year are included within Corporate and are not reflected in the APLA operating segment results. For more information see Note 20 — Acquisitions and Divestitures within the accompanying Notes to the Consolidated Financial Statements.

FISCAL 2021 COMPARED TO FISCAL 2020

On a currency-neutral basis, APLA revenues increased 8% for fiscal 2021. The increase was due to higher revenues across most territories, led by a 15% increase in Japan, a 37% increase in Pacific, which includes Australia and New Zealand, and a 12% increase in Korea, partially offset by a decline in Latin Distributors of 48%. Additionally, the transition of our NIKE Brand business in Brazil to a third-party distributor operating model reduced APLA revenue growth by approximately 2 percentage points. Revenues increased in most key categories, led by Sportswear and the Jordan Brand. NIKE Direct revenues increased 22%, primarily fueled by strong digital sales growth of 73%, partially offset by comparable store sales declines of 4%, largely due to reduced physical retail traffic, in part resulting from safety-related measures in response to COVID-19.

Currency-neutral footwear revenues increased 8% for fiscal 2021 due to higher revenues in several key categories, primarily the Jordan Brand and Sportswear. Unit sales of footwear decreased 5%, while higher ASP per pair contributed approximately 13 percentage points of footwear revenue growth, driven by higher full-price and NIKE Direct ASPs, in part reflecting inflationary conditions in our SOCO territory, which includes Argentina, Chile and Uruguay, as well as the favorable impact of growth in our NIKE Direct business.

Currency-neutral apparel revenues increased 10% for fiscal 2021 due to higher revenues in most key categories, led by Sportswear. Unit sales of apparel increased 5%, while higher ASP per unit contributed approximately 5 percentage points of apparel revenue growth. Higher ASP per unit was primarily driven by higher full-price ASP, in part reflecting inflationary conditions in our SOCO territory.

Reported EBIT increased 29% for fiscal 2021 driven by higher revenues, lower selling and administrative expense and gross margin expansion. Gross margin increased approximately 130 basis points as higher full-price ASP, net of discounts, in part reflecting inflationary conditions in our SOCO territory, and lower other costs, were partially offset by higher product costs, unfavorable standard foreign currency exchange rates and lower margin in our NIKE Direct business. The decrease in other costs was primarily due to annualizing the impacts of COVID-19, including lower factory cancellation charges and lower inventory obsolescence reserves. Selling and administrative expense decreased due to lower demand creation and operating overhead expense. The decrease in demand creation expense was primarily due to lower advertising and marketing expense, as well as a decline in sports marketing costs. Lower operating overhead expense was primarily due to lower bad debt and travel and related costs, partially offset by higher NIKE Direct variable costs.

2021 FORM 10-K 40

GLOBAL BRAND DIVISIONS

(Dollars in millions)			FISCAL 2021			FISCAL 2020			% CHANGE			% CHANGE EXCLUDING CURRENCY CHANGES			FISCAL 2019			% CHANGE			% CHANGE EXCLUDING CURRENCY CHANGES
Revenues			$	25		$	30		-17		%	-17		%	$	42		-29		%	-26		%
Earnings (Loss) Before Interest and Taxes			$	(3,656)		$	(3,468)		-5		%				$	(3,262)		-6		%

Global Brand Divisions primarily represent demand creation and operating overhead expense, including product creation and design expenses that are centrally managed for the NIKE Brand, as well as costs associated with NIKE Direct global digital operations and enterprise technology. Global Brand Divisions revenues include NIKE Brand licensing and other miscellaneous revenues that are not part of a geographic operating segment.

FISCAL 2021 COMPARED TO FISCAL 2020

Global Brand Divisions' loss before interest and taxes increased 5% for fiscal 2021 due to higher total selling and administrative expense, driven by higher operating overhead expense, partially offset by lower demand creation expense. The increase in operating overhead expense was primarily due to continued investments in digital capabilities, partially offset by lower travel and related expenses. Lower demand creation expense was primarily due to lower sports marketing costs.

CONVERSE

(Dollars in millions)			FISCAL 2021			FISCAL 2020			% CHANGE			% CHANGE EXCLUDING CURRENCY CHANGES			FISCAL 2019			% CHANGE			% CHANGE EXCLUDING CURRENCY CHANGES
Revenues by:
Footwear			$	1,986		$	1,642		21		%	17		%	$	1,658		-1		%	1		%
Apparel			104			89			17		%	13		%	118			-25		%	-22		%
Equipment			29			25			16		%	14		%	24			4		%	8		%
Other(1)			86			90			-4		%	-1		%	106			-15		%	-14		%
TOTAL REVENUES			$	2,205		$	1,846		19		%	16		%	$	1,906		-3		%	-1		%
Revenues by:
Sales to Wholesale Customers			$	1,353		$	1,154		17		%	13		%	$	1,247		-7		%	-5		%
Sales through Direct to Consumer			766			602			27		%	24		%	553			9		%	11		%
Other(1)			86			90			-4		%	-1		%	106			-15		%	-14		%
TOTAL REVENUES			$	2,205		$	1,846		19		%	16		%	$	1,906		-3		%	-1		%
EARNINGS BEFORE INTEREST AND TAXES			$	543		$	297		83		%				$	303		-2		%

(1) Other revenues consist of territories serviced by third-party licensees who pay royalties to Converse for the use of its registered trademarks and other intellectual property rights. We do not own the Converse trademarks in Japan and accordingly do not earn revenues in Japan.

