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EX-32.2 - EXHIBIT 32.2 - NIKE INCnke-11302018xexhibit322.htm
EX-32.1 - EXHIBIT 32.1 - NIKE INCnke-11302018xexhibit321.htm
EX-31.2 - EXHIBIT 31.2 - NIKE INCnke-11302018xexhibit312.htm
EX-31.1 - EXHIBIT 31.1 - NIKE INCnke-11302018xexhibit311.htm
UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
FORM 10-Q
(Mark One)
QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934
For the Quarterly Period Ended November 30, 2018
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
orangeswoosh08.jpg
 
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)
Registrants 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      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      No  
Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, a non-accelerated filer, a smaller reporting company or an emerging growth company. See the definitions of “large accelerated filer,” “accelerated filer,” “smaller reporting company” and “emerging growth company” in Rule 12b-2 of the Exchange Act.
Large accelerated filer
Accelerated filer
Smaller reporting company
 
 
 
 
Non-accelerated filer
(Do not check if a smaller reporting company)
 
Emerging growth company
If an emerging growth company, indicate by check mark if the registrant has elected not to use the extended transition period for complying with any new or revised financial accounting standards provided pursuant to Section 13(a) of the Exchange Act.
Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Exchange Act).    Yes      No  
Shares of Common Stock outstanding as of January 3, 2019 were:
Class A
315,024,752

Class B
1,258,772,793

 
1,573,797,545




NIKE, INC.
FORM 10-Q
Table of Contents
 
 
 
Page
ITEM 1.
 
 
 
 
 
 
ITEM 2.
ITEM 3.
ITEM 4.
 
 
 
ITEM 1.
ITEM 1A.
ITEM 2.
ITEM 6.
 
 



PART I - FINANCIAL INFORMATION
ITEM 1. Financial Statements
NIKE, Inc. Unaudited Condensed Consolidated Balance Sheets
 
 
November 30,
 
May 31,
(In millions)
 
2018
 
2018
ASSETS
 
 
 
 
Current assets:
 
 
 
 
Cash and equivalents
 
$
3,423

 
$
4,249

Short-term investments
 
618

 
996

Accounts receivable, net
 
4,346

 
3,498

Inventories
 
5,388

 
5,261

Prepaid expenses and other current assets
 
1,791

 
1,130

Total current assets
 
15,566

 
15,134

Property, plant and equipment, net
 
4,588

 
4,454

Identifiable intangible assets, net
 
284

 
285

Goodwill
 
154

 
154

Deferred income taxes and other assets
 
2,085

 
2,509

TOTAL ASSETS
 
$
22,677

 
$
22,536

LIABILITIES AND SHAREHOLDERS’ EQUITY
 
 
 
 
Current liabilities:
 
 
 
 
Current portion of long-term debt
 
$
6

 
$
6

Notes payable
 
9

 
336

Accounts payable
 
2,574

 
2,279

Accrued liabilities
 
4,478

 
3,269

Income taxes payable
 
211

 
150

Total current liabilities
 
7,278

 
6,040

Long-term debt
 
3,466

 
3,468

Deferred income taxes and other liabilities
 
3,204

 
3,216

Commitments and contingencies (Note 13)
 


 


Redeemable preferred stock
 

 

Shareholders’ equity:
 
 
 
 
Common stock at stated value:
 
 
 
 
Class A convertible — 315 and 329 shares outstanding
 

 

Class B — 1,262 and 1,272 shares outstanding
 
3

 
3

Capital in excess of stated value
 
6,707

 
6,384

Accumulated other comprehensive income (loss)
 
209

 
(92
)
Retained earnings
 
1,810

 
3,517

Total shareholders’ equity
 
8,729

 
9,812

TOTAL LIABILITIES AND SHAREHOLDERS’ EQUITY
 
$
22,677

 
$
22,536

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)
 
2018
 
2017
 
2018
 
2017
Revenues
 
$
9,374

 
$
8,554

 
$
19,322

 
$
17,624

Cost of sales
 
5,269

 
4,876

 
10,820

 
9,984

Gross profit
 
4,105

 
3,678

 
8,502

 
7,640

Demand creation expense
 
910

 
877

 
1,874

 
1,732

Operating overhead expense
 
2,232

 
1,891

 
4,331

 
3,892

Total selling and administrative expense
 
3,142

 
2,768

 
6,205

 
5,624

Interest expense (income), net
 
14

 
13

 
25

 
29

Other (income) expense, net
 
(48
)
 
18

 
5

 
36

Income before income taxes
 
997

 
879

 
2,267

 
1,951

Income tax expense
 
150

 
112

 
328

 
234

NET INCOME
 
$
847

 
$
767

 
$
1,939

 
$
1,717

 
 
 
 
 
 
 
 
 
Earnings per common share:
 
 
 
 
 
 
 
 
Basic
 
$
0.54

 
$
0.47

 
$
1.22

 
$
1.05

Diluted
 
$
0.52

 
$
0.46

 
$
1.19

 
$
1.03

 
 
 
 
 
 
 
 
 
Weighted average common shares outstanding:
 
 
 
 
 
 
 
 
Basic
 
1,581.4

 
1,627.0

 
1,587.7

 
1,633.1

Diluted
 
1,620.7

 
1,660.9

 
1,627.2

 
1,669.1

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)
 
2018
 
2017
 
2018
 
2017
Net income
 
$
847

 
$
767

 
$
1,939

 
$
1,717

Other comprehensive income (loss), net of tax:
 
 
 
 
 
 
 
