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EX-31.1 - SECTION 302 CEO CERTIFICATION - NIKE INCnke-11302014xexhibit311.htm
EX-31.2 - SECTION 302 CFO CERTIFICATION - NIKE INCnke-11302014xexhibit312.htm
EX-32 - SECTION 906 CEO AND CFO CERTIFICATION - NIKE INCnke-11302014xexhibit32.htm
 UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
FORM 10-Q
(Mark One)
x    QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934
For the Quarterly Period Ended November 30, 2014
¨    TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934
For the transition period from              to
Commission file number-001-10635
 
NIKE, Inc.
(Exact name of registrant as specified in its charter)
 
 
 
OREGON
 
93-0584541
(State or other jurisdiction of
incorporation or organization)
 
(I.R.S. Employer
Identification No.)
 
 
One Bowerman Drive,
Beaverton, Oregon
 
97005-6453
(Address of principal executive offices)
 
(Zip Code)
Registrant’s telephone number, including area code: (503) 671-6453
Indicate by check mark whether the registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days.    Yes  þ    No  ¨
Indicate by check mark whether the registrant has submitted electronically and posted on its corporate Web site, if any, every Interactive Data File required to be submitted and posted pursuant to Rule 405 of Regulation S-T (§ 232.405 of this chapter) during the preceding 12 months (or for such shorter period that the registrant was required to submit and post such files).    Yes  þ    No  ¨
Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, a non-accelerated filer, or a smaller reporting company. See the definitions of “large accelerated filer,” “accelerated filer” and “smaller reporting company” in Rule 12b-2 of the Exchange Act.
Large accelerated filer
þ
  
Accelerated filer
¨
 
 
 
 
Non-accelerated filer
¨
   (Do not check if a smaller reporting company)
Smaller Reporting Company
¨
Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Exchange Act).    Yes  ¨    No  þ
Shares of Common Stock outstanding as of January 2, 2015 were:
Class A
177,557,876

Class B
686,380,646

 
863,938,522




NIKE, INC.
FORM 10-Q
Table of Contents
 



PART I - FINANCIAL INFORMATION
ITEM 1. Financial Statements
NIKE, Inc. Unaudited Condensed Consolidated Balance Sheets
 
 
November 30,
 
May 31,
(In millions)
 
2014
 
2014
ASSETS
 
 
 
 
Current assets:
 
 
 
 
Cash and equivalents (Note 4)
 
$
2,273

 
$
2,220

Short-term investments (Note 4)
 
2,440

 
2,922

Accounts receivable, net
 
3,457

 
3,434

Inventories (Note 2)
 
4,150

 
3,947

Deferred income taxes (Note 5)
 
334

 
355

Prepaid expenses and other current assets (Notes 4 and 8)
 
1,379

 
818

Total current assets
 
14,033

 
13,696

Property, plant and equipment, net
 
2,927

 
2,834

Identifiable intangible assets, net
 
281

 
282

Goodwill
 
131

 
131

Deferred income taxes and other assets (Notes 4, 5 and 8)
 
1,795

 
1,651

TOTAL ASSETS
 
$
19,167

 
$
18,594

LIABILITIES AND SHAREHOLDERS’ EQUITY
 
 
 
 
Current liabilities:
 
 
 
 
Current portion of long-term debt (Note 4)
 
$
110

 
$
7

Notes payable (Note 4)
 
93

 
167

Accounts payable
 
2,074

 
1,930

Accrued liabilities (Notes 3, 4 and 8)
 
2,622

 
2,491

Income taxes payable (Note 5)
 
38

 
432

Total current liabilities
 
4,937

 
5,027

Long-term debt (Note 4)
 
1,084

 
1,199

Deferred income taxes and other liabilities (Notes 4, 5 and 8)
 
1,446

 
1,544

Commitments and contingencies (Note 11)
 


 


Redeemable preferred stock
 

 

Shareholders’ equity:
 
 
 
 
Common stock at stated value
 
 
 
 
Class A convertible — 178 and 178 shares outstanding
 

 

Class B — 686 and 692 shares outstanding
 
3

 
3

Capital in excess of stated value
 
6,375

 
5,865

Accumulated other comprehensive income (Note 9)
 
525

 
85

Retained earnings
 
4,797

 
4,871

Total shareholders’ equity
 
11,700

 
10,824

TOTAL LIABILITIES AND SHAREHOLDERS’ EQUITY
 
$
19,167

 
$
18,594

The accompanying Notes to the Unaudited Condensed Consolidated Financial Statements are an integral part of this statement.
 

3


NIKE, Inc. Unaudited Condensed Consolidated Statements of Income
 
 
Three Months Ended November 30,
 
Six Months Ended November 30,
(In millions, except per share data)
 
2014
 
2013
 
2014
 
2013
Revenues
 
$
7,380

 
$
6,431

 
$
15,362

 
$
13,402

Cost of sales
 
4,053

 
3,605

 
8,314

 
7,444

Gross profit
 
3,327

 
2,826

 
7,048

 
5,958

Demand creation expense
 
766

 
691

 
1,663

 
1,422

Operating overhead expense
 
1,672

 
1,400

 
3,255

 
2,727

Total selling and administrative expense
 
2,438

 
2,091

 
4,918

 
4,149

Interest expense (income), net
 
9

 
8

 
18

 
16

Other expense (income), net
 
2

 
13

 
5

 
41

Income before income taxes
 
878

 
714

 
2,107

 
1,752

Income tax expense (Note 5)
 
223

 
180

 
490

 
439

NET INCOME
 
$
655

 
$
534

 
$
1,617

 
$
1,313


 
 
 
 
 
 
 
 
Earnings per common share:
 
 
 
 
 
 
 
 
Basic
 
$
0.76

 
$
0.60

 
$
1.87

 
$
1.48

Diluted
 
$
0.74

 
$
0.59

 
$
1.83

 
$
1.44


 
 
 
 
 
 
 
 
Dividends declared per common share
 
$
0.28

 
$
0.24

 
$
0.52

 
$
0.45

The accompanying Notes to the Unaudited Condensed Consolidated Financial Statements are an integral part of this statement.

4


NIKE, Inc. Unaudited Condensed Consolidated Statements of Comprehensive Income
 
 
Three Months Ended November 30,
 
Six Months Ended November 30,
(In millions)
 
2014
 
2013
 
2014
 
2013
Net income
 
$
655

 
$
534

 
$
1,617

 
$
1,313

Other comprehensive income (loss), net of tax:
 
 
 
 
 
 
 
 
Change in net foreign currency translation adjustment
 
(34
)
 
14

 
(32
)
 
(17
)
Change in net gains (losses) on cash flow hedges
 
333

 
(100
)
 
468

 
(165
)
Change in net gains (losses) on other
 
2

 
(1
)
 
4

 
(2
)
Total other comprehensive income (loss), net of tax
 
301

 
(87
)
 
440

 
(184
)
TOTAL COMPREHENSIVE INCOME
 
$
956

 
$
447

 
$
2,057

 
$
1,129

The accompanying Notes to the Unaudited Condensed Consolidated Financial Statements are an integral part of this statement.