FISCAL 2021 COMPARED TO FISCAL 2020

On a currency-neutral basis, Converse revenues increased 16% for fiscal 2021. The increase in revenues was driven by revenue growth across Western Europe, North America and Asia. Wholesale revenues increased 13%, driven primarily by growth in Western Europe and Asia, in part due to the impacts of COVID-19 in the prior year. Direct to consumer revenues increased 24%, driven by strong digital sales growth across North America and Western Europe. Combined unit sales within the wholesale and direct to consumer channels increased 9%, while ASP increased 8%, primarily due to growth in full-price sales, including through our digital channel.

Reported EBIT increased 83%, driven by higher revenues and lower selling and administrative expense. Gross margin was flat, as higher full-price ASP, net of discounts, and the favorable rate impact of fixed supply chain costs on a higher volume of wholesale shipments was offset by higher product costs and unfavorable changes in standard foreign currency exchange rates. Selling and administrative expense decreased due to lower operating overhead and demand creation expense. Operating overhead expense decreased primarily due to lower bad debt, travel and related costs and other administrative costs. Demand creation expense decreased as a result of lower advertising and marketing, as well as digital marketing expenses.

2021 FORM 10-K 41

CORPORATE

(Dollars in millions)			FISCAL 2021			FISCAL 2020			% CHANGE			FISCAL 2019			% CHANGE
Revenues			$	40		$	(11)		—			$	(7)		—
Earnings (Loss) Before Interest and Taxes			$	(2,261)		$	(1,967)		-15		%	$	(1,810)		-9		%

Corporate revenues primarily consist of foreign currency hedge gains and losses related to revenues generated by entities within the NIKE Brand geographic operating segments and Converse, but managed through our central foreign exchange risk management program.

The Corporate loss before interest and taxes primarily consists of unallocated general and administrative expenses, including expenses associated with centrally managed departments; depreciation and amortization related to our corporate headquarters; unallocated insurance, benefit and compensation programs, including stock-based compensation; and certain foreign currency gains and losses.

In addition to the foreign currency gains and losses recognized in Corporate revenues, foreign currency results in Corporate include gains and losses resulting from the difference between actual foreign currency exchange rates and standard rates used to record non-functional currency denominated product purchases within the NIKE Brand geographic operating segments and Converse; related foreign currency hedge results; conversion gains and losses arising from remeasurement of monetary assets and liabilities in non-functional currencies; and certain other foreign currency derivative instruments.

FISCAL 2021 COMPARED TO FISCAL 2020

Corporate's loss before interest and taxes increased $294 million during fiscal 2021, primarily due to the following:

• an unfavorable change in net foreign currency gains and losses of $241 million related to the remeasurement of monetary assets and liabilities denominated in non-functional currencies and the impact of certain foreign currency derivative instruments, reported as a component of consolidated Other (income) expense, net;

• a favorable change of $132 million related to the difference between actual foreign currency exchange rates and standard foreign currency exchange rates assigned to the NIKE Brand geographic operating segments and Converse, net of hedge gains and losses; these results are reported as a component of consolidated gross margin; and

• an unfavorable change of $185 million in part due to restructuring-related costs of $294 million associated with changes to our organizational model announced in July 2020, partially offset by the $405 million charge in the prior year related to our planned distributor transition within APLA.

For more information related to our distributor partnership transition within APLA, as well as more information related to our organizational realignment and related costs, refer to Note 20 — Acquisitions and Divestitures and Note 21 — Restructuring, respectively, within the accompanying Notes to the Consolidated Financial Statements.

FOREIGN CURRENCY EXPOSURES AND HEDGING PRACTICES

OVERVIEW

As a global company with significant operations outside the United States, in the normal course of business we are exposed to risk arising from changes in currency exchange rates. Our primary foreign currency exposures arise from the recording of transactions denominated in non-functional currencies and the translation of foreign currency denominated results of operations, financial position and cash flows into U.S. Dollars.

Our foreign exchange risk management program is intended to lessen both the positive and negative effects of currency fluctuations on our consolidated results of operations, financial position and cash flows. We manage global foreign exchange risk centrally on a portfolio basis to address those risks material to NIKE, Inc. We manage these exposures by taking advantage of natural offsets and currency correlations existing within the portfolio and, where practical and material, by hedging a portion of the remaining exposures using derivative instruments such as forward contracts and options. As described below, the implementation of the NIKE Trading Company (NTC) and our foreign currency adjustment program enhanced our ability to manage our foreign exchange risk by increasing the natural offsets and currency correlation benefits existing within our portfolio of foreign exchange exposures. Our hedging policy is designed to partially or entirely offset the impact of exchange rate changes on the underlying net exposures being hedged. Where exposures are hedged, our program has the effect of delaying the impact of exchange rate movements on our Consolidated Financial Statements; the length of the delay is dependent upon hedge horizons. We do not hold or issue derivative instruments for trading or speculative purposes.