 
Change in net foreign currency translation adjustment
 
(2
)
 
(8
)
 
(130
)
 
14

Change in net gains (losses) on cash flow hedges
 
241

 
8

 
434

 
(387
)
Change in net gains (losses) on other
 

 
(1
)
 
(3
)
 
(1
)
Total other comprehensive income (loss), net of tax
 
239

 
(1
)
 
301

 
(374
)
TOTAL COMPREHENSIVE INCOME
 
$
1,086

 
$
766

 
$
2,240

 
$
1,343

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)
 
2018
 
2017
Cash provided by operations:
 
 
 
 
Net income
 
$
1,939

 
$
1,717

Adjustments to reconcile net income to net cash provided by operations:
 
 
 
 
Depreciation
 
349

 
366

Deferred income taxes
 
11

 
(83
)
Stock-based compensation
 
133

 
103

Amortization and other
 
10

 
10

Net foreign currency adjustments
 
210

 
(67
)
Changes in certain working capital components and other assets and liabilities:
 
 
 
 
(Increase) decrease in accounts receivable
 
(324
)
 
143

(Increase) decrease in inventories
 
(263
)
 
(243
)
(Increase) decrease in prepaid expenses and other current and non-current assets
 
(124
)
 
(208
)
Increase (decrease) in accounts payable, accrued liabilities and other current and non-current liabilities
 
884

 
160

Cash provided by operations
 
2,825

 
1,898

Cash used by investing activities:
 
 
 
 
Purchases of short-term investments
 
(1,771
)
 
(3,002
)
Maturities of short-term investments
 
1,181

 
2,229

Sales of short-term investments
 
971

 
1,044

Additions to property, plant and equipment
 
(630
)
 
(498
)
Disposals of property, plant and equipment
 
4

 
1

Cash used by investing activities
 
(245
)
 
(226
)
Cash used by financing activities:
 
 
 
 
Long-term debt payments, including current portion
 
(3
)
 
(3
)
Increase (decrease) in notes payable
 
(327
)
 
904

Payments on capital lease and other financing obligations
 
(14
)
 
(11
)
Proceeds from exercise of stock options and other stock issuances
 
340

 
320

Repurchases of common stock
 
(2,637
)
 
(1,776
)
Dividends — common and preferred
 
(638
)
 
(595
)
Tax payments for net share settlement of equity awards
 
(11
)
 
(53
)
Cash used by financing activities
 
(3,290
)
 
(1,214
)
Effect of exchange rate changes on cash and equivalents
 
(116
)
 
38

Net increase (decrease) in cash and equivalents
 
(826
)
 
496

Cash and equivalents, beginning of period
 
4,249

 
3,808

CASH AND EQUIVALENTS, END OF PERIOD
 
$
3,423

 
$
4,304

Supplemental disclosure of cash flow information:
 
 
 
 
Non-cash additions to property, plant and equipment
 
$
128

 
$
92

Dividends declared and not paid
 
348

 
325

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

6


NIKE, Inc. Unaudited Condensed Consolidated Statements of Shareholders’ Equity
 
 
Common Stock
 
Capital in
Excess
of Stated
Value
 
Accumulated
Other
Comprehensive
Income (Loss)
 
Retained
Earnings
 
Total
 
 
Class A
 
Class B
 
(In millions, except per share data)
 
Shares
 
Amount
 
Shares
 
Amount
 
Balance at August 31, 2018
 
320

 
$

 
1,269

 
$
3

 
$
6,525

 
$
(30
)
 
$
2,494

 
$
8,992

Stock options exercised
 

 

 
2

 

 
78

 

 


 
78

Conversion to Class B Common Stock
 
(5
)
 

 
5

 

 


 

 


 

Repurchase of Class B Common Stock
 

 

 
(16
)
 

 
(68
)
 

 
(1,183
)
 
(1,251
)
Dividends on common stock ($0.22 per share)
 

 

 


 

 


 

 
(348
)
 
(348
)
Issuance of shares to employees, net of shares withheld for employee taxes
 

 

 
2

 

 
80

 

 


 
80

Stock-based compensation
 

 

 


 

 
92

 

 


 
92

Net income
 

 

 


 

 


 

 
847

 
847

Other comprehensive income (loss)
 

 

 


 

 


 
239

 


 
239

Balance at November 30, 2018
 
315

 
$

 
1,262

 
$
3

 
$
6,707

 
$
209

 
$
1,810

 
$
8,729

 
 
Common Stock
 
Capital in
Excess
of Stated
Value
 
Accumulated
Other
Comprehensive
Income (Loss)
 
Retained
Earnings
 
Total
 
 
Class A
 
Class B
 
(In millions, except per share data)
 
Shares
 
Amount
 
Shares
 
Amount
 
Balance at August 31, 2017
 
329

 
$

 
1,308

 
$
3

 
$
5,839

 
$
(586
)
 
$
6,737

 
$
11,993

Stock options exercised
 


 

 
3

 

 
103

 

 


 
103

Repurchase of Class B Common Stock
 

 

 
(17
)
 

 
(60
)
 

 
(842
)
 
(902
)
Dividends on common stock ($0.20 per share)
 

 

 


 

 


 

 
(325
)
 
(325
)
Issuance of shares to employees, net of shares withheld for employee taxes
 

 

 
1

 

 
70

 

 

 
70

Stock-based compensation
 

 

 

 

 
53

 

 


 
53

Net income
 

 

 


 

 


 

 
767

 
767

Other comprehensive income (loss)
 


 

 


 

 


 
(1
)
 