5


NIKE, Inc. Unaudited Condensed Consolidated Statements of Cash Flows
 
 
Six Months Ended November 30,
(In millions)
 
2014
 
2013
Cash provided by operations:
 
 
 
 
Net income
 
$
1,617

 
$
1,313

Income charges (credits) not affecting cash:
 
 
 
 
Depreciation
 
301

 
246

Deferred income taxes
 
49

 
24

Stock-based compensation (Note 6)
 
92

 
88

Amortization and other
 
(54
)
 
51

Changes in certain working capital components and other assets and liabilities:
 
 
 
 
(Increase) in accounts receivable
 
(177
)
 
(89
)
(Increase) in inventories
 
(318
)
 
(277
)
(Increase) in prepaid expenses and other current assets
 
(58
)
 
(125
)
(Decrease) in accounts payable, accrued liabilities and income taxes payable  
 
(217
)
 
(283
)
Cash provided by operations
 
1,235

 
948

Cash used by investing activities:
 
 
 
 
Purchases of short-term investments
 
(2,588
)
 
(2,848
)
Maturities of short-term investments
 
1,862

 
1,662

Sales of short-term investments
 
1,045

 
546

Investments in reverse repurchase agreements
 

 
(100
)
Additions to property, plant and equipment
 
(487
)
 
(449
)
Disposals of property, plant and equipment
 
2

 
1

(Increase) in other assets, net of other liabilities
 

 
(1
)
Cash used by investing activities
 
(166
)
 
(1,189
)
Cash used by financing activities:
 
 
 
 
Long-term debt payments, including current portion
 
(4
)
 
(57
)
(Decrease) increase in notes payable
 
(58
)
 
59

Payments on capital lease obligations
 
(12
)
 

Proceeds from exercise of stock options and other stock issuances
 
313

 
233

Excess tax benefits from share-based payment arrangements
 
116

 
71

Repurchase of common stock
 
(1,243
)
 
(928
)
Dividends — common and preferred
 
(416
)
 
(375
)
Cash used by financing activities
 
(1,304
)
 
(997
)
Effect of exchange rate changes
 
288

 
(13
)
Net increase (decrease) in cash and equivalents
 
53

 
(1,251
)
Cash and equivalents, beginning of period
 
2,220

 
3,337

CASH AND EQUIVALENTS, END OF PERIOD
 
$
2,273

 
$
2,086

Supplemental disclosure of cash flow information:
 
 
 
 
Non-cash additions to property, plant and equipment
 
$
141

 
$
117

Dividends declared and not paid
 
242

 
213

The accompanying Notes to the Unaudited Condensed Consolidated Financial Statements are an integral part of this statement.

6


Notes to the Unaudited Condensed Consolidated Financial Statements
 
 

7


NOTE 1 — Summary of Significant Accounting Policies
Basis of Presentation
The accompanying Unaudited Condensed Consolidated Financial Statements reflect all normal adjustments which are, in the opinion of management, necessary for a fair statement of the results of operations for the interim period. The year-end Condensed Consolidated Balance Sheet data as of May 31, 2014 was derived from audited financial statements, but does not include all disclosures required by accounting principles generally accepted in the United States of America (“U.S. GAAP”). The interim financial information and notes thereto should be read in conjunction with the Company’s latest Annual Report on Form 10-K. The results of operations for the three and six months ended November 30, 2014 are not necessarily indicative of results to be expected for the entire year.
Reclassifications
Certain prior year amounts have been reclassified to conform to fiscal 2015 presentation.
Revisions
The Company has historically capitalized costs associated with internally generated patents and trademarks and amortized these assets over the legal term of the patents and trademarks. During the fourth quarter of fiscal 2014, management determined that these capitalized costs were not accurately identified with specific patent or trademark assets and, therefore, concluded that amounts previously capitalized should have been expensed as incurred. Accordingly, the Unaudited Condensed Consolidated Financial Statements have been revised to correctly expense costs associated with internally developed patents and trademarks in the period incurred and to reverse expenses for amortization of previously capitalized costs. The revisions resulted in a decrease in Net income of $3 million and $4 million for the three and six months ended November 30, 2013, respectively. Cash provided by operations decreased $9 million while Cash used by investing activities decreased $9 million for the six months ended November 30, 2013.
Also, in the fourth quarter of fiscal 2014, the Company revised certain prior year amounts in the Unaudited Condensed Consolidated Statements of Cash Flows to eliminate intercompany transfers of short-term investments, to correctly reflect the purchases, sales and maturities of short-term investments related to the Company's hedging program involving U.S. Dollar denominated available-for-sale securities and to correctly classify certain investment holdings as Short-term investments. For the six months ended November 30, 2013, the revisions resulted in a net increase in Purchases of short-term investments of $89 million, a net increase in Maturities of short-term investments of $60 million and a net increase in Sales of short-term investments of $29 million. This revision had no impact on Cash used by investing activities or Net increase (decrease) in cash and equivalents.
Certain prior year amounts have also been revised in the Unaudited Condensed Consolidated Statements of Cash Flows to correctly recognize the cash flow impacts of certain inventory amounts held by third parties, which were identified during the third quarter of fiscal 2014 and resulted in cash flow impacts of $3 million for both Inventories and Accrued liabilities for the six months ended November 30, 2013. This revision had no impact on Cash provided by operations or Net increase (decrease) in cash and equivalents.
The Company also revised certain prior period amounts in the Unaudited Condensed Consolidated Statements of Cash Flows to correctly reflect non-cash additions to property, plant and equipment, which were identified during the second quarter of fiscal 2014. For the six months ended November 30, 2013, this revision increased Cash provided by operations and increased Cash used by investing activities, each by $21 million.
The Company assessed the materiality of these misstatements on prior periods’ financial statements in accordance with SEC Staff Accounting Bulletin ("SAB") No. 99, Materiality, codified in Accounting Standards Codification ("ASC") 250, Presentation of Financial Statements, and concluded that these misstatements were not material to any prior annual or interim periods. Accordingly, in accordance with ASC 250 (SAB No. 108, Considering the Effects of Prior Year Misstatements when Quantifying Misstatements in Current Year Financial Statements), the Unaudited Condensed Consolidated Financial Statements as of November 30, 2013, and for the three and six months then ended, which are presented herein, have been revised. The following are selected line items from the Company's Unaudited Condensed Consolidated Financial Statements illustrating the effect of these corrections and the correction of other immaterial errors:
 
 
NIKE, Inc. Unaudited Condensed Consolidated Statements of Income
 
 
Three Months Ended November 30, 2013
 
Six Months Ended November 30, 2013
(In millions, except per share data)
 
As Reported
 
Adjustment
 
As Revised
 
As Reported
 
Adjustment
 
As Revised
Total selling and administrative expense
 
$
2,088

 
$
3

 
$
2,091

 
$
4,144

 
$
5

 
$
4,149

Income before income taxes
 
717

 
(3
)
 
714

 
1,757

 
(5
)
 
1,752

Income tax expense
 
180

 

 
180

 
440

 
(1
)
 
439

NET INCOME
 
$
537

 
$
(3
)
 
$
534

 
$
1,317

 
$
(4
)
 
$
1,313

 
 
 
 
 
 
 
 
 
 
 
 
 
Earnings per common share:
 
 
 
 
 
 
 
 
 
 
 
 
Basic
 
$
0.60

 
$

 
$
0.60

 
$
1.48

 
$

 
$
1.48

Diluted
 
$
0.59

 
$

 
$
0.59

 
$
1.45

 
$
(0.01
)
 
$
1.44


8


 
 
NIKE, Inc. Unaudited Condensed Consolidated Statements of Comprehensive Income
 
 
Three Months Ended November 30, 2013
 
Six Months Ended November 30, 2013
(In millions)
 
As Reported
 
Adjustment
 
As Revised
 
As Reported
 
Adjustment
 
As Revised
Net income
 
$
537

 
$
(3
)
 
$
534

 
$
1,317

 
$
(4
)
 