Refer to Note 6 — Fair Value Measurements and Note 14 — Risk Management and Derivatives in the accompanying Notes to the Consolidated Financial Statements for additional description of outstanding derivatives at each reported period end.

2021 FORM 10-K 42

TRANSACTIONAL EXPOSURES

We conduct business in various currencies and have transactions which subject us to foreign currency risk. Our most significant transactional foreign currency exposures are:

• Product Costs — NIKE's product costs are exposed to fluctuations in foreign currencies in the following ways:

1.Product purchases denominated in currencies other than the functional currency of the transacting entity:

a.Certain NIKE entities purchase product from the NTC, a wholly-owned sourcing hub that buys NIKE branded products from third-party factories, predominantly in U.S. Dollars. The NTC, whose functional currency is the U.S. Dollar, then sells the products to NIKE entities in their respective functional currencies. NTC sales to a NIKE entity with a different functional currency results in a foreign currency exposure for the NTC.

b.Other NIKE entities purchase product directly from third-party factories in U.S. Dollars. These purchases generate a foreign currency exposure for those NIKE entities with a functional currency other than the U.S. Dollar.

In both purchasing scenarios, a weaker U.S. Dollar reduces inventory costs incurred by NIKE whereas a stronger U.S. Dollar increases its cost.

2.Factory input costs: NIKE operates a foreign currency adjustment program with certain factories. The program is designed to more effectively manage foreign currency risk by assuming certain of the factories' foreign currency exposures, some of which are natural offsets to our existing foreign currency exposures. Under this program, our payments to these factories are adjusted for rate fluctuations in the basket of currencies (“factory currency exposure index”) in which the labor, materials and overhead costs incurred by the factories in the production of NIKE branded products (“factory input costs”) are denominated.

For the currency within the factory currency exposure indices that is the local or functional currency of the factory, the currency rate fluctuation affecting the product cost is recorded within Inventories and is recognized in Cost of sales when the related product is sold to a third-party. All currencies within the indices, excluding the U.S. Dollar and the local or functional currency of the factory, are recognized as embedded derivative contracts and are recorded at fair value through Other (income) expense, net. Refer to Note 14 — Risk Management and Derivatives in the accompanying Notes to the Consolidated Financial Statements for additional detail.

As an offset to the impacts of the fluctuating U.S. Dollar on our non-functional currency denominated product purchases described above, a strengthening U.S. Dollar against the foreign currencies within the factory currency exposure indices reduces NIKE's U.S. Dollar inventory cost. Conversely, a weakening U.S. Dollar against the indexed foreign currencies increases our inventory cost.

• Non-Functional Currency Denominated External Sales — A portion of our NIKE Brand and Converse revenues associated with European operations are earned in currencies other than the Euro (e.g., the British Pound) but are recognized at a subsidiary that uses the Euro as its functional currency. These sales generate a foreign currency exposure.

• Other Costs — Non-functional currency denominated costs, such as endorsement contracts, also generate foreign currency risk, though to a lesser extent. In certain cases, the Company has entered into contractual agreements which have payments indexed to foreign currencies that create embedded derivative contracts recorded at fair value through Other (income) expense, net. Refer to Note 14 — Risk Management and Derivatives in the accompanying Notes to the Consolidated Financial Statements for additional detail.

• Non-Functional Currency Denominated Monetary Assets and Liabilities — Our global subsidiaries have various assets and liabilities, primarily receivables and payables, including intercompany receivables and payables, denominated in currencies other than their functional currencies. These balance sheet items are subject to remeasurement which may create fluctuations in Other (income) expense, net within our consolidated results of operations.

MANAGING TRANSACTIONAL EXPOSURES

Transactional exposures are managed on a portfolio basis within our foreign currency risk management program. We manage these exposures by taking advantage of natural offsets and currency correlations that exist within the portfolio and may also elect to use currency forward and option contracts to hedge the remaining effect of exchange rate fluctuations on probable forecasted future cash flows, including certain product cost exposures, non-functional currency denominated external sales and other costs described above. Generally, these are accounted for as cash flow hedges, except for hedges of the embedded derivative components of the product cost exposures and other contractual agreements.

2021 FORM 10-K 43

Certain currency forward contracts used to manage the foreign exchange exposure of non-functional currency denominated monetary assets and liabilities subject to remeasurement, and embedded derivative contracts are not formally designated as hedging instruments. Accordingly, changes in fair value of these instruments are recognized in Other (income) expense, net and are intended to offset the foreign currency impact of the remeasurement of the related non-functional currency denominated asset or liability or the embedded derivative contract being hedged.

