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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 AUGUST 31, 2020

OR

TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(D) OF THE SECURITIES EXCHANGE ACT OF 1934
FOR THE TRANSITION PERIOD FROM                         TO                         .

Commission File No. 1-10635
nke-20200831_g1.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 and zip code)

(503) 671-6453
(Registrant's telephone number, including area code)
SECURITIES REGISTERED PURSUANT TO SECTION 12(B) OF THE ACT:
Class B Common Stock
NKE
New York Stock Exchange
(Title of each class)
(Trading symbol)
(Name of each exchange on which registered)
Indicate by check mark:
YES
NO
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.
þ
whether the registrant has submitted electronically every Interactive Data File required to be submitted 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 such files).
þ
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
þ
Accelerated filer
Non-accelerated filer
Smaller reporting company
Emerging growth company
if an emerging growth company, 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.
whether the registrant is a shell company (as defined in Rule 12b-2 of the Act).
þ
As of September 28, 2020, the number of shares of the Registrant's Common Stock outstanding were:
Class A
315,017,252 
Class B
1,254,809,281 
1,569,826,533 



Table of Contents

NIKE, INC.
FORM 10-Q
TABLE OF CONTENTS
PAGE
PART I - FINANCIAL INFORMATION
ITEM 1.
ITEM 3.
ITEM 4.
PART II - OTHER INFORMATION
ITEM 1.
ITEM 1A.
ITEM 2.
ITEM 6.



Table of Contents

PART I - FINANCIAL INFORMATION
ITEM 1. FINANCIAL STATEMENTS
NIKE, INC.
UNAUDITED CONDENSED CONSOLIDATED STATEMENTS OF INCOME
THREE MONTHS ENDED AUGUST 31,
(In millions, except per share data)
20202019
Revenues$10,594 $10,660 
Cost of sales5,853 5,789 
Gross profit4,741 4,871 
Demand creation expense677 1,018 
Operating overhead expense2,298 2,310 
Total selling and administrative expense2,975 3,328 
Interest expense (income), net65 15 
Other (income) expense, net(14)(33)
Income before income taxes1,715 1,561 
Income tax expense197 194 
NET INCOME$1,518 $1,367 
Earnings per common share:
Basic$0.97 $0.87 
Diluted$0.95 $0.86 
Weighted average common shares outstanding:
Basic1,561.8 1,562.4 
Diluted1,593.3 1,597.5 
The accompanying Notes to the Unaudited Condensed Consolidated Financial Statements are an integral part of this statement.
1


Table of Contents

NIKE, INC.
UNAUDITED CONDENSED CONSOLIDATED STATEMENTS OF COMPREHENSIVE INCOME
THREE MONTHS ENDED AUGUST 31,
(Dollars in millions)
20202019
Net income$1,518 $1,367 
Other comprehensive income (loss), net of tax:
Change in net foreign currency translation adjustment318 (89)
Change in net gains (losses) on cash flow hedges(658)36 
Change in net gains (losses) on other(5)2 
Total other comprehensive income (loss), net of tax(345)(51)
TOTAL COMPREHENSIVE INCOME$1,173 $1,316 
The accompanying Notes to the Unaudited Condensed Consolidated Financial Statements are an integral part of this statement.
2


Table of Contents

NIKE, INC.
UNAUDITED CONDENSED CONSOLIDATED BALANCE SHEETS
AUGUST 31,MAY 31,
(In millions)
20202020
ASSETS
Current assets:
Cash and equivalents$8,148 $8,348 
Short-term investments1,332 439 
Accounts receivable, net3,813 2,749 
Inventories6,705 7,367 
Prepaid expenses and other current assets1,939 1,653 
Total current assets21,937 20,556 
Property, plant and equipment, net4,969 4,866 
Operating lease right-of-use assets, net3,158 3,097 
Identifiable intangible assets, net272 274 
Goodwill223 223 
Deferred income taxes and other assets2,699 2,326 
TOTAL ASSETS$33,258 $31,342 
LIABILITIES AND SHAREHOLDERS' EQUITY
Current liabilities:
Current portion of long-term debt$1 $3 
Notes payable137 248 
Accounts payable1,983 2,248 
Current portion of operating lease liabilities459 445 
Accrued liabilities5,742 5,184 
Income taxes payable297 156 
Total current liabilities8,619 8,284 
Long-term debt9,408 9,406 
Operating lease liabilities2,961 2,913 
Deferred income taxes and other liabilities3,046 2,684 
Redeemable preferred stock  
Shareholders' equity:
Common stock at stated value:
Class A convertible — 315 and 315 shares outstanding
  