 
(1
)
Balance at November 30, 2017
 
329

 
$

 
1,295

 
$
3

 
$
6,005

 
$
(587
)
 
$
6,337

 
$
11,758


7


NIKE, Inc. Unaudited Condensed Consolidated Statements of Shareholders’ Equity
 
 
Common Stock
 
Capital in
Excess
of Stated
Value
 
Accumulated
Other
Comprehensive
Income (Loss)
 
Retained
Earnings
 
Total
 
 
Class A
 
Class B
 
(In millions, except per share data)
 
Shares
 
Amount
 
Shares
 
Amount
 
Balance at May 31, 2018
 
329

 
$

 
1,272

 
$
3

 
$
6,384

 
$
(92
)
 
$
3,517

 
$
9,812

Stock options exercised
 

 

 
8

 

 
260

 

 


 
260

Conversion to Class B Common Stock
 
(14
)
 

 
14

 

 


 

 


 

Repurchase of Class B Common Stock
 

 

 
(34
)
 

 
(137
)
 

 
(2,495
)
 
(2,632
)
Dividends on common stock ($0.42 per share) and preferred stock ($0.10 per share)
 

 

 


 

 


 

 
(666
)
 
(666
)
Issuance of shares to employees, net of shares withheld for employee taxes
 

 

 
2

 

 
67

 

 
(1
)
 
66

Stock-based compensation
 

 

 


 

 
133

 

 


 
133

Net income
 

 

 


 

 


 

 
1,939

 
1,939

Other comprehensive income (loss)
 

 

 


 

 


 
301

 


 
301

Adoption of ASU 2016-16 (Note 1)
 

 

 


 

 


 

 
(507
)
 
(507
)
Adoption of ASC Topic 606 (Note 1)
 

 

 


 

 


 

 
23

 
23

Balance at November 30, 2018
 
315

 
$

 
1,262

 
$
3

 
$
6,707

 
$
209

 
$
1,810

 
$
8,729

 
 
Common Stock
 
Capital in
Excess
of Stated
Value
 
Accumulated
Other
Comprehensive
Income (Loss)
 
Retained
Earnings
 
Total
 
 
Class A
 
Class B
 
(In millions, except per share data)
 
Shares
 
Amount
 
Shares
 
Amount
 
Balance at May 31, 2017
 
329

 
$

 
1,314

 
$
3

 
$
5,710

 
$
(213
)
 
$
6,907

 
$
12,407

Stock options exercised
 


 

 
11

 

 
259

 

 


 
259

Repurchase of Class B Common Stock
 

 

 
(32
)
 

 
(112
)
 

 
(1,639
)
 
(1,751
)
Dividends on common stock ($0.38 per share) and preferred stock ($0.10 per share)
 

 

 


 

 


 

 
(620
)
 
(620
)
Issuance of shares to employees, net of shares withheld for employee taxes
 

 

 
2

 

 
45

 

 
(28
)
 
17

Stock-based compensation
 

 

 

 

 
103

 

 


 
103

Net income
 

 

 


 

 


 

 
1,717

 
1,717

Other comprehensive income (loss)
 


 

 


 

 


 
(374
)
 


 
(374
)
Balance at November 30, 2017
 
329

 
$

 
1,295

 
$
3

 
$
6,005

 
$
(587
)
 
$
6,337

 
$
11,758

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


8


Notes to the Unaudited Condensed Consolidated Financial Statements

9


Note 1 — Summary of Significant Accounting Policies
Basis of Presentation
The Unaudited Condensed Consolidated Financial Statements include the accounts of NIKE, Inc. and its subsidiaries (the “Company” or “NIKE”) and 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, 2018 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, 2018 are not necessarily indicative of results to be expected for the entire year.
Reclassifications
As previously disclosed in the Annual Report on Form 10-K for the fiscal year ended May 31, 2018, management identified a misstatement related to the historical allocation of repurchases of Class B Common stock between Capital in excess of stated value and Retained earnings within the Shareholders Equity section of the Consolidated Balance Sheets and the Consolidated Statements of Shareholders’ Equity. The misstatement had no impact on the previously reported Consolidated Statements of Income, Comprehensive Income or Cash Flows.
The Company assessed the materiality of these misstatements on prior period financial statements in accordance with U.S. Securities and Exchange Commission Staff Accounting Bulletin 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 period. As such, the Company has revised the Unaudited Condensed Consolidated Statements of Shareholders Equity for the periods ended August 31, 2017 and November 30, 2017, through a reduction to Capital in excess of stated value of $3.0 billion and an incremental $0.1 billion, respectively, and an increase to Retained earnings for the same amount in the respective periods.
Recently Adopted Accounting Standards
In May 2014, the Financial Accounting Standards Board (FASB) issued Accounting Standards Update (ASU) No. 2014-09, Revenue from Contracts with Customers (Topic 606), that replaces existing revenue recognition guidance. The new standard requires companies to recognize revenue in a way that depicts the transfer of promised goods or services to customers in an amount that reflects the consideration to which the entity expects to be entitled in exchange for those goods or services. In addition, Topic 606 requires disclosures of the nature, amount, timing and uncertainty of revenue and cash flows arising from contracts with customers. The Company adopted this standard using a modified retrospective approach in the first quarter of fiscal 2019 with the cumulative effect of initially applying the new standard recognized in Retained earnings at June 1, 2018. Comparative prior period information has not been adjusted and continues to be reported in accordance with previous revenue recognition guidance in ASC Topic 605 — Revenue Recognition. The Company has applied the new standard to all contracts at adoption.
The Company’s adoption of Topic 606 resulted in a change to the timing of revenue recognition. The satisfaction of the Company’s performance obligation is based upon transfer of control over a product to a customer, which results in sales being recognized upon shipment rather than upon delivery for certain wholesale transactions and substantially all digital commerce sales. A customer is considered to have control once they are able to direct the use and receive substantially all of the benefits of the product. This resulted in a cumulative effect adjustment, which increased Retained earnings by $23 million at June 1, 2018. The adoption of Topic 606 did not have a material effect on the Unaudited Condensed Consolidated Statements of Income during the three and six months ended November 30, 2018.
Additionally, the Company’s reserve balances for returns, post-invoice sales discounts and miscellaneous claims for wholesale transactions were previously reported net of the estimated cost of inventory for product returns, and as a reduction to Accounts receivable, net on the Unaudited Condensed Consolidated Balance Sheets. Under Topic 606, an asset for the estimated cost of inventory for expected products returns is now recognized separately from the liability for sales-related reserves. This resulted in an increase to Accounts receivable, net, an increase in Prepaid expenses and other current assets and an increase in Accrued liabilities on the Unaudited Condensed Consolidated Balance Sheets at November 30, 2018. Sales-related reserves for the Company’s direct to consumer operations continue to be recognized in Accrued liabilities, but are now recorded separately from an asset for the estimated cost of inventory for expected product returns, which is recognized in Prepaid expenses and other current assets. The following table presents the related effect of the adoption of Topic 606 on the Unaudited Condensed Consolidated Balance Sheets at November 30, 2018:
 