TRANSLATIONAL EXPOSURES

Many of our foreign subsidiaries operate in functional currencies other than the U.S. Dollar. Fluctuations in currency exchange rates create volatility in our reported results as we are required to translate the balance sheets, operational results and cash flows of these subsidiaries into U.S. Dollars for consolidated reporting. The translation of foreign subsidiaries' non-U.S. Dollar denominated balance sheets into U.S. Dollars for consolidated reporting results in a cumulative translation adjustment to Accumulated other comprehensive income (loss) within Shareholders' equity. In the translation of our Consolidated Statements of Income, a weaker U.S. Dollar in relation to foreign functional currencies benefits our consolidated earnings whereas a stronger U.S. Dollar reduces our consolidated earnings. The impact of foreign exchange rate fluctuations on the translation of our consolidated Revenues was a benefit of approximately $893 million, a detriment of approximately $867 million and a detriment of approximately $1,236 million for the years ended May 31, 2021, 2020 and 2019, respectively. The impact of foreign exchange rate fluctuations on the translation of our Income before income taxes was a benefit of approximately $260 million, a detriment of approximately $212 million and a detriment of approximately $233 million for the years ended May 31, 2021, 2020 and 2019, respectively.

Management generally identifies hyper-inflationary markets as those markets whose cumulative inflation rate over a three-year period exceeds 100%. Management has concluded our Argentina subsidiary within our APLA operating segment is operating in a hyper-inflationary market. As a result, beginning in the second quarter of fiscal 2019, the functional currency of our Argentina subsidiary changed from the local currency to the U.S. Dollar. As of and for the period ended May 31, 2021, this change did not have a material impact on our results of operations or financial condition and we do not anticipate it will have a material impact in future periods based on current rates.

MANAGING TRANSLATIONAL EXPOSURES

To minimize the impact of translating foreign currency denominated revenues and expenses into U.S. Dollars for consolidated reporting, certain foreign subsidiaries use excess cash to purchase U.S. Dollar denominated available-for-sale investments. The variable future cash flows associated with the purchase and subsequent sale of these U.S. Dollar denominated investments at non-U.S. Dollar functional currency subsidiaries creates a foreign currency exposure that qualifies for hedge accounting under U.S. GAAP. We utilize forward contracts and/or options to mitigate the variability of the forecasted future purchases and sales of these U.S. Dollar investments. The combination of the purchase and sale of the U.S. Dollar investment and the hedging instrument has the effect of partially offsetting the year-over-year foreign currency translation impact on net earnings in the period the investments are sold. Hedges of the purchase of U.S. Dollar denominated available-for-sale investments are accounted for as cash flow hedges.

We estimate the combination of translation of foreign currency-denominated profits from our international businesses and the year-over-year change in foreign currency related gains and losses included in Other (income) expense, net had a favorable impact of approximately $19 million and unfavorable impacts of $91 million and $97 million on our Income before income taxes for the years ended May 31, 2021, 2020 and 2019, respectively.

NET INVESTMENTS IN FOREIGN SUBSIDIARIES

We are also exposed to the impact of foreign exchange fluctuations on our investments in wholly-owned foreign subsidiaries denominated in a currency other than the U.S. Dollar, which could adversely impact the U.S. Dollar value of these investments and therefore the value of future repatriated earnings. We have, in the past, hedged and may, in the future, hedge net investment positions in certain foreign subsidiaries to mitigate the effects of foreign exchange fluctuations on these net investments. These hedges are accounted for as net investment hedges in accordance with U.S. GAAP. There were no outstanding net investment hedges as of May 31, 2021 and 2020. There were no cash flows from net investment hedge settlements for the years ended May 31, 2021, 2020 and 2019.

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LIQUIDITY AND CAPITAL RESOURCES

CASH FLOW ACTIVITY

Cash provided (used) by operations was an inflow of $6,657 million for fiscal 2021 compared to $2,485 million for fiscal 2020. Net income, adjusted for non-cash items, generated $6,612 million of operating cash inflow for fiscal 2021 compared to $3,730 million for fiscal 2020. The increase primarily reflects the recovery of our business operations from the impact of COVID-19. The net change in working capital and other assets and liabilities resulted in an increase to Cash provided (used) by operations of $45 million for fiscal 2021, compared to a decrease of $1,245 million for fiscal 2020. The net change in working capital was impacted by a $2,361 million decrease in Inventories, driven by strong consumer demand as we return to healthy inventory levels across markets closed in the prior year due to COVID-19. An increase in Accounts Payable and Accrued Liabilities also contributed to the net change in working capital, primarily due to reduced spending in fiscal 2020 as a result of COVID-19. In addition, the net change in working capital was impacted by a $2,845 million increase in Accounts receivable, net, primarily driven by higher revenues in the fourth quarter of fiscal 2021.

Cash provided (used) by investing activities was an outflow of $3,800 million for fiscal 2021, compared to an outflow of $1,028 million for fiscal 2020, primarily driven by higher purchases of short-term investments. During fiscal 2021, the net change in investments (including sales, maturities and purchases) resulted in a cash outflow of $3,276 million compared to a cash inflow of $27 million in fiscal 2020. Additionally, during fiscal 2021, we continued investing in our infrastructure to support future growth, specifically focused around digital capabilities, our end-to-end technology foundation, our corporate facilities and improvements across our supply chain. In future periods, we expect to make annual capital expenditures of approximately 3% of annual revenues.