Class B — 1,250 and 1,243 shares outstanding
3 3 
Capital in excess of stated value8,695 8,299 
Accumulated other comprehensive income (loss)(401)(56)
Retained earnings (deficit)927 (191)
Total shareholders' equity9,224 8,055 
TOTAL LIABILITIES AND SHAREHOLDERS' EQUITY$33,258 $31,342 
The accompanying Notes to the Unaudited Condensed Consolidated Financial Statements are an integral part of this statement.
3


Table of Contents

NIKE, INC.
UNAUDITED CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS
THREE MONTHS ENDED AUGUST 31,
(Dollars in millions)
20202019
Cash provided (used) by operations:
Net income$1,518 $1,367 
Adjustments to reconcile net income to net cash provided (used) by operations:
Depreciation176 169 
Deferred income taxes(220)(42)
Stock-based compensation136 80 
Amortization, impairment and other41 6 
Net foreign currency adjustments(45)49 
Changes in certain working capital components and other assets and liabilities:
(Increase) decrease in accounts receivable(990)(456)
(Increase) decrease in inventories689 (270)
(Increase) decrease in prepaid expenses, operating lease right-of-use assets and other current and non-current assets(338)38 
Increase (decrease) in accounts payable, accrued liabilities, operating lease liabilities and other current and non-current liabilities(85)(547)
Cash provided (used) by operations882 394 
Cash provided (used) by investing activities:
Purchases of short-term investments(1,401)(504)
Maturities of short-term investments302 16 
Sales of short-term investments384 533 
Additions to property, plant and equipment(176)(284)
Other investing activities2 (109)
Cash provided (used) by investing activities(889)(348)
Cash provided (used) by financing activities:
Increase (decrease) in notes payable(30)241 
Repayment of borrowings(83)(2)
Proceeds from exercise of stock options and other stock issuances302 111 
Repurchase of common stock (999)
Dividends — common and preferred(384)(345)
Other financing activities(53)(16)
Cash provided (used) by financing activities(248)(1,010)
Effect of exchange rate changes on cash and equivalents55 (56)
Net increase (decrease) in cash and equivalents(200)(1,020)
Cash and equivalents, beginning of period8,348 4,466 
CASH AND EQUIVALENTS, END OF PERIOD$8,148 $3,446 
Supplemental disclosure of cash flow information:
Non-cash additions to property, plant and equipment$114 $90 
Dividends declared and not paid383 344 
The accompanying Notes to the Unaudited Condensed Consolidated Financial Statements are an integral part of this statement.
4


Table of Contents

NIKE, INC.
UNAUDITED CONDENSED CONSOLIDATED STATEMENTS OF SHAREHOLDERS' EQUITY
COMMON STOCKCAPITAL IN EXCESS OF STATED VALUEACCUMULATED OTHER COMPREHENSIVE INCOME (LOSS)RETAINED EARNINGS (DEFICIT)TOTAL
CLASS ACLASS B
(In millions, except per share data)
SHARESAMOUNTSHARESAMOUNT
Balance at May 31, 2020315 $ 1,243 $3 $8,299 $(56)$(191)$8,055 
Stock options exercised7 291 291 
Dividends on common stock ($0.245 per share) and preferred stock ($0.10 per share)
(383)(383)
Issuance of shares to employees, net of shares withheld for employee taxes(31)(17)(48)
Stock-based compensation136 136 
Net income1,518 1,518 
Other comprehensive income (loss)(345)(345)
Balance at August 31, 2020315 $ 1,250 $3 $8,695 $(401)$927 $9,224 