 
As of November 30, 2018
(In millions)
 
As Reported
 
Effect of Adoption
 
Balances Without Adoption of Topic 606
Accounts receivable, net
 
$
4,346

 
$
695

 
$
3,651

Prepaid expenses and other current assets
 
1,791

 
384

 
1,407

Total current assets
 
15,566

 
1,079

 
14,487

TOTAL ASSETS
 
22,677

 
1,079

 
21,598

Accrued liabilities
 
4,478

 
1,079

 
3,399

Total current liabilities
 
7,278

 
1,079

 
6,199

TOTAL LIABILITIES AND SHAREHOLDERS’ EQUITY
 
$
22,677

 
$
1,079

 
$
21,598

Other impacts from the adoption of Topic 606 on the Unaudited Condensed Consolidated Financial Statements were immaterial. Refer to Note 11 — Revenues for further discussion.
In October 2016, the FASB issued ASU No. 2016-16, Income Taxes (Topic 740): Intra-Entity Transfers of Assets Other Than Inventory. The updated guidance requires companies to recognize the income tax consequences of an intra-entity transfer of an asset other than inventory when the transfer occurs. Income tax effects of intra-entity transfers of inventory will continue to be deferred until the inventory has been sold to a third party. The

10


Company adopted the standard on June 1, 2018, using a modified retrospective approach, with the cumulative effect of applying the new standard recognized in Retained earnings at the date of adoption. The adoption resulted in reductions to Retained earnings, Deferred income taxes and other assets and Prepaid expenses and other current assets of $507 million, $422 million and $45 million, respectively, and an increase in Deferred income taxes and other liabilities of $40 million on the Unaudited Condensed Consolidated Balance Sheets.
In August 2017, the FASB issued ASU No. 2017-12, Derivatives and Hedging (Topic 815): Targeted Improvements to Accounting for Hedging Activities, which expands and refines hedge accounting for both financial and non-financial risk components, aligns the recognition and presentation of the effects of hedging instruments and hedge items in the financial statements, and includes certain targeted improvements to ease the application of current guidance related to the assessment of hedge effectiveness. The Company elected to early adopt the ASU in the first quarter of fiscal 2019 and the adoption of the new guidance did not have a material impact on the Unaudited Condensed Consolidated Financial Statements.
In January 2016, the FASB issued ASU No. 2016-01, Financial Instruments Overall (Subtopic 825-10): Recognition and Measurement of Financial Assets and Financial Liabilities. The updated guidance enhances the reporting model for financial instruments, which includes amendments to address aspects of recognition, measurement, presentation and disclosure. The Company adopted the ASU in the first quarter of fiscal 2019 and the adoption of the new guidance did not have a material impact on the Unaudited Condensed Consolidated Financial Statements.
Recently Issued Accounting Standards
In February 2016, the FASB issued ASU No. 2016-02, Leases (Topic 842), which replaces existing lease accounting guidance. The new standard is intended to provide enhanced transparency and comparability by requiring lessees to record right-of-use assets and corresponding lease liabilities on the balance sheet. The new guidance will require the Company to continue to classify leases as either operating or financing, with classification affecting the pattern of expense recognition in the income statement. In July 2018, the FASB issued ASU No. 2018-11, which provides entities with an additional transition method to adopt Topic 842. Under the new transition method, an entity initially applies the new standard at the adoption date, versus at the beginning of the earliest period presented, and recognizes a cumulative-effect adjustment to the opening balance of retained earnings in the period of adoption. The Company expects to elect this transition method at the adoption date of June 1, 2019. The Company continues to assess the effect the guidance will have on its existing accounting policies and the Consolidated Financial Statements, and expects there will be an increase in assets and liabilities on the Consolidated Balance Sheets at adoption due to the recognition of right-of-use assets and corresponding lease liabilities, which is expected to be material. Refer to Note 15 Commitments and Contingencies of the Annual Report on Form 10-K for the fiscal year ended May 31, 2018 for information about the Companys lease obligations.
Note 2 — Inventories
Inventory balances of $5,388 million and $5,261 million at November 30, 2018 and May 31, 2018, respectively, were substantially all finished goods.
Note 3 — Accrued Liabilities
Accrued liabilities included the following:
 