$
1,313

TOTAL COMPREHENSIVE INCOME
 
$
450

 
$
(3
)
 
$
447

 
$
1,133

 
$
(4
)
 
$
1,129

 
 
NIKE, Inc. Unaudited Condensed Consolidated Statements of Cash Flows
 
 
Six Months Ended November 30, 2013
(In millions)
 
As Reported
 
Adjustment
 
As Revised
Cash provided by operations:
 
 
 
 
 
 
Net income
 
$
1,317

 
$
(4
)
 
$
1,313

Income charges (credits) not affecting cash:
 
 
 
 
 
 
Deferred income taxes
 
23

 
1

 
24

Amortization and other
 
54

 
(3
)
 
51

(Increase) in inventories
 
(280
)
 
3

 
(277
)
(Decrease) in accounts payable, accrued liabilities and income taxes
 
(305
)
 
22

 
(283
)
Cash provided by operations
 
929

 
19

 
948

Cash used by investing activities:
 
 
 
 
 
 
Purchases of short-term investments
 
(2,759
)
 
(89
)
 
(2,848
)
Maturities of short-term investments
 
1,602

 
60

 
1,662

Sales of short-term investments
 
517

 
29

 
546

Additions to property, plant and equipment
 
(428
)
 
(21
)
 
(449
)
(Increase) in other assets, net of other liabilities
 
(10
)
 
9

 
(1
)
Cash used by investing activities
 
(1,177
)
 
(12
)
 
(1,189
)
Cash used by financing activities:
 
 
 
 
 
 
(Decrease) increase in notes payable
 
66

 
(7
)
 
59

Cash used by financing activities
 
(990
)
 
(7
)
 
(997
)
Net increase (decrease) in cash and equivalents
 
(1,251
)
 

 
(1,251
)
Cash and equivalents, beginning of period
 
3,337

 

 
3,337

CASH AND EQUIVALENTS, END OF PERIOD
 
$
2,086

 
$

 
$
2,086

Recently Issued Accounting Standards
In May 2014, the Financial Accounting Standards Board ("FASB") issued an accounting standards update that replaces existing revenue recognition guidance. Among other things, the updated guidance requires companies to recognize revenue in a way that depicts the transfer of promised goods or services to customers in an amount that reflects the consideration to which the entity expects to be entitled in exchange for those goods or services. The new guidance is effective for the Company beginning June 1, 2017 and early adoption is not permitted. The Company is currently evaluating the effect the guidance will have on the Consolidated Financial Statements.
NOTE 2 — Inventories
Inventory balances of $4,150 million and $3,947 million at November 30, 2014 and May 31, 2014, respectively, were substantially all finished goods.

9


NOTE 3 — Accrued Liabilities
Accrued liabilities included the following:
 
 
As of November 30,
 
As of May 31,
(In millions)
 
2014
 
2014
Compensation and benefits, excluding taxes
 
$
666

 
$
782

Endorsement compensation
 
295

 
328

Taxes other than income taxes
 
245

 
204

Dividends payable
 
242

 
209

Collateral received from counterparties to foreign currency hedging instruments
 
170

 

Advertising and marketing
 
161

 
133

Import and logistics costs
 
112

 
127

Fair value of derivatives
 
55

 
85

Other(1)
 
676

 
623

TOTAL ACCRUED LIABILITIES
 
$
2,622

 
$
2,491

(1)
Other consists of various accrued expenses with no individual item accounting for more than 5% of the total Accrued liabilities balance at November 30, 2014 and May 31, 2014.
NOTE 4 — Fair Value Measurements
The Company measures certain financial assets and liabilities at fair value on a recurring basis, including derivatives and available-for-sale securities. Fair value is the price the Company would receive to sell an asset or pay to transfer a liability in an orderly transaction with a market participant at the measurement date. The Company uses the three-level hierarchy established by the FASB that prioritizes fair value measurements based on the types of inputs used for the various valuation techniques (market approach, income approach and cost approach).
The levels of the fair value hierarchy are described below:
Level 1: Quoted prices in active markets for identical assets or liabilities.
Level 2: Inputs other than quoted prices that are observable for the asset or liability, either directly or indirectly; these include quoted prices for similar assets or liabilities in active markets and quoted prices for identical assets or liabilities in markets that are not active.
Level 3: Unobservable inputs for which there is little or no market data available, which require the reporting entity to develop its own assumptions.
The Company’s assessment of the significance of a particular input to the fair value measurement in its entirety requires judgment and considers factors specific to the asset or liability. Financial assets and liabilities are classified in their entirety based on the most conservative level of input that is significant to the fair value measurement.
Pricing vendors are utilized for certain Level 1 and Level 2 investments. These vendors either provide a quoted market price in an active market or use observable inputs without applying significant adjustments in their pricing. Observable inputs include broker quotes, interest rates and yield curves observable at commonly quoted intervals, volatilities and credit risks. The Company’s fair value processes include controls that are designed to ensure appropriate fair values are recorded. These controls include a comparison of fair values to another independent pricing vendor.
The following tables present information about the Company’s financial assets measured at fair value on a recurring basis as of November 30, 2014 and May 31, 2014, and indicate the level in the fair value hierarchy in which the Company classifies the fair value measurement.
 
As of November 30, 2014
(In millions)
 
Assets at Fair Value
 
Cash and Cash Equivalents
 
Short-term Investments
 
Other Long-term Assets
Cash
 
$
780

 
$
780

 
$

 
$

Level 1:
 
 
 
 
 
 
 
 
U.S. Treasury securities
 
873

 
25

 
848

 

Level 2:
 
 
 
 
 
 
 
 
Time deposits
 
302

 
302

 

 

U.S. Agency securities
 
788

 

 
788

 

Commercial paper and bonds
 
854

 
50

 
804

 

Money market funds
 
1,116

 
1,116

 

 

Total Level 2:
 
3,060

 
1,468

 
1,592

 

Level 3:
 
 
 
 
 
 
 
 
Non-marketable preferred stock
 
6

 

 

 
6

TOTAL
 
$
4,719

 
$
2,273

 
$
2,440

 
$
6


10



 
As of May 31, 2014
(In millions)
 
Assets at Fair Value
 
Cash and Cash Equivalents
 
Short-term Investments
 
Other Long-term Assets
Cash
 
$
780

 
$
780

 
$

 
$

Level 1:
 
 
 
 
 
 
 
 
U.S. Treasury securities
 
1,137

 
151

 
986

 

Level 2:
 
 
 
 
 
 
 
 
Time deposits
 
227

 
227

 

 

U.S. Agency securities
 
1,027

 
25

 
1,002

 

Commercial paper and bonds
 
959

 
25

 
934

 

Money market funds
 
1,012

 
1,012

 

 

Total Level 2:
 
3,225

 
1,289

 
1,936

 

Level 3:
 
 
 
 
 
 
 
 
Non-marketable preferred stock
 
7

 

 

 
7

TOTAL
 
$
5,149

 
$
2,220

 
$
2,922

 
$
7

The following tables present information about the Company’s derivative assets and liabilities measured at fair value on a recurring basis as of November 30, 2014 and May 31, 2014, and indicate the level in the fair value hierarchy in which the Company classifies the fair value measurement.
 