Cash provided (used) by financing activities was an outflow of $1,459 million for fiscal 2021 compared to an inflow of $2,491 million for fiscal 2020. This change was primarily due to the net proceeds from a $5,942 million corporate bond issuance in the fourth quarter of fiscal 2020, partially offset by lower share repurchases during fiscal 2021.

During the fourth quarter of fiscal 2020, to enhance our liquidity position in response to COVID-19, we elected to temporarily suspend share repurchases under our existing share repurchase program. The existing program remained authorized by the Board of Directors and during the fourth quarter of fiscal 2021, we began repurchasing shares under the program. In fiscal 2021, we purchased 4.9 million shares of NIKE's Class B Common Stock for $650 million (an average price of $133.54 per share) under the four-year, $15 billion share repurchase program approved by the Board of Directors in June 2018. As of May 31, 2021, we had repurchased 50.0 million shares at a cost of $4,669 million (an average price of $93.33 per share) under this program. We continue to expect funding of share repurchases will come from operating cash flows and excess cash. The timing and the amount of share repurchases will be dictated by our capital needs and stock market conditions.

CAPITAL RESOURCES

On July 23, 2019, we filed a shelf registration statement (the “Shelf”) with the U.S. Securities and Exchange Commission (SEC) which permits us to issue an unlimited amount of debt securities from time to time. The Shelf expires on July 23, 2022.

On August 16, 2019, we entered into a committed credit facility agreement with a syndicate of banks which provides for up to $2 billion of borrowings, with the option to increase borrowings up to $3 billion in total upon lender approval. The facility matures on August 16, 2024, with a one-year extension option prior to any anniversary of the closing date, provided that in no event shall the facility extend beyond August 16, 2026. This facility replaces the prior $2 billion credit facility agreement entered into on August 28, 2015, which would have matured August 28, 2020. On March 15, 2021, we entered into a committed credit facility agreement with a syndicate of banks which provides for up to $1 billion of borrowings, with the option to increase borrowings up to $1.5 billion in total upon lender approval. The facility matures on March 14, 2022, with a 364-day extension option up to 30 days prior to the existing termination date, provided that in no event shall the facility extend beyond March 13, 2023. This facility replaces the prior $2 billion credit facility agreement entered into on April 6, 2020, which would have matured on April 5, 2021. As of May 31, 2021 and 2020, no amounts were outstanding under our committed credit facilities. Refer to Note 7 — Short-Term Borrowings and Credit Lines for additional information.

We currently have long-term debt ratings of AA- and A1 from Standard and Poor's Corporation and Moody's Investor Services, respectively. As it relates to our committed credit facilities entered into on August 16, 2019 and March 15, 2021, if our long-term debt ratings were to decline, the facility fees and interest rates would increase. Conversely, if our long-term debt ratings were to improve, the facility fees and interest rates would decrease. Changes in our long-term debt ratings would not trigger acceleration of maturity of any then-outstanding borrowings or any future borrowings under the committed credit facilities. Under these facilities, we have agreed to various covenants. These covenants include limits on our disposal of assets and the amount of debt secured by liens we may incur. In the event we were to have any borrowings outstanding under these facilities, failed to meet any covenant and were unable to obtain a waiver from a majority of the banks in the syndicate, any borrowings would become

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immediately due and payable. As of May 31, 2021, we were in full compliance with each of these covenants and believe it is unlikely we will fail to meet any of these covenants in the foreseeable future.

Liquidity was also provided by our $3 billion commercial paper program, which we decreased from $4 billion in connection with the new credit facility agreement, entered into on March 15, 2021, as described above. During the fiscal year ended May 31, 2021, the maximum amount of commercial paper borrowings outstanding at any point was $248 million. No commercial paper was outstanding as of May 31, 2021. As of May 31, 2020, we had $248 million of commercial paper outstanding at a weighted average interest rate of 1.65%.

We may continue to issue commercial paper or other debt securities depending on general corporate needs. We currently have short-term debt ratings of A1+ and P1 from Standard and Poor's Corporation and Moody's Investor Services, respectively.

To date, we have not experienced difficulty accessing the credit markets; however, future volatility in the capital markets may increase costs associated with issuing commercial paper or other debt instruments or affect our ability to access those markets.

As of May 31, 2021, we had cash, cash equivalents and short-term investments totaling $13.5 billion, primarily consisting of commercial paper, corporate notes, deposits held at major banks, money market funds, U.S. government sponsored enterprise obligations, U.S. Treasury obligations and other investment grade fixed-income securities. Our fixed-income investments are exposed to both credit and interest rate risk. All of our investments are investment grade to minimize our credit risk. While individual securities have varying durations, as of May 31, 2021, the weighted-average days to maturity of our cash equivalents and short-term investments portfolio was 54 days.

We believe that existing cash, cash equivalents, short-term investments and cash generated by operations, together with access to external sources of funds as described above, will be sufficient to meet our domestic and foreign capital needs in the foreseeable future.

We utilize a variety of tax planning and financing strategies to manage our worldwide cash and deploy funds to locations where they are needed. We indefinitely reinvest a significant portion of our foreign earnings, and our current plans do not demonstrate a need to repatriate these earnings. Should we require additional capital in the United States, we may determine to repatriate indefinitely reinvested foreign funds or raise capital in the United States through debt. Given our existing structure, if we were to repatriate indefinitely reinvested foreign earnings, we would be required to accrue and pay withholding taxes in certain foreign jurisdictions.