 
As of November 30,
 
As of May 31,
(In millions)
 
2018
 
2018
Sales-related reserves(1)
 
$
1,107

 
$
20

Compensation and benefits, excluding taxes
 
882

 
897

Endorsement compensation
 
371

 
425

Dividends payable
 
347

 
320

Import and logistics costs
 
323

 
268

Taxes other than income taxes payable
 
275

 
224

Collateral received from counterparties to hedging instruments
 
259

 
23

Advertising and marketing
 
182

 
140

Fair value of derivatives
 
53

 
184

Other(2)
 
679

 
768

TOTAL ACCRUED LIABILITIES
 
$
4,478

 
$
3,269

(1)
Sales-related reserves as of November 30, 2018 reflect the Company’s fiscal 2019 adoption of Topic 606. As of May 31, 2018, Sales-related reserves reflect the Company's prior accounting under Topic 605. Refer to Note 1 — Summary of Significant Accounting Policies for additional information on the adoption of the new standard.
(2)
Other consists of various accrued expenses with no individual item accounting for more than 5% of the total Accrued liabilities balance at November 30, 2018 and May 31, 2018.
Note 4 — Fair Value Measurements
The Company measures certain financial assets and liabilities at fair value on a recurring basis, including derivatives, equity securities and available-for-sale debt securities. Fair value is the price the Company would receive to sell an asset or pay to transfer a liability in an orderly transaction with a market participant at the measurement date. The Company uses a three-level hierarchy established by the 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).

11


The levels of the fair value hierarchy are described below:
Level 1: Quoted prices in active markets for identical assets or liabilities.
Level 2: Inputs other than quoted prices that are observable for the asset or liability, either directly or indirectly; these include quoted prices for similar assets or liabilities in active markets and quoted prices for identical or similar assets or liabilities in markets that are not active.
Level 3: Unobservable inputs with little or no market data available, which require the reporting entity to develop its own assumptions.
The Company’s assessment of the significance of a particular input to the fair value measurement in its entirety requires judgment and considers factors specific to the asset or liability. Financial assets and liabilities are classified in their entirety based on the most conservative level of input that is significant to the fair value measurement.
Pricing vendors are utilized for a majority of Level 1 and Level 2 investments. These vendors either provide a quoted market price in an active market or use observable inputs without applying significant adjustments in their pricing. Observable inputs include broker quotes, interest rates and yield curves observable at commonly quoted intervals, volatilities and credit risks. The fair value of derivative contracts is determined using observable market inputs such as the daily market foreign currency rates, forward pricing curves, currency volatilities, currency correlations and interest rates, and considers non-performance risk of the Company and its counterparties.
The Company’s fair value measurement process includes comparing fair values to another independent pricing vendor to ensure appropriate fair values are recorded.
The following tables present information about the Company’s financial assets measured at fair value on a recurring basis as of November 30, 2018 and May 31, 2018, and indicate the level in the fair value hierarchy in which the Company classifies the fair value measurement.
 
 
As of November 30, 2018
(In millions)
 
Assets at Fair Value
 
Cash and Equivalents
 
Short-term Investments
 
Other Long-term Assets
Cash
 
$
481

 
$
481

 
$

 
$

Level 1:
 
 
 
 
 
 
 
 
U.S. Treasury securities
 
359

 

 
359

 

Level 2:
 
 
 
 
 
 
 
 
Time deposits
 
1,421

 
1,318

 
103

 

U.S. Agency securities
 
52

 
50

 
2

 

Commercial paper and bonds
 
205

 
51

 
154

 

Money market funds
 
1,523

 
1,523

 

 

Total Level 2:
 
3,201

 
2,942

 
259

 

Level 3:
 
 
 
 
 
 
 
 
Non-marketable preferred stock
 
11

 

 

 
11

TOTAL
 
$
4,052

 
$
3,423

 
$
618

 
$
11

 
 
As of May 31, 2018
(In millions)
 
Assets at Fair Value
 
Cash and Equivalents
 
Short-term Investments
 
Other Long-term Assets
Cash
 
$
415

 
$
415

 
$

 
$

Level 1:
 
 
 
 
 
 
 
 
U.S. Treasury securities
 
1,178

 
500

 
678

 

Level 2:
 
 
 
 
 
 
 
 
Time deposits
 
925

 
907

 
18

 

U.S. Agency securities
 
102

 
100

 
2

 

Commercial paper and bonds
 
451

 
153

 
298

 

Money market funds
 
2,174

 
2,174

 

 

Total Level 2:
 
3,652

 
3,334

 
318

 

Level 3:
 
 
 
 
 
 
 
 
Non-marketable preferred stock
 
11

 

 

 
11

TOTAL
 
$
5,256

 
$
4,249

 
$
996

 
$
11


12


The Company elects to record the gross assets and liabilities of its derivative financial instruments on the Unaudited Condensed Consolidated Balance Sheets. The Company’s derivative financial instruments are subject to master netting arrangements that allow for the offset of assets and liabilities in the event of default or early termination of the contract. Any amounts of cash collateral received related to these instruments associated with the Companys credit-related contingent features are recorded in Cash and equivalents and Accrued liabilities, the latter of which would further offset against the Company’s derivative asset balance. Any amounts of cash collateral posted related to these instruments associated with the Companys credit-related contingent features are recorded in Prepaid expenses and other current assets, which would further offset against the Company’s derivative liability balance. Cash collateral received or posted related to the Companys credit-related contingent features is presented in the Cash provided by operations component of the Unaudited Condensed Consolidated Statements of Cash Flows. Any amounts of non-cash collateral received, such as securities, are not recorded on the Unaudited Condensed Consolidated Balance Sheets pursuant to U.S. GAAP. For further information related to credit risk, refer to Note 9 — Risk Management and Derivatives.
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, 2018 and May 31, 2018, and indicate the level in the fair value hierarchy in which the Company classifies the fair value measurement.
 