As of November 30, 2014
 
 
Derivative Assets
 
Derivative Liabilities
(In millions)
 
Assets at Fair Value
 
Other Current Assets
 
Other Long-term Assets
 
Liabilities at Fair Value
 
Accrued Liabilities
 
Other Long-term Liabilities
Level 2:
 
 
 
 
 
 
 
 
 
 
 
 
Foreign exchange forwards and options(1)
 
$
635

 
$
465

 
$
170

 
$
58

 
$
55

 
$
3

Embedded derivatives
 
1

 
1

 

 

 

 

Interest rate swap contracts
 
4

 
4

 

 

 

 

TOTAL
 
$
640

 
$
470

 
$
170

 
$
58

 
$
55

 
$
3

(1)
The Company’s derivative financial instruments are subject to master netting arrangements that allow for the offset of assets and liabilities in the event of default or early termination of the contract. The Company elects to record the gross assets and liabilities of its derivative financial instruments on the Unaudited Condensed Consolidated Balance Sheets. If the derivative financial instruments had been netted on the Unaudited Condensed Consolidated Balance Sheets, the asset and liability positions each would have been reduced by $58 million. At November 30, 2014, the Company had received from various counterparties $170 million of cash collateral; this amount has been recorded in Cash and equivalents and Accrued liabilities, the latter of which would also net against the Company's derivative asset balance. No amount of collateral was posted on the Company’s derivative liability balance.
 
As of May 31, 2014
 
 
Derivative Assets
 
Derivative Liabilities
(In millions)
 
Assets at Fair Value
 
Other Current Assets
 
Other Long-term Assets
 
Liabilities at Fair Value
 
Accrued Liabilities
 
Other Long-term Liabilities
Level 2:
 
 
 
 
 
 
 
 
 
 
 
 
Foreign exchange forwards and options(1)
 
$
127

 
$
101

 
$
26

 
$
85

 
$
84

 
$
1

Interest rate swap contracts
 
6

 

 
6

 

 

 

TOTAL
 
$
133

 
$
101

 
$
32

 
$
85

 
$
84

 
$
1

(1)
The Company’s derivative financial instruments are subject to master netting arrangements that allow for the offset of assets and liabilities in the event of default or early termination of the contract. The Company elects to record the gross assets and liabilities of its derivative financial instruments on the Consolidated Balance Sheets. If the derivative financial instruments had been netted on the Consolidated Balance Sheets, the asset and liability positions each would have been reduced by $63 million. No amounts of collateral were received or posted on the Company’s derivative assets and liabilities as of May 31, 2014.
Available-for-sale securities comprise investments in U.S. Treasury and Agency securities, money market funds, corporate commercial paper and bonds. These securities are valued using market prices on both active markets (Level 1) and less active markets (Level 2). The gross realized gains and losses on sales of available-for-sale securities were immaterial for the three and six months ended November 30, 2014 and 2013. Unrealized gains and losses on available-for-sale securities included in Other comprehensive income were immaterial as of November 30, 2014 and May 31, 2014.
The Company regularly reviews its available-for-sale securities for other-than-temporary impairment. For the six months ended November 30, 2014 the Company did not consider any of its securities to be other-than-temporarily impaired and accordingly, did not recognize any impairment losses.

11


As of November 30, 2014, the Company held $1,857 million of available-for-sale securities with maturity dates within one year from the purchase date and $583 million with maturity dates over one year and less than five years from the purchase date within Short-term investments. As of May 31, 2014, the Company held $2,287 million of available-for-sale securities with maturity dates within one year from purchase date and $635 million with maturity dates over one year and less than five years from purchase date within Short-term investments.
Included in Interest expense (income), net for each of the three months ended November 30, 2014 and 2013 was interest income related to the Company's available-for-sale securities of $2 million and $1 million, respectively, and $3 million and $2 million for each of the six months ended November 30, 2014 and 2013, respectively.
The Company’s Level 3 assets comprise investments in certain non-marketable preferred stock. These Level 3 investments are an immaterial portion of the Company's portfolio. Changes in Level 3 investment assets were immaterial during the six months ended November 30, 2014 and the year ended May 31, 2014.
Derivative financial instruments include foreign exchange forwards and options, embedded derivatives and interest rate swap contracts. Refer to Note 8 — Risk Management and Derivatives for additional detail.
No transfers among the levels within the fair value hierarchy occurred during the six months ended November 30, 2014.
As of November 30, 2014 and May 31, 2014, the Company had no assets or liabilities that were required to be measured at fair value on a non-recurring basis.
Financial Assets and Liabilities Not Recorded at Fair Value
The Company’s long-term debt is recorded at adjusted cost, net of amortized premiums and discounts and interest rate swap fair value adjustments. The fair value of long-term debt is estimated based upon quoted prices for similar instruments or quoted prices for identical instruments in inactive markets (Level 2). The fair value of the Company’s long-term debt, including the current portion, was approximately $1,179 million at November 30, 2014 and $1,154 million at May 31, 2014.
The carrying amounts reflected on the Unaudited Condensed Consolidated Balance Sheets for Notes payable approximate fair value.
NOTE 5 — Income Taxes
The effective tax rate was 23.3% and 25.1% for the six month periods ended November 30, 2014 and 2013, respectively. The decrease in the Company’s effective tax rate was primarily due to the resolution of audits in several jurisdictions and an increase in the proportion of earnings from operations outside of the United States, which are generally subject to a lower tax rate. The decrease was partially offset by adjustments to tax expense on intercompany transactions and the benefit realized in the prior year period from the U.S. research and development tax credit.
As of November 30, 2014, total gross unrecognized tax benefits, excluding related interest and penalties, were $444 million, $240 million of which would affect the Company’s effective tax rate if recognized in future periods. As of May 31, 2014, total gross unrecognized tax benefits, excluding related interest and penalties, were $506 million. The liability for payment of interest and penalties decreased $7 million during the six months ended November 30, 2014. As of November 30, 2014 and May 31, 2014, accrued interest and penalties related to uncertain tax positions were $160 million and $167 million, respectively (excluding federal benefit).
The Company is subject to taxation primarily in the United States, China, the Netherlands and Brazil, as well as various other state and foreign jurisdictions. The Company has closed all U.S. federal income tax matters through fiscal 2011, with the exception of the validation of foreign tax credits utilized. The Company is currently under audit by the Internal Revenue Service for the 2012 through 2014 tax years. The Company’s major foreign jurisdictions, China, the Netherlands and Brazil, have concluded substantially all income tax matters through calendar 2005, fiscal 2009 and calendar 2008, respectively. Although the timing of resolution of audits is not certain, the Company evaluates all domestic and foreign audit issues in the aggregate, along with the expiration of applicable statutes of limitations, and estimates that it is reasonably possible the total gross unrecognized tax benefits could decrease by up to $39 million within the next 12 months.
NOTE 6 — Stock-Based Compensation
In 1990, the Board of Directors adopted, and the shareholders approved, the NIKE, Inc. 1990 Stock Incentive Plan (the “1990 Plan”). The 1990 Plan provides for the issuance of up to 326 million previously unissued shares of Class B Common Stock in connection with stock options and other awards granted under the 1990 Plan. The 1990 Plan authorizes the grant of non-statutory stock options, incentive stock options, stock appreciation rights, restricted stock, restricted stock units and performance-based awards. The exercise price for stock options and stock appreciation rights may not be less than the fair market value of the underlying shares on the date of grant. A committee of the Board of Directors administers the 1990 Plan. The committee has the authority to determine the employees to whom awards will be made, the amount of the awards and the other terms and conditions of the awards. Substantially all stock option grants outstanding under the 1990 Plan were granted in the first quarter of each fiscal year, vest ratably over four years and expire 10 years from the date of grant.
In addition to the 1990 Plan, the Company gives employees the right to purchase shares at a discount to the market price under employee stock purchase plans (“ESPPs”). Employees are eligible to participate through payroll deductions of up to 10% of their compensation. At the end of each 6-month offering period, shares are purchased by the participants at 85% of the lower of the fair market value at the beginning or the end of the offering period.
The Company accounts for stock-based compensation by estimating the fair value of options granted under the 1990 Plan and employees’ purchase rights under the ESPPs using the Black-Scholes option pricing model. The Company recognizes this fair value as Operating overhead expense over the vesting period using the straight-line method.