COMMON STOCKCAPITAL IN EXCESS OF STATED VALUEACCUMULATED OTHER COMPREHENSIVE INCOME (LOSS)RETAINED EARNINGSTOTAL
CLASS ACLASS B
(In millions, except per share data)SHARESAMOUNTSHARESAMOUNT
Balance at May 31, 2019315 $ 1,253 $3 $7,163 $231 $1,643 $9,040 
Stock options exercised4 116 116 
Repurchase of Class B Common Stock(12)(55)(940)(995)
Dividends on common stock ($0.22 per share) and preferred stock ($0.10 per share)
(344)(344)
Issuance of shares to employees, net of shares withheld for employee taxes(8)(4)(12)
Stock-based compensation80 80 
Net income1,367 1,367 
Other comprehensive income (loss)(51)(51)
Adoption of ASC Topic 842(1)(1)
Balance at August 31, 2019315 $ 1,245 $3 $7,296 $180 $1,721 $9,200 
The accompanying Notes to the Unaudited Condensed Consolidated Financial Statements are an integral part of this statement.
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NOTES TO THE UNAUDITED CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
Note 1
Note 2
Note 3
Note 4
Note 5
Note 6
Note 7
Note 8
Note 9
Note 10
Note 11
Note 12
Note 13
Note 14
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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 recurring 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, 2020 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 months ended August 31, 2020 are not necessarily indicative of results to be expected for the entire fiscal year.
As previously disclosed in the Annual Report on Form 10-K for the fiscal year ended May 31, 2020, the extent to which the evolving COVID-19 pandemic impacts the Company's financial statements will depend on a number of factors, including the magnitude and duration of the pandemic. There remains risk that COVID-19 could have material adverse impacts on future revenue growth as well as overall profitability and may lead to higher than normal inventory levels in various markets, revised payment terms with certain wholesale customers, higher sales-related reserves and a volatile effective tax rate driven by changes in the mix of earnings across the Company's jurisdictions.
NOTE 2 — INVENTORIES
Inventory balances of $6,705 million and $7,367 million at August 31, 2020 and May 31, 2020, respectively, were substantially all finished goods.
NOTE 3 — ACCRUED LIABILITIES
Accrued liabilities included the following:
AUGUST 31,MAY 31,
(Dollars in millions)
20202020
Sales-related reserves$1,127 $1,178 
Compensation and benefits, excluding taxes950 1,248 
Fair value of derivatives512 190 
Allowance for expected loss on sale(1)
438 405 
Other2,715 2,163 
TOTAL ACCRUED LIABILITIES$5,742 $5,184 
(1)Refer to Note 13 — Acquisitions and Divestitures for additional information.
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. For additional information about the Company's fair value policies refer to Note 1 — Summary of Significant Accounting Policies of the Annual Report on Form 10-K for the fiscal year ended May 31, 2020.
The following tables present information about the Company's financial assets measured at fair value on a recurring basis as of August 31, 2020 and May 31, 2020, and indicate the level in the fair value hierarchy in which the Company classifies the fair value measurement:
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AUGUST 31, 2020
(Dollars in millions)
ASSETS AT FAIR VALUECASH AND EQUIVALENTSSHORT-TERM INVESTMENTS
Cash$542 $542 $— 
Level 1:
U.S. Treasury securities1,695 400 1,295 
Level 2:
Commercial paper and bonds33  33 
Money market funds6,340 6,340  
Time deposits867 866 1 
U.S. Agency securities3  3 
Total Level 27,243 7,206 37 
TOTAL$9,480 $8,148 $1,332 
MAY 31, 2020
(Dollars in millions)
ASSETS AT FAIR VALUECASH AND EQUIVALENTSSHORT-TERM INVESTMENTS
Cash$596 $596 $— 
Level 1:
U.S. Treasury securities1,204 800 404 
Level 2:
Commercial paper and bonds32  32 
Money market funds5,973 5,973  
Time deposits981 979 2 
U.S. Agency securities1  1 
Total Level 26,987 6,952 35 
TOTAL$8,787 $8,348 $439 
As of August 31, 2020, the Company held $1,291 million of available-for-sale debt securities with maturity dates within one year and $41 million with maturity dates over one year and less than five years in Short-term investments on the Unaudited Condensed Consolidated Balance Sheets. The fair value of the Company's available-for-sale debt securities approximates their amortized cost.
Included in Interest expense (income), net was interest income related to the Company's investment portfolio of $7 million and $21 million for the three months ended August 31, 2020 and 2019, respectively.
The following tables present information about the Company's derivative assets and liabilities measured at fair value on a recurring basis as of August 31, 2020 and May 31, 2020, and indicate the level in the fair value hierarchy in which the Company classifies the fair value measurement:
AUGUST 31, 2020
DERIVATIVE ASSETSDERIVATIVE LIABILITIES
(Dollars in millions)
ASSETS AT FAIR VALUEOTHER CURRENT ASSETSOTHER LONG-TERM ASSETSLIABILITIES AT FAIR VALUEACCRUED LIABILITIESOTHER LONG-TERM LIABILITIES
Level 2:
Foreign exchange forwards and options(1)
$48 $43 $5 $655 $511 $144 
Embedded derivatives   1 1  
TOTAL$48 $43 $5 $656 $512 $144 
(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 $44 million as of August 31, 2020. As of that date, the Company had posted $151 million of cash collateral to various counterparties related to foreign exchange derivative instruments. No amount of collateral was received on the Company's derivative asset balance as of August 31, 2020.