 
As of November 30, 2018
 
 
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)
 
$
648

 
$
498

 
$
150

 
$
50

 
$
50

 
$

Embedded derivatives
 
8

 
2

 
6

 
8

 
3

 
5

TOTAL
 
$
656

 
$
500

 
$
156

 
$
58

 
$
53

 
$
5

(1)
If the foreign exchange derivative instruments had been netted on the Unaudited Condensed Consolidated Balance Sheets, the asset and liability positions each would have been reduced by $46 million as of November 30, 2018. As of that date, the Company had received $259 million of cash collateral from various counterparties related to foreign exchange derivative instruments. No amount of collateral was posted on the Companys derivative liability balance as of November 30, 2018.
 
 
As of May 31, 2018
 
 
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)
 
$
389

 
$
237

 
$
152

 
$
182

 
$
182

 
$

Embedded derivatives
 
11

 
3

 
8

 
8

 
2

 
6

TOTAL
 
$
400

 
$
240

 
$
160

 
$
190

 
$
184

 
$
6

(1)
If the foreign exchange derivative instruments had been netted on the Condensed Consolidated Balance Sheets, the asset and liability positions each would have been reduced by $182 million as of May 31, 2018. As of that date, the Company had received $23 million of cash collateral from various counterparties related to these foreign exchange derivative instruments. No amount of collateral was posted on the Companys derivative liability balance as of May 31, 2018.
The Company’s investment portfolio consists of investments in U.S. Treasury and Agency securities, time deposits, money market funds, corporate commercial paper and bonds. These securities are valued using market prices in both active markets (Level 1) and less active markets (Level 2). As of November 30, 2018, the Company held $582 million of available-for-sale securities with maturity dates within one year and $36 million with maturity dates over one year and less than five years in Short-term investments on the Unaudited Condensed Consolidated Balance Sheets. The gross realized gains and losses on sales of securities were immaterial for the three and six months ended November 30, 2018 and 2017. Unrealized gains and losses on available-for-sale securities included in Accumulated other comprehensive income (loss) were immaterial as of November 30, 2018 and May 31, 2018. The Company regularly reviews its available-for-sale securities for other-than-temporary impairment. For the six months ended November 30, 2018 and 2017, the Company did not consider any of its securities to be other-than-temporarily impaired and, accordingly, did not recognize any impairment losses.
Included in Interest expense (income), net for the three months ended November 30, 2018 and 2017 was interest income related to the Company’s investment portfolio of $20 million and $13 million, respectively, and $40 million and $24 million for the six months ended November 30, 2018 and 2017, 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, 2018 and the fiscal year ended May 31, 2018.
No transfers among levels within the fair value hierarchy occurred during the six months ended November 30, 2018 and the fiscal year ended May 31, 2018.
For additional information related to the Company’s derivative financial instruments, refer to Note 9 — Risk Management and Derivatives. The carrying amounts of other current financial assets and other current financial liabilities approximate fair value.
As of November 30, 2018 and May 31, 2018, assets or liabilities required to be measured at fair value on a non-recurring basis were immaterial.