12


The following table summarizes the Company’s total stock-based compensation expense recognized in Operating overhead expense: 
 
 
Three Months Ended November 30,
 
Six Months Ended November 30,
(In millions)
 
2014
 
2013
 
2014
 
2013
Stock options(1)
 
$
35

 
$
32

 
$
65

 
$
61

ESPPs
 
6

 
6

 
12

 
11

Restricted stock
 
8

 
8

 
15

 
16

TOTAL STOCK-BASED COMPENSATION EXPENSE
 
$
49

 
$
46

 
$
92

 
$
88

(1)
Expense for stock options includes the expense associated with stock appreciation rights. Accelerated stock option expense is recorded for employees eligible for accelerated stock option vesting upon retirement. Accelerated stock option expense for the three month periods ended November 30, 2014 and 2013 was $5 million and $4 million, respectively, and for the six month periods ended November 30, 2014 and 2013 was $9 million and $8 million, respectively.
As of November 30, 2014, the Company had $251 million of unrecognized compensation costs from stock options, net of estimated forfeitures, to be recognized in Operating overhead expense over a weighted average remaining period of 2.4 years.
The weighted average fair value per share of the options granted during the six month periods ended November 30, 2014 and 2013, as computed using the Black-Scholes pricing model, was $16.94 and $14.88, respectively. The weighted average assumptions used to estimate these fair values are as follows:
 
 
Six Months Ended November 30,
  
 
2014
 
2013
Dividend yield
 
1.2
%
 
1.3
%
Expected volatility
 
23.6
%
 
27.9
%
Weighted average expected life (in years)
 
5.8

 
5.3

Risk-free interest rate
 
1.7
%
 
1.3
%
The Company estimates the expected volatility based on the implied volatility in market traded options on the Company’s common stock with a term greater than one year, along with other factors. The weighted average expected life of options is based on an analysis of historical and expected future exercise patterns. The interest rate is based on the U.S. Treasury (constant maturity) risk-free rate in effect at the date of grant for periods corresponding with the expected term of the options.
NOTE 7 — Earnings Per Share
The following is a reconciliation from basic earnings per common share to diluted earnings per common share. The computation of diluted earnings per common share omitted options to purchase an additional 9.1 million and 7.9 million shares of common stock outstanding for the three month periods ended November 30, 2014 and 2013, respectively, and options to purchase an additional 0.1 million and 0.1 million shares of common stock outstanding for the six month periods ended November 30, 2014 and 2013, respectively, because the options were anti-dilutive.
 
 
Three Months Ended November 30,
 
Six Months Ended November 30,
(In millions, except per share data)
 
2014
 
2013
 
2014
 
2013
Determination of shares:
 
 
 
 
 
 
 
 
Weighted average common shares outstanding
 
863.1

 
888.0

 
864.0

 
888.7

Assumed conversion of dilutive stock options and awards
 
21.7

 
22.6

 
21.8

 
22.0

DILUTED WEIGHTED AVERAGE COMMON SHARES OUTSTANDING
 
884.8

 
910.6

 
885.8

 
910.7

 
 
 
 
 
 
 
 
 
Earnings per common share:
 
 
 
 
 
 
 
 
Basic
 
$
0.76

 
$
0.60

 
$
1.87

 
$
1.48

Diluted
 
$
0.74

 
$
0.59

 
$
1.83

 
$
1.44

NOTE 8 — Risk Management and Derivatives
The Company is exposed to global market risks, including the effect of changes in foreign currency exchange rates and interest rates, and uses derivatives to manage financial exposures that occur in the normal course of business. The Company does not hold or issue derivatives for trading or speculative purposes.
The Company may elect to designate certain derivatives as hedging instruments under the accounting standards for derivatives and hedging. The Company formally documents all relationships between designated hedging instruments and hedged items as well as its risk management objectives and strategies for undertaking hedge transactions. This process includes linking all derivatives designated as hedges to either recognized assets or liabilities or forecasted transactions.

13


The majority of derivatives outstanding as of November 30, 2014 are designated as cash flow or fair value hedges. All derivatives are recognized on the Unaudited Condensed Consolidated Balance Sheet at fair value and classified based on the instrument’s maturity date. The total notional amount of outstanding derivatives as of November 30, 2014 was approximately $14.8 billion, which primarily comprises cash flow hedges for Euro/U.S. Dollar, British Pound/Euro, and Japanese Yen/U.S. Dollar currency pairs. As of November 30, 2014, there were outstanding currency forward contracts with maturities up to 24 months.
The following table presents the fair values of derivative instruments included within the Unaudited Condensed Consolidated Balance Sheets as of November 30, 2014 and May 31, 2014: 
 
 
Derivative Assets
 
Derivative Liabilities
(In millions)
 
Balance Sheet
Location
 
November 30,
2014
 
May 31,
2014
 
Balance Sheet 
Location
 
November 30,
2014
 
May 31,
2014
Derivatives formally designated as hedging instruments:
 
 
 
 
 
 
 
 
 
 
 
 
Foreign exchange forwards and options
 
Prepaid expenses and other current assets
 
$
382

 
$
76

 
Accrued liabilities
 
$
38

 
$
57

Interest rate swap contracts
 
Prepaid expenses and other current assets
 
4

 

 
Accrued liabilities
 

 

Foreign exchange forwards and options
 
Deferred income taxes and other assets
 
170

 
26

 
Deferred income taxes and other liabilities
 
3

 
1

Interest rate swap contracts
 
Deferred income taxes and other assets
 

 
6

 
Deferred income taxes and other liabilities
 

 

Total derivatives formally designated as hedging instruments
 
 
 
556

 
108

 
 
 
41

 
58

Derivatives not designated as hedging instruments:
 
 
 
 
 
 
 
 
 
 
 
 
Foreign exchange forwards and options
 
Prepaid expenses and other current assets
 
83

 
25

 
Accrued liabilities
 
17

 
27

Embedded derivatives
 
Prepaid expenses and other current assets
 
1

 

 
Accrued liabilities
 

 

Total derivatives not designated as hedging instruments
 
 
 
84

 
25

 
 
 
17

 
27

TOTAL DERIVATIVES
 
 
 
$
640

 
$
133

 
 
 
$
58

 
$
85

The following tables present the amounts affecting the Unaudited Condensed Consolidated Statements of Income for the three and six months ended November 30, 2014 and 2013:

(In millions)
Amount of Gain (Loss) Recognized in Other Comprehensive Income on Derivatives(1)

Amount of Gain (Loss) Reclassified From Accumulated Other Comprehensive Income into Income(1)
Three Months Ended November 30, 2014
 
Six Months Ended November 30, 2014

Location of Gain (Loss) Reclassified From  Accumulated Other Comprehensive Income into Income(1)

Three Months Ended November 30, 2014
 
Six Months Ended November 30, 2014
Derivatives designated as cash flow hedges:
 
 
 
 
 
 
 
 
 
Foreign exchange forwards and options
$
(4
)
 
$
(42
)

Revenues

$
(19
)
 
$
(36
)
Foreign exchange forwards and options
280

 
399


Cost of sales

21

 
13

Foreign exchange forwards and options

 


Total selling and administrative expense


 

Foreign exchange forwards and options
103

 
140


Other expense (income), net

13

 
18

Total designated cash flow hedges
$
379

 
$
497




$
15

 
$
(5
)
(1)
For the three and six months ended November 30, 2014, the amounts recorded in Other expense (income), net as a result of hedge ineffectiveness and the discontinuance of cash flow hedges because the forecasted transactions were no longer probable of occurring were immaterial.