OFF-BALANCE SHEET ARRANGEMENTS

In connection with various contracts and agreements, we routinely provide indemnification relating to the enforceability of intellectual property rights, coverage for legal issues that arise and other items where we are acting as the guarantor. Currently, we have several such agreements in place. Based on our historical experience and the estimated probability of future loss, we have determined that the fair value of such indemnification is not material to our financial position or results of operations.

CONTRACTUAL OBLIGATIONS

Our significant long-term contractual obligations as of May 31, 2021, and significant endorsement contracts, including related marketing commitments, entered into through the date of this report are as follows:

DESCRIPTION OF COMMITMENT			CASH PAYMENTS DUE DURING THE YEAR ENDING MAY 31,
(Dollars in millions)			2022			2023			2024			2025			2026			THEREAFTER			TOTAL
Operating Leases			$	534		$	530		$	490		$	437		$	357		$	1,397		$	3,745
Long-Term Debt(1)			286			786			275			1,275			251			11,290			14,163
Endorsement Contracts(2)			1,502			1,244			1,091			966			726			2,863			8,392
Product Purchase Obligations(3)			6,448			—			—			—			—			—			6,448
Other Purchase Obligations(4)			1,347			541			331			191			96			230			2,736
Transition Tax Related to the Tax Cuts and Jobs Act(5)			86			86			161			215			268			—			816
TOTAL			$	10,203		$	3,187		$	2,348		$	3,084		$	1,698		$	15,780		$	36,300

*(1)*The cash payments due for long-term debt include estimated interest payments. Estimates of interest payments are based on outstanding principal amounts, applicable fixed interest rates or currently effective interest rates as of May 31, 2021 (if variable), timing of scheduled payments and the term of the debt obligations.

*(2)*The amounts listed for endorsement contracts represent approximate amounts of base compensation and minimum guaranteed royalty fees we are obligated to pay athlete, public figure, sport team and league endorsers of our products. Actual payments under some contracts may be higher than the amounts listed as these contracts provide for bonuses to be paid to the endorsers based upon athletic achievements and/or royalties on product sales in future periods. Actual payments under some contracts may also be lower as these contracts include provisions for reduced payments if athletic performance declines in future periods.

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In addition to the cash payments, we are obligated to furnish our endorsers with NIKE product for their use. It is not possible to determine how much we will spend on this product on an annual basis as the contracts generally do not stipulate a specific amount of cash to be spent on the product. The amount of product provided to the endorsers will depend on many factors, including general playing conditions, the number of sporting events in which they participate and our own decisions regarding product and marketing initiatives. In addition, the costs to design, develop, source and purchase the products furnished to the endorsers are incurred over a period of time and are not necessarily tracked separately from similar costs incurred for products sold to customers.

*(3)*We generally order product at least four to five months in advance of sale based primarily on advanced orders received from external wholesale customers and internal orders from our direct to consumer operations. The amounts listed for product purchase obligations represent agreements (including open purchase orders) to purchase products in the ordinary course of business that are enforceable and legally binding and specify all significant terms. In some cases, prices are subject to change throughout the production process.

*(4)*Other purchase obligations primarily include construction, service and marketing commitments, including marketing commitments associated with endorsement contracts, made in the ordinary course of business. The amounts represent the minimum payments required by legally binding contracts and agreements that specify all significant terms, and may include open purchase orders for non-product purchases.

*(5)*Represents the future cash payments due as part of the transition tax on deemed repatriation of undistributed earnings of foreign subsidiaries, which is reflected net of foreign tax credits we utilized. Refer to Part II, Item 8. Financial Statements and Supplementary Data, Note 9 - Income Taxes, in our fiscal 2020 Form 10-K, which was filed with the United States Securities and Exchange Commission on July 24, 2020 for additional information.

In addition to the above, we have long-term obligations for uncertain tax positions and various post-retirement benefits for which we are not able to reasonably estimate when cash payments will occur. Refer to Note 9 — Income Taxes and Note 13 — Benefit Plans in the accompanying Notes to the Consolidated Financial Statements for further information related to uncertain tax positions and post-retirement benefits, respectively.

We also have the following outstanding short-term debt obligations as of May 31, 2021. Refer to Note 7 — Short-Term Borrowings and Credit Lines in the accompanying Notes to the Consolidated Financial Statements for further description and interest rates related to the short-term debt obligations listed below.

(Dollars in millions)			MAY 31, 2021
Notes payable, due at mutually agreed-upon dates within one year of issuance or on demand			$	2

As of May 31, 2021, we had bank guarantees and letters of credit outstanding totaling $275 million, issued primarily for real estate agreements, self-insurance programs and other general business obligations.

NEW ACCOUNTING PRONOUNCEMENTS

Refer to Note 1 — Summary of Significant Accounting Policies in the accompanying Notes to the Consolidated Financial Statements for recently adopted accounting standards.