13


Financial Assets and Liabilities Not Recorded at Fair Value
Long-term debt is recorded at adjusted cost, net of unamortized premiums, discounts and debt issuance costs. The fair value of Long-term debt is estimated based upon quoted prices for similar instruments or quoted prices for identical instruments in inactive markets (Level 2). The fair value of the Company’s Long-term debt, including the current portion, was approximately $3,171 million at November 30, 2018 and $3,294 million at May 31, 2018.
For fair value information regarding Notes payable, refer to Note 5 — Short-Term Borrowings and Credit Lines.
Note 5 — Short-Term Borrowings and Credit Lines
As of November 30, 2018, the Company had no outstanding borrowings under its $2 billion commercial paper program. As of May 31, 2018, $325 million of commercial paper was outstanding at a weighted average interest rate of 1.77%. These borrowings are included within Notes payable on the Unaudited Condensed Consolidated Balance Sheets.
Due to the short-term nature of the borrowings, the carrying amounts reflected on the Unaudited Condensed Consolidated Balance Sheets for Notes payable approximate fair value.
Note 6 — Income Taxes
The effective tax rate was 14.5% for the six months ended November 30, 2018 compared to 12.0% for the six months ended November 30, 2017. The Companys effective tax rate for the current period reflects the impact of the new U.S. statutory rate and implemented provisions of the U.S. Tax Cuts and Jobs Act (the “Tax Act”).
The Company continued its analysis of the Tax Act during the second quarter of fiscal 2019. This resulted in no change to the provisional amounts recorded in fiscal 2018 related to the one-time transition tax on the deemed repatriation of undistributed foreign earnings and the remeasurement of deferred tax assets and liabilities. As of November 30, 2018, the Company completed its analysis of the impact of the Tax Act in accordance with U.S. Securities and Exchange Commission Staff Accounting Bulletin No. 118 (“SAB 118”) and the amounts are no longer considered provisional.
As of November 30, 2018, total gross unrecognized tax benefits, excluding related interest and penalties, were $773 million, $521 million of which would affect the Company’s effective tax rate if recognized in future periods. As of May 31, 2018, total gross unrecognized tax benefits, excluding related interest and penalties, were $698 million. As of November 30, 2018 and May 31, 2018, accrued interest and penalties related to uncertain tax positions were $157 million (excluding federal benefit). Increases in the liability for payment of interest and penalties were offset by reductions in interest and penalties for the six months ended November 30, 2018.
The Company is subject to taxation in the United States, as well as various state and foreign jurisdictions. The Company has closed all U.S. federal income tax matters through fiscal 2016, with the exception of certain transfer pricing adjustments.
The Company’s major foreign jurisdictions, China and the Netherlands, have substantially concluded all income tax matters through calendar 2007 and fiscal 2012, 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 approximately $200 million within the next 12 months.
Note 7 — Common Stock and Stock-Based Compensation
The authorized number of shares of Class A Common Stock, no par value, and Class B Common Stock, no par value, are 400 million and 2,400 million, respectively. Each share of Class A Common Stock is convertible into one share of Class B Common Stock. Voting rights of Class B Common Stock are limited in certain circumstances with respect to the election of directors. There are no differences in the dividend and liquidation preferences or participation rights of the holders of Class A and Class B Common Stock. From time to time, the Company’s Board of Directors authorizes share repurchase programs for the repurchase of Class B Common Stock. The value of repurchased shares is deducted from Total shareholders’ equity through allocation to Capital in excess of stated value and Retained earnings.
The NIKE, Inc. Stock Incentive Plan (the “Stock Incentive Plan”) provides for the issuance of up to 718 million previously unissued shares of Class B Common Stock in connection with equity awards granted under the Stock Incentive Plan. The Stock Incentive Plan authorizes the grant of non-statutory stock options, incentive stock options, stock appreciation rights, restricted stock, restricted stock units and performance-based awards. The exercise price for stock options and stock appreciation rights may not be less than the fair market value of the underlying shares on the date of grant. A committee of the Board of Directors administers the Stock Incentive Plan. The committee has the authority to determine the employees to whom awards will be made, the amount of the awards and the other terms and conditions of the awards. The Company generally grants stock options and restricted stock on an annual basis. Substantially all awards outstanding under the Stock Incentive Plan vest ratably over four years, with stock option grants expiring ten years from the date of grant.
In addition to the Stock Incentive Plan, the Company gives employees the right to purchase shares at a discount from the market price under employee stock purchase plans (ESPPs). Subject to the annual statutory limit, employees are eligible to participate through payroll deductions of up to 10% of their compensation. At the end of each six-month offering period, shares are purchased by the participants at 85% of the lower of the fair market value at the beginning or the end of the offering period.
The Company accounts for stock-based compensation for options granted under the Stock Incentive Plan and employees purchase rights under the ESPPs by estimating the fair value using the Black-Scholes option pricing model. The Company recognizes this fair value as Cost of sales or Operating overhead expense, as applicable, on a straight-line basis over the vesting period.

14


The following table summarizes the Companys total stock-based compensation expense recognized in Cost of sales or Operating overhead expense, as applicable: 
 
 
Three Months Ended November 30,
 
Six Months Ended November 30,
(In millions)
 
2018
 
2017
 
2018
 
2017
Stock options(1)
 
$
63

 
$
39

 
$
83

 
$
72

ESPPs
 
8

 
9

 
18

 
17

Restricted stock
 
21

 
5

 
32

 
14

TOTAL STOCK-BASED COMPENSATION EXPENSE
 
$
92

 
$
53

 
$
133

 
$
103

(1)
Expense for stock options includes the expense associated with stock appreciation rights. Accelerated stock option expense is recorded for employees eligible for accelerated stock option vesting upon retirement. Accelerated stock option expense was $13 million and $5 million for the three months ended November 30, 2018 and 2017, respectively, and $14 million and $8 million for the six months ended November 30, 2018 and 2017, respectively.
As of November 30, 2018, the Company had $474 million of unrecognized compensation costs from stock options, net of estimated forfeitures, to be recognized in Cost of sales or Operating overhead expense, as applicable, over a weighted average remaining period of 2.5 years.
The weighted average fair value per share of the options granted during the six months ended November 30, 2018 and 2017, computed as of the grant date using the Black-Scholes pricing model, was $22.81 and $9.82, respectively. The weighted average assumptions used to estimate these fair values were as follows:
 
 
Six Months Ended November 30,
 
 
2018
 
2017
Dividend yield
 
1.0
%
 
1.2
%
Expected volatility
 
26.6
%
 
16.4
%
Weighted average expected life (in years)
 
6.0

 
6.0

Risk-free interest rate
 
2.8
%
 
2.0
%
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 8 — Earnings Per Share
The following is a reconciliation from basic earnings per common share to diluted earnings per common share. The computations of diluted earnings per common share excluded options, including shares under ESPPs, to purchase an additional 17.8 million and 44.5 million shares of common stock outstanding for the three months ended November 30, 2018 and 2017, respectively, and 17.8 million and 44.5 million shares of common stock outstanding for the six months ended November 30, 2018 and 2017, respectively, because the options were anti-dilutive.
 