14


    

(In millions)
Amount of Gain (Loss) Recognized in Other Comprehensive Income on Derivatives(1)
 
Amount of Gain (Loss) Reclassified From Accumulated Other Comprehensive Income into Income(1)
Three Months Ended November 30, 2013
 
Six Months Ended November 30, 2013
 
Location of Gain (Loss) Reclassified From  Accumulated Other Comprehensive Income into Income(1)
 
Three Months Ended November 30, 2013
 
Six Months Ended November 30, 2013
Derivatives designated as cash flow hedges:
 
 
 
 
 
 
 
 
 
Foreign exchange forwards and options
$
(16
)
 
$
(19
)
 
Revenues
 
$
7

 
$
21

Foreign exchange forwards and options
(64
)
 
(88
)
 
Cost of sales
 
7

 
23

Foreign exchange forwards and options
2

 
3

 
Total selling and administrative expense
 

 

Foreign exchange forwards and options
(16
)
 
(23
)
 
Other expense (income), net
 
6

 
11

Total designated cash flow hedges
$
(94
)
 
$
(127
)
 
 
 
$
20

 
$
55

(1)
For the three and six months ended November 30, 2013, the amounts recorded in Other expense (income), net as a result of hedge ineffectiveness and the discontinuance of cash flow hedges because the forecasted transactions were no longer probable of occurring were immaterial.
 
 
Amount of Gain (Loss) Recognized in Income on Derivatives
 
Location of Gain (Loss) 
Recognized in Income on Derivatives
 
 
Three Months Ended November 30,
 
Six Months Ended November 30,
 
(In millions)
 
2014
 
2013
 
2014
 
2013
 
Derivatives designated as fair value hedges:
 
 
 
 
 
 
 
 
 
 
Interest rate swaps(1)
 
$
1

 
$
1

 
$
2

 
$
2

 
Interest expense (income), net
Derivatives not designated as hedging instruments:
 
 
 
 
 
 
 
 
 
 
Foreign exchange forwards and options
 
$
185

 
$
(24
)
 
$
278

 
$
(39
)
 
Other expense (income), net
Embedded derivatives
 
$
2

 
$
(1
)
 
$
1

 
$
(1
)
 
Other expense (income), net
(1)
All interest rate swap agreements meet the shortcut method requirements under the accounting standards for derivatives and hedging. Accordingly, changes in the fair values of the interest rate swap agreements are considered to exactly offset changes in the fair value of the underlying long-term debt. Refer to “Fair Value Hedges” in this note for additional detail.
Refer to Note 3 — Accrued Liabilities for derivative instruments recorded in Accrued liabilities, Note 4 — Fair Value Measurements for a description of how the above financial instruments are valued, and Note 9 — Accumulated Other Comprehensive Income for additional information on changes in Other comprehensive income for the three and six months ended November 30, 2014 and 2013.
Cash Flow Hedges
The purpose of the Company’s foreign currency hedging activities is to protect the Company from the risk that the eventual cash flows resulting from transactions in foreign currencies will be adversely affected by changes in exchange rates. Foreign currency exposures that the Company may elect to hedge in this manner include product cost exposures, non-functional currency denominated external and intercompany revenues, selling and administrative expenses, investments in U.S. Dollar-denominated available-for-sale debt securities and certain other intercompany transactions.
Product cost exposures are primarily generated through non-functional currency denominated product purchases and the foreign currency adjustment program described below. NIKE entities primarily purchase products in two ways: (1) Certain NIKE entities purchase product from the NIKE Trading Company (“NTC”), a wholly owned sourcing hub that buys NIKE branded products from third party factories, predominantly in U.S. Dollars. The NTC, whose functional currency is the U.S. Dollar, then sells the products to NIKE entities in their respective functional currencies. When the NTC sells to a NIKE entity with a different functional currency, the result is a foreign currency exposure for the NTC. (2) Other NIKE entities purchase product directly from third party factories in U.S. Dollars. These purchases generate a foreign currency exposure for those NIKE entities with a functional currency other than the U.S. Dollar.
The Company operates a foreign currency adjustment program with certain factories. The program is designed to more effectively manage foreign currency risk by assuming certain of the factories’ foreign currency exposures, some of which are natural offsets to the Company's existing foreign currency exposures. Under this program, the Company’s payments to these factories are adjusted for rate fluctuations in the basket of currencies (“factory currency exposure index”) in which the labor, materials and overhead costs incurred by the factories in the production of NIKE branded products (“factory input costs”) are denominated. For the portion of the indices denominated in the local or functional currency of the factory, the Company may elect to place formally designated cash flow hedges. For all currencies within the indices, excluding the U.S. Dollar and the local or functional currency of the factory, an embedded derivative contract is created upon the factory’s acceptance of NIKE’s purchase order. Embedded derivative contracts are separated from the related purchase order, and their accounting treatment is described further below.