CRITICAL ACCOUNTING POLICIES

Our previous discussion and analysis of our financial condition and results of operations are based upon our Consolidated Financial Statements, which have been prepared in accordance with accounting principles generally accepted in the United States of America. The preparation of these financial statements requires us to make estimates and judgments that affect the reported amounts of assets, liabilities, revenues and expenses and related disclosure of contingent assets and liabilities. Note 1 — Summary of Significant Accounting Policies in the accompanying Notes to the Consolidated Financial Statements describes the significant accounting policies and methods used in the preparation of our Consolidated Financial Statements.

We believe the estimates, assumptions and judgments involved in the accounting policies described below have the greatest potential impact on our Consolidated Financial Statements, so we consider these to be our critical accounting policies and estimates. Management has reviewed and discussed these critical accounting policies with the Audit & Finance Committee of the Board of Directors.

These policies require that we make estimates in the preparation of our Consolidated Financial Statements as of a given date. Because of the uncertainty inherent in these matters, actual results could differ from the estimates we use in applying the critical accounting policies. Within the context of these critical accounting policies, we are not currently aware of any reasonably likely events or circumstances that would result in materially different amounts being reported.

REVENUE RECOGNITION

Beginning in fiscal 2019, we adopted Accounting Standards Update (ASU) No. 2014-09, Revenue from Contracts with Customers (Topic 606). Our revenue recognition policies under Topic 606 are described in the following paragraphs.

Revenue transactions associated with the sale of NIKE Brand footwear, apparel and equipment, as well as Converse products, comprise a single performance obligation, which consists of the sale of products to customers either through wholesale or direct to consumer channels. We satisfy the performance obligation and record revenues when transfer of control to the customer has occurred, based on the terms of sale. A customer is considered to have control once they are able to direct the use and receive

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substantially all of the benefits of the product. Control is transferred to wholesale customers upon shipment or upon receipt depending on the country of the sale and the agreement with the customer. Control transfers to retail store customers at the time of sale and to substantially all digital commerce customers upon shipment. The transaction price is determined based upon the invoiced sales price, less anticipated sales returns, discounts and miscellaneous claims from customers. Payment terms for wholesale transactions depend on the country of sale or agreement with the customer and payment is generally required within 90 days or less of shipment to or receipt by the wholesale customer. Payment is due at the time of sale for retail store and digital commerce transactions.

As part of our revenue recognition policy, consideration promised in our contracts with customers is variable due to anticipated reductions, such as sales returns, discounts and miscellaneous claims from customers. We estimate the most likely amount we will be entitled to receive and record an anticipated reduction against Revenues, with an offsetting increase to Accrued liabilities at the time revenues are recognized. The estimated cost of inventory for product returns is recorded in Prepaid expenses and other current assets on the Consolidated Balance Sheets.

The provision for anticipated sales returns consists of both contractual return rights and discretionary authorized returns. Provisions for post-invoice sales discounts consist of both contractual programs and discretionary discounts that are expected to be granted at a later date.

Estimates of discretionary authorized returns, discounts and claims are based on (1) historical rates, (2) specific identification of outstanding returns not yet received from customers and outstanding discounts and claims and (3) estimated returns, discounts and claims expected but not yet finalized with customers. Actual returns, discounts and claims in any future period are inherently uncertain and may differ from estimates recorded. If actual or expected future returns, discounts or claims were significantly different than reserves established, a reduction or increase to net revenues would be recorded in the period in which such determination was made.

Refer also to Note 1 — Summary of Significant Accounting Policies and Note 16 — Revenues for additional information in the accompanying Notes to the Consolidated Financial Statements.

INVENTORY RESERVES

We make ongoing estimates relating to the net realizable value of inventories based upon our assumptions about future demand and market conditions. If we estimate the net realizable value of our inventory is less than the cost of the inventory recorded on our books, we record a reserve equal to the difference between the cost of the inventory and the estimated net realizable value. This reserve is recorded as a charge to Cost of sales. If changes in market conditions result in reductions to the estimated net realizable value of our inventory below our previous estimate, we would increase our reserve in the period in which we made such a determination.

CONTINGENT PAYMENTS UNDER ENDORSEMENT CONTRACTS

A significant amount of our Demand creation expense relates to payments under endorsement contracts. In general, endorsement payments are expensed on a straight-line basis over the term of the contract. However, certain contract elements may be accounted for differently based upon the facts and circumstances of each individual contract.

Certain contracts provide for contingent payments to endorsers based upon specific achievements in their sports (e.g., winning a championship). We record 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 we determine payments are probable, the amounts are reported in Demand creation expense ratably over the contract period based on our best estimate of the endorser's performance. In these instances, to the extent actual payments to the endorser differ from our estimate due to changes in the endorser's performance, adjustments to 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, which we record in Cost of sales as the related sales occur. For contracts containing minimum guaranteed royalty payments, we record the amount of any guaranteed payment in excess of that earned through sales of product within Demand creation expense.

PROPERTY, PLANT AND EQUIPMENT AND DEFINITE-LIVED ASSETS

We review the carrying value of long-lived assets or asset groups to be used in operations whenever events or changes in circumstances indicate 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, we would assess the recoverability of an asset

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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 the carrying value of the asset group is not recoverable, we will estimate the fair value of the asset group using appropriate valuation methodologies that 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.