 
Three Months Ended November 30,
 
Six Months Ended November 30,
(In millions, except per share data)
 
2018
 
2017
 
2018
 
2017
Determination of shares:
 
 
 
 
 
 
 
 
Weighted average common shares outstanding
 
1,581.4

 
1,627.0

 
1,587.7

 
1,633.1

Assumed conversion of dilutive stock options and awards
 
39.3

 
33.9

 
39.5

 
36.0

DILUTED WEIGHTED AVERAGE COMMON SHARES OUTSTANDING
 
1,620.7

 
1,660.9

 
1,627.2

 
1,669.1

 
 
 
 
 
 
 
 
 
Earnings per common share:
 
 
 
 
 
 
 
 
Basic
 
$
0.54

 
$
0.47

 
$
1.22

 
$
1.05

Diluted
 
$
0.52

 
$
0.46

 
$
1.19

 
$
1.03

Note 9 — 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 U.S. GAAP. 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, liabilities, or forecasted transactions and assessing, both at inception and on an ongoing basis, the effectiveness of the hedging relationships.

15


The majority of derivatives outstanding as of November 30, 2018 are designated as foreign currency cash flow hedges, primarily for Euro/U.S. Dollar, British Pound/Euro, Japanese Yen/U.S. Dollar and Chinese Yuan/U.S. Dollar currency pairs. All derivatives are recognized on the Unaudited Condensed Consolidated Balance Sheets at fair value and classified based on the instrument’s maturity date.
The following table presents the fair values of derivative instruments included within the Unaudited Condensed Consolidated Balance Sheets as of November 30, 2018 and May 31, 2018. Refer to Note 4 — Fair Value Measurements for a description of how the financial instruments in the table below are valued.
 
 
Derivative Assets
 
Derivative Liabilities
(In millions)
 
Balance Sheet
Location
 
November 30,
2018
 
May 31,
2018
 
Balance Sheet 
Location
 
November 30,
2018
 
May 31,
2018
Derivatives formally designated as hedging instruments:
 
 
 
 
 
 
 
 
 
 
 
 
Foreign exchange forwards and options
 
Prepaid expenses and other current assets
 
$
345

 
$
118

 
Accrued liabilities
 
$
10

 
$
156

Foreign exchange forwards and options
 
Deferred income taxes and other assets
 
140

 
152

 
Deferred income taxes and other liabilities
 

 

Total derivatives formally designated as hedging instruments
 
 
 
485

 
270

 
 
 
10

 
156

Derivatives not designated as hedging instruments:
 
 
 
 
 
 
 
 
 
 
 
 
Foreign exchange forwards and options
 
Prepaid expenses and other current assets
 
153

 
119

 
Accrued liabilities
 
40

 
26

Embedded derivatives
 
Prepaid expenses and other current assets
 
2

 
3

 
Accrued liabilities
 
3

 
2

Foreign exchange forwards and options
 
Deferred income taxes and other assets
 
10

 

 
Deferred income taxes and other liabilities
 

 

Embedded derivatives
 
Deferred income taxes and other assets
 
6

 
8

 
Deferred income taxes and other liabilities
 
5

 
6

Total derivatives not designated as hedging instruments
 
 
 
171

 
130

 
 
 
48

 
34

TOTAL DERIVATIVES
 
 
 
$
656

 
$
400

 
 
 
$
58

 
$
190

The following tables present the amounts in the Unaudited Condensed Consolidated Statements of Income in which the effects of cash flow hedges are recorded and the effects of cash flow hedge activity on these line items for the three and six months ended November 30, 2018 and 2017:
 
 
Three Months Ended November 30, 2018
 
Three Months Ended November 30, 2017
(In millions)
 
Total
 
Amount of Gain (Loss) on Cash Flow Hedge Activity
 
Total
 
Amount of Gain (Loss) on Cash Flow Hedge Activity
Revenues
 
$
9,374

 
$
3

 
$
8,554

 
$
13

Cost of sales
 
5,269

 
10

 
4,876

 
(21
)
Other (income) expense, net
 
(48
)
 

 
18

 
(20
)
Interest expense (income), net
 
14

 
(1
)
 
13

 
(2
)
 
 
Six Months Ended November 30, 2018
 
Six Months Ended November 30, 2017
(In millions)
 
Total
 
Amount of Gain (Loss) on Cash Flow Hedge Activity
 
Total
 
Amount of Gain (Loss) on Cash Flow Hedge Activity
Revenues
 
$
19,322

 
$
8

 
$
17,624

 
$
15

Cost of sales
 
10,820

 
(34
)
 
9,984

 
24

Other (income) expense, net
 
5

 
(9
)
 
36

 
(18
)
Interest expense (income), net
 
25

 
(3
)
 
29

 
(4
)

16


The following tables present the amounts affecting the Unaudited Condensed Consolidated Statements of Income for the three and six months ended November 30, 2018 and 2017:

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

Amount of Gain (Loss) Reclassified from Accumulated Other Comprehensive Income (Loss) into Income(1)
Three Months Ended November 30,
 
Location of Gain (Loss) Reclassified from Accumulated Other Comprehensive Income (Loss) into Income
 
Three Months Ended November 30,
2018
 
2017


2018
 
2017
Derivatives designated as cash flow hedges:
 
 
 
 
 
 
 
 
 
Foreign exchange forwards and options
$
3

 
$
(36
)

Revenues

$
3

 
$
13

Foreign exchange forwards and options
173

 
13


Cost of sales

10

 
(21
)
Foreign exchange forwards and options
79

 
7


Other (income) expense, net


 
(20
)
Interest rate swaps(2)

 

 
Interest expense (income), net
 
(1
)
 
(2
)
Total designated cash flow hedges
$
255

 
$
(16
)



$
12