15


The Company’s policy permits the utilization of derivatives to reduce its foreign currency exposures where internal netting or other strategies cannot be effectively employed. Hedged transactions are denominated primarily in Euros, British Pounds and Japanese Yen. Typically, the Company may enter into hedge contracts starting up to 12 to 24 months in advance of the forecasted transaction and may place incremental hedges up to 100% of the exposure by the time the forecasted transaction occurs.
All changes in fair value of derivatives designated as cash flow hedges, excluding any ineffective portion, are recorded in Other comprehensive income until Net income is affected by the variability of cash flows of the hedged transaction. In most cases, amounts recorded in Other comprehensive income will be released to Net income sometime after the maturity of the related derivative. Effective hedge results are classified within the Unaudited Condensed Consolidated Statements of Income in the same manner as the underlying exposure, with the results of hedges of non-functional currency denominated revenues and product cost exposures, excluding embedded derivatives as described below, recorded in Revenues or Cost of sales, when the underlying hedged transaction affects consolidated Net income. Results of hedges of selling and administrative expense are recorded together with those costs when the related expense is recorded. Results of hedges of anticipated purchases and sales of U.S. Dollar-denominated available-for-sale securities are recorded in Other expense (income), net when the securities are sold. Results of hedges of certain anticipated intercompany transactions are recorded in Other expense (income), net when the transaction occurs. The Company classifies the cash flows at settlement from these designated cash flow hedge derivatives in the same category as the cash flows from the related hedged items, generally within the Cash provided by operations component of the Unaudited Condensed Consolidated Statements of Cash Flows.
Premiums paid on options are initially recorded as deferred charges. The Company assesses the effectiveness of options based on the total cash flows method and records total changes in the options’ fair value to Other comprehensive income to the degree they are effective.
The Company formally assesses, both at a hedge’s inception and on an ongoing basis, whether the derivatives that are used in the hedging transaction have been highly effective in offsetting changes in the cash flows of hedged items and whether those derivatives may be expected to remain highly effective in future periods. Effectiveness for cash flow hedges is assessed based on changes in forward rates. Ineffectiveness was not material for the three and six months ended November 30, 2014 and 2013.
The Company discontinues hedge accounting prospectively when: (1) it determines that the derivative is no longer highly effective in offsetting changes in the cash flows of a hedged item (including hedged items such as firm commitments or forecasted transactions); (2) the derivative expires or is sold, terminated or exercised; (3) it is no longer probable that the forecasted transaction will occur; or (4) management determines that designating the derivative as a hedging instrument is no longer appropriate.
When the Company discontinues hedge accounting because it is no longer probable that the forecasted transaction will occur in the originally expected period, but is expected to occur within an additional two-month period of time thereafter, the gain or loss on the derivative remains in Accumulated other comprehensive income and is reclassified to Net income when the forecasted transaction affects consolidated Net income. However, if it is probable that a forecasted transaction will not occur by the end of the originally specified time period or within an additional two-month period of time thereafter, the gains and losses that were accumulated in Other comprehensive income will be recognized immediately in Other expense (income), net. In all situations in which hedge accounting is discontinued and the derivative remains outstanding, the Company will carry the derivative at its fair value on the balance sheet, recognizing future changes in the fair value in Other expense (income), net. For the three and six months ended November 30, 2014 and 2013, the amounts recorded in Other expense (income), net as a result of the discontinuance of cash flow hedging because the forecasted transaction was no longer probable of occurring were immaterial.
As of November 30, 2014, $325 million of deferred net gains (net of tax) on both outstanding and matured derivatives accumulated in Other comprehensive income were expected to be reclassified to Net income during the next 12 months concurrent with the underlying hedged transactions also being recorded in Net income. Actual amounts ultimately reclassified to Net income are dependent on the exchange rates in effect when derivative contracts that are currently outstanding mature. As of November 30, 2014, the maximum term over which the Company is hedging exposures to the variability of cash flows for its forecasted transactions was 24 months.
Fair Value Hedges
The Company is also exposed to the risk of changes in the fair value of certain fixed-rate debt attributable to changes in interest rates. Derivatives currently used by the Company to hedge this risk are receive-fixed, pay-variable interest rate swaps. As of November 30, 2014, all interest rate swap agreements are designated as fair value hedges of the related long-term debt, all classified as current as of November 30, 2014, and meet the shortcut method requirements under the accounting standards for derivatives and hedging. Accordingly, changes in the fair values of the interest rate swap agreements are considered to exactly offset changes in the fair value of the underlying long-term debt. The cash flows associated with the Company’s fair value hedges are periodic interest payments while the swaps are outstanding, which are reflected within the Cash provided by operations component of the Unaudited Condensed Consolidated Statements of Cash Flows. The Company recorded no ineffectiveness from its interest rate swaps designated as fair value hedges for the three and six months ended November 30, 2014 or 2013.
Net Investment Hedges
The Company has hedged and may, in the future, hedge the risk of variability in foreign-currency-denominated net investments in wholly owned international operations. All changes in fair value of the derivatives designated as net investment hedges, except ineffective portions, are reported in the cumulative translation adjustment component of Other comprehensive income along with the foreign currency translation adjustments on those investments. The Company classifies the cash flows at settlement of its net investment hedges within the Cash used by investing activities component of the Unaudited Condensed Consolidated Statements of Cash Flows. The Company assesses hedge effectiveness based on changes in forward rates. The Company recorded no ineffectiveness from its net investment hedges for the three and six months ended November 30, 2014 or 2013.

16


Embedded Derivatives
As part of the foreign currency adjustment program described above, an embedded derivative contract is created upon the factory’s acceptance of NIKE’s purchase order for currencies within the factory currency exposure indices that are neither the U.S. Dollar nor the local or functional currency of the factory. Embedded derivative contracts are treated as foreign currency forward contracts that are bifurcated from the related purchase order and recorded at fair value as a derivative asset or liability on the balance sheet with their corresponding change in fair value recognized in Other expense (income), net from the date a purchase order is accepted by a factory through the date the purchase price is no longer subject to foreign currency fluctuations. At November 30, 2014, the notional amount of embedded derivatives outstanding was approximately $167 million.
Undesignated Derivative Instruments
The Company may elect to enter into foreign exchange forwards to mitigate the change in fair value of specific assets and liabilities on the balance sheet and/or the embedded derivative contracts explained above. These forwards are not designated as hedging instruments under the accounting standards for derivatives and hedging. Accordingly, these undesignated instruments are recorded at fair value as a derivative asset or liability on the Unaudited Condensed Consolidated Balance Sheets with their corresponding change in fair value recognized in Other expense (income), net, together with the re-measurement gain or loss from the hedged balance sheet position or embedded derivative contract. The Company classifies the cash flows at settlement from undesignated instruments in the same category as the cash flows from the related hedged items, generally within the Cash provided by operations component of the Unaudited Condensed Consolidated Statements of Cash Flows.
Credit Risk
The Company is exposed to credit-related losses in the event of nonperformance by counterparties to hedging instruments. The counterparties to all derivative transactions are major financial institutions with investment grade credit ratings. However, this does not eliminate the Company’s exposure to credit risk with these institutions. This credit risk is limited to the unrealized gains in such contracts should any of these counterparties fail to perform as contracted. To manage this risk, the Company has established strict counterparty credit guidelines that are continually monitored.
The Company’s derivative contracts contain credit risk related contingent features designed to protect against significant deterioration in counterparties’ creditworthiness and their ultimate ability to settle outstanding derivative contracts in the normal course of business. The Company’s bilateral credit related contingent features generally require the owing entity, either the Company or the derivative counterparty, to post collateral for the portion of the fair value in excess of $50 million should the fair value of outstanding derivatives per counterparty be greater than $50 million. Additionally, a certain level of decline in credit rating of either the Company or the counterparty could also trigger collateral requirements. As of November 30, 2014, the Company was in compliance with all credit risk related contingent features and had no derivative instruments with credit risk related contingent features in a net liability position. Accordingly, the Company was not required to post any collateral as a result of these contingent features. Further, as of November 30, 2014, those counterparties that were required to post collateral complied with such requirements (refer to Note 4 — Fair Value Measurements). Given the considerations described above, the Company considers the impact of the risk of counterparty default to be immaterial.
NOTE 9 — Accumulated Other Comprehensive Income
The changes in Accumulated other comprehensive income, net of tax, for the three and six months ended November 30, 2014 were as follows:
(In millions)
 
Foreign Currency Translation Adjustment(1)
 
Cash Flow Hedges
 
Net Investment Hedges(1)
 
Other
 
Total
Balance at August 31, 2014
 
$
11

 
$
167

 
$
95

 
$
(49
)
 
$
224

Other comprehensive gains (losses) before reclassifications(2)
 
(34
)
 
351

 

 
9

 
326

Reclassifications to net income of previously deferred (gains) losses(3)
 

 
(18
)
 

 
(7
)
 
(25
)
Other comprehensive income (loss)
 
(34
)
 
333

 

 
2

 
301

Balance at November 30, 2014
 
$
(23
)
 
$
500

 
$
95

 
$
(47
)
 
$
525

(1)
The accumulated foreign currency translation adjustment and net investment hedge gains/losses related to an investment in a foreign subsidiary are reclassified to Net income upon sale or upon complete or substantially complete liquidation of the respective entity.
(2)
Net of tax benefit (expense) of $11 million, $(28) million, $0 million, $(1) million and $(18) million, respectively.
(3)
Net of tax (benefit) expense of $0 million, $(3) million, $0 million, $2 million and $(1) million, respectively.