HEDGE ACCOUNTING FOR DERIVATIVES

We use derivative contracts to hedge certain anticipated foreign currency and interest rate transactions as well as certain non-functional currency monetary assets and liabilities. When the specific criteria to qualify for hedge accounting has been met, changes in the fair value of contracts hedging probable forecasted future cash flows are recorded in Accumulated other comprehensive income (loss), rather than Net income, until the underlying hedged transaction affects Net income. In most cases, this results in gains and losses on hedge derivatives being released from Accumulated other comprehensive income (loss) into Net income sometime after the maturity of the derivative. One of the criteria for this accounting treatment is that the notional value of these derivative contracts should not be in excess of the designated amount of anticipated transactions. By their very nature, our estimates of anticipated transactions may fluctuate over time and may ultimately vary from actual transactions. When the designated amount of anticipated or actual transactions decline below hedged levels, or if it is no longer probable a forecasted transaction will occur by the end of the originally specified time period or within an additional two-month period of time thereafter, we are required to reclassify the cumulative change in fair value of the over-hedged portion of the related hedge contract from Accumulated other comprehensive income (loss) to Other (income) expense, net during the quarter in which the decrease occurs. In rare circumstances, the additional period of time may exceed two months due to extenuating circumstances related to the nature of the forecasted transaction that are outside our control or influence.

INCOME TAXES

We are subject to taxation in the United States, as well as various state and foreign jurisdictions. The determination of our provision for income taxes requires significant judgment, the use of estimates and the interpretation and application of complex tax laws. On an interim basis, we estimate our effective tax rate for the full fiscal year. This estimated annual effective tax rate is then applied to the year-to-date Income before income taxes excluding infrequently occurring or unusual items, to determine the year-to-date Income tax expense. The income tax effects of infrequent or unusual items are recognized in the interim period in which they occur. As the fiscal year progresses, we continually refine our estimate based upon actual events and earnings by jurisdiction during the year. This continual estimation process periodically results in a change to our expected effective tax rate for the fiscal year. When this occurs, we adjust the income tax provision during the quarter in which the change in estimate occurs.

We record valuation allowances against our deferred tax assets, when necessary. Realization of deferred tax assets (such as net operating loss carry-forwards) is dependent on future taxable earnings and is therefore uncertain. At least quarterly, we assess the likelihood that our deferred tax asset balance will be recovered from future taxable income. To the extent we believe that recovery is not likely, we establish a valuation allowance against our net deferred tax asset, which increases our Income tax expense in the period when such determination is made.

We have not recorded withholding tax expense for foreign earnings we have determined to be indefinitely reinvested within certain of our foreign jurisdictions. The amount of earnings indefinitely reinvested offshore is due to the actual deployment of such earnings in our offshore operations and our expectations of the future cash needs of our U.S. and foreign entities. Withholding tax consequences are also a factor in determining the amount of foreign earnings to be indefinitely reinvested offshore.

We carefully review all factors that drive the ultimate disposition of foreign earnings determined to be reinvested offshore and apply stringent standards to overcome the presumption of repatriation. Despite this approach, because the determination is based on expected working capital and other capital needs in jurisdictions where the earnings are generated, the possibility exists that foreign earnings declared as indefinitely reinvested may be repatriated. For instance, the actual cash needs of our U.S. operations may exceed our current expectations, or the actual cash needs of our foreign entities may be less than our current expectations. This would result in additional withholding tax expense in the year we determined amounts were no longer indefinitely reinvested offshore.

On a quarterly basis, we evaluate the probability a tax position will be effectively sustained and the appropriateness of the amount recognized for uncertain tax positions based on factors including changes in facts or circumstances, changes in tax law, settled audit issues and new audit activity. Changes in our assessment may result in the recognition of a tax benefit or an additional charge to the tax provision in the period our assessment changes. We recognize interest and penalties related to income tax matters in Income tax expense.

Refer to Note 9 — Income Taxes in the accompanying Notes to the Consolidated Financial Statements for additional information.

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OTHER CONTINGENCIES

In the ordinary course of business, we are involved in legal proceedings regarding contractual and employment relationships, product liability claims, trademark rights and a variety of other matters. We record contingent liabilities resulting from claims against us when a loss is assessed to be probable and the amount of the loss is reasonably estimable. Assessing probability of loss and estimating probable losses requires analysis of multiple factors, including in some cases judgments about the potential actions of third-party claimants and courts. Recorded contingent liabilities are based on the best information available and actual losses in any future period are inherently uncertain. If future adjustments to estimated probable future losses or actual losses exceed our recorded liability for such claims, we would record additional charges during the period in which the actual loss or change in estimate occurred. In addition to contingent liabilities recorded for probable losses, we disclose contingent liabilities when there is a reasonable possibility the ultimate loss will materially exceed the recorded liability. While we cannot predict the outcome of pending legal matters with certainty, we do not believe any currently identified claim, proceeding or litigation, either individually or in aggregate, will have a material impact on our results of operations, financial position or cash flows.

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