17


(In millions)
 
Foreign Currency Translation Adjustment(1)
 
Cash Flow Hedges
 
Net Investment Hedges(1)
 
Other
 
Total
Balance at May 31, 2014
 
$
9

 
$
32

 
$
95

 
$
(51
)
 
$
85

Other comprehensive gains (losses) before reclassifications(2)
 
(32
)
 
470

 

 
14

 
452

Reclassifications to net income of previously deferred (gains) losses(3)
 

 
(2
)
 

 
(10
)
 
(12
)
Other comprehensive income (loss)
 
(32
)
 
468

 

 
4

 
440

Balance at November 30, 2014
 
$
(23
)
 
$
500

 
$
95

 
$
(47
)
 
$
525

(1)
The accumulated foreign currency translation adjustment and net investment hedge gains/losses related to an investment in a foreign subsidiary are reclassified to Net income upon sale or upon complete or substantially complete liquidation of the respective entity.
(2)
Net of tax benefit (expense) of $0 million, $(27) million, $0 million, $(3) million and $(30) million, respectively.
(3)
Net of tax (benefit) expense of $0 million, $(7) million, $0 million, $3 million and $(4) million, respectively.
The changes in Accumulated other comprehensive income, net of tax, for the three and six months ended November 30, 2013 were as follows:
(In millions)
 
Foreign Currency Translation Adjustment(1)
 
Cash Flow Hedges
 
Net Investment Hedges(1)
 
Other
 
Total
Balance at August 31, 2013
 
$
10

 
$
128

 
$
95

 
$
(56
)
 
$
177

Other comprehensive gains (losses) before reclassifications(2)
 
14

 
(85
)
 

 
(2
)
 
(73
)
Reclassifications to net income of previously deferred (gains) losses(3)
 

 
(15
)
 

 
1

 
(14
)
Other comprehensive income (loss)
 
14

 
(100
)
 

 
(1
)
 
(87
)
Balance at November 30, 2013
 
$
24

 
$
28

 
$
95

 
$
(57
)
 
$
90

(1)
The accumulated foreign currency translation adjustment and net investment hedge gains/losses related to an investment in a foreign subsidiary are reclassified to Net income upon sale or upon complete or substantially complete liquidation of the respective entity.
(2)
Net of tax benefit (expense) of $0 million, $9 million, $0 million, $0 million and $9 million, respectively.
(3)
Net of tax (benefit) expense of $0 million, $5 million, $0 million, $0 million and $5 million, respectively.
(In millions)
 
Foreign Currency Translation Adjustment(1)
 
Cash Flow Hedges
 
Net Investment Hedges(1)
 
Other
 
Total
Balance at May 31, 2013
 
$
41

 
$
193

 
$
95

 
$
(55
)
 
$
274

Other comprehensive gains (losses) before reclassifications(2)
 
(17
)
 
(120
)
 

 
(4
)
 
(141
)
Reclassifications to net income of previously deferred (gains) losses(3)
 

 
(45
)
 

 
2

 
(43
)
Other comprehensive income (loss)
 
(17
)
 
(165
)
 

 
(2
)
 
(184
)
Balance at November 30, 2013
 
$
24

 
$
28

 
$
95

 
$
(57
)
 
$
90

(1)
The accumulated foreign currency translation adjustment and net investment hedge gains/losses related to an investment in a foreign subsidiary are reclassified to Net income upon sale or upon complete or substantially complete liquidation of the respective entity.
(2)
Net of tax benefit (expense) of $0 million, $7 million, $0 million, $0 million and $7 million, respectively.
(3)
Net of tax (benefit) expense of $0 million, $10 million, $0 million, $0 million and $10 million, respectively.

18


The following table summarizes the reclassifications from Accumulated other comprehensive income to the Unaudited Condensed Consolidated Statements of Income:
 
 
Amount of Gain (Loss) Reclassified from Accumulated Other Comprehensive Income into Income
 
 
 
 
Three Months Ended November 30,
 
Six Months Ended November 30,
 
Location of Gain (Loss) Reclassified from Accumulated Other Comprehensive Income into Income
(In millions)
 
2014
 
2013
 
2014
 
2013
 
Gains (losses) on cash flow hedges:
 
 
 
 
 
 
 
 
 
 
Foreign exchange forwards and options
 
$
(19
)
 
$
7

 
$
(36
)
 
$
21

 
Revenue
Foreign exchange forwards and options
 
21

 
7

 
13

 
23

 
Cost of sales
Foreign exchange forwards and options
 

 

 

 

 
Total selling and administrative expense
Foreign exchange forwards and options
 
13

 
6

 
18

 
11

 
Other expense (income), net
Total before tax
 
15

 
20

 
(5
)
 
55

 
 
Tax benefit (expense)
 
3

 
(5
)
 
7

 
(10
)
 
 
Gain net of tax
 
18

 
15

 
2

 
45

 
 
Gains (losses) on other
 
9

 
(1
)
 
13

 
(2
)
 
Other expense (income), net
Total before tax
 
9

 
(1
)
 
13

 
(2
)
 
 
Tax (expense)
 
(2
)
 

 
(3
)
 

 
 
Gain (loss) net of tax
 
7

 
(1
)
 
10

 
(2
)
 
 
Total net gain reclassified for the period
 
$
25

 
$
14

 
$
12

 
$
43

 
 

NOTE 10 — Operating Segments
The Company’s operating segments are evidence of the structure of the Company's internal organization. The NIKE Brand segments are defined by geographic regions for operations participating in NIKE Brand and Hurley sales activity.
Each NIKE Brand geographic segment operates predominantly in one industry: the design, development, marketing and selling of athletic footwear, apparel and equipment. The Company’s reportable operating segments for the NIKE Brand are: North America, Western Europe, Central & Eastern Europe, Greater China, Japan and Emerging Markets. The Company’s NIKE Brand Direct to Consumer operations are managed within each geographic operating segment. Converse is also a reportable segment for NIKE, Inc., and operates in one industry: the design, marketing, licensing and selling of casual sneakers, apparel and accessories.
Global Brand Divisions is included within the NIKE Brand for presentation purposes to align with the way management views the Company. Global Brand Divisions primarily represent NIKE Brand licensing businesses that are not part of a geographic operating segment, demand creation and operating overhead expenses that are centrally managed for the NIKE Brand and costs associated with product development and supply chain operations.
Corporate consists largely of unallocated general and administrative expenses, including expenses associated with centrally managed departments; depreciation and amortization related to the Company’s headquarters; and unallocated insurance, benefit and compensation programs, including stock-based compensation; certain foreign currency gains and losses, including certain hedge gains and losses; certain corporate eliminations and other items.

19


The primary financial measure used by the Company to evaluate performance of individual operating segments is earnings before interest and taxes (commonly referred to as “EBIT”), which represents Net income before Interest expense (income), net and Income tax expense in the Unaudited Condensed Consolidated Statements of Income. Reconciling items for EBIT represent corporate expense items that are not allocated to the operating segments for management reporting.
As part of the Company's centrally managed foreign exchange risk management program, standard foreign currency rates are assigned twice per year to each NIKE Brand entity in the Company's geographic operating segments and Converse. These rates are set approximately nine months in advance of the future selling season 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 use of these standard rates to record non-functional currency product purchases in the entity’s functional currency. Differences between assigned standard foreign currency rates and actual market rates are included in Corporate, together with foreign currency hedge gains and losses generated from the Company's centrally managed foreign exchange risk management program and other conversion gains and losses.
Accounts receivable, Inventories and Property, plant and equipment, net for operating segments are regularly reviewed by management and are therefore provided below.
Certain prior year amounts have been reclassified to conform to fiscal 2015 presentation.
 
 
Three Months Ended November 30,