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MAY 31, 2020
DERIVATIVE ASSETSDERIVATIVE LIABILITIES
(Dollars in millions)
ASSETS AT FAIR VALUEOTHER CURRENT ASSETSOTHER LONG-TERM ASSETSLIABILITIES AT FAIR VALUEACCRUED LIABILITIESOTHER LONG-TERM LIABILITIES
Level 2:
Foreign exchange forwards and options(1)
$94 $91 $3 $205 $188 $17 
Embedded derivatives1 1  2 2  
TOTAL$95 $92 $3 $207 $190 $17 
(1)If the foreign exchange derivative instruments had been netted on the Consolidated Balance Sheets, the asset and liability positions each would have been reduced by $76 million as of May 31, 2020. As of that date, no amount of cash collateral had been received or posted on the derivative asset and liability balances related to these foreign exchange derivative instruments.
For additional information related to the Company's derivative financial instruments and credit risk, refer to Note 9 — Risk Management and Derivatives.
The carrying amounts of other current financial assets and other current financial liabilities approximate fair value.
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 $10,731 million at August 31, 2020 and $10,645 million at May 31, 2020.
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
The carrying amounts reflected on the Unaudited Condensed Consolidated Balance Sheets for Notes payable approximate fair value.
As of August 31, 2020 and May 31, 2020, the Company had $112 million and $248 million of borrowings outstanding at a weighted average interest rate of 1.72% and 1.65%, respectively, under its $4 billion commercial paper program. Commercial paper repayments with original maturities greater than three months are included in Repayments from borrowings on the Unaudited Condensed Consolidated Statements of Cash Flows.
As of August 31, 2020, there have been no significant changes to the credit lines reported in the Company's Annual Report on Form 10-K for the fiscal year ended May 31, 2020.
NOTE 6 — INCOME TAXES
The effective tax rate was 11.5% and 12.4% for the three months ended August 31, 2020 and 2019, respectively. The decrease in the Company's effective tax rate was attributable to discrete items including a more favorable impact from stock-based compensation, offset by a reserve related to Altera Corp. v. Commissioner where the taxpayer was denied a hearing before the U.S. Supreme Court on June 22, 2020, thereby ratifying the Ninth Circuit Court's decision and requiring the inclusion of stock-based compensation in intercompany cost-sharing arrangements.
As of August 31, 2020, total gross unrecognized tax benefits, excluding related interest and penalties, were $860 million, $584 million of which would affect the Company's effective tax rate if recognized in future periods. During the three months ended August 31, 2020, the Company recognized $77 million of gross unrecognized tax benefits related to Altera Corp. v. Commissioner discussed above, of which $71 million impacted the effective tax rate. The majority of the total gross unrecognized tax benefits are long-term in nature and included within Deferred income taxes and other liabilities on the Unaudited Condensed Consolidated Balance Sheets. As of May 31, 2020, total gross unrecognized tax benefits, excluding related interest and penalties, were $771 million. The liability for payment of interest and penalties increased by $21 million during the three months ended August 31, 2020. As of August 31, 2020 and May 31, 2020, accrued interest and penalties related to uncertain tax positions were $179 million and $158 million, respectively (excluding federal benefit).
The Company is subject to taxation in the United States, as well as various state and foreign jurisdictions. The Company is currently under audit by the U.S. Internal Revenue Service ("IRS") for fiscal years 2017 through 2019. The Company has closed all U.S. federal income tax matters through fiscal 2016, with the exception of certain transfer pricing adjustments.
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Tax years after 2009 remain open in certain major foreign jurisdictions. 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 $50 million within the next 12 months. In January 2019, the European Commission opened a formal investigation to examine whether the Netherlands has breached State Aid rules when granting certain tax rulings to the Company. The Company believes the investigation is without merit. If this matter is adversely resolved, the Netherlands may be required to assess additional amounts with respect to current and prior periods, and the Company's Netherlands income taxes in the future could increase.
NOTE 7 — STOCK-BASED COMPENSATION
STOCK-BASED COMPENSATION
The NIKE, Inc. Stock Incentive Plan (the “Stock Incentive Plan”) provides for the issuance of up to 798 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. 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). Refer to Note 11 — Common Stock and Stock-Based Compensation of the Annual Report on Form 10-K for the fiscal year ended May 31, 2020 for further information.
The following table summarizes the Company's total stock-based compensation expense recognized in Cost of sales or Operating overhead expense, as applicable: 
 THREE MONTHS ENDED AUGUST 31,
(Dollars in millions)
20202019
Stock options(1)
$70 $42 
ESPPs18 13 
Restricted stock48 25 
TOTAL STOCK-BASED COMPENSATION EXPENSE$136 $80 
(1)Expense for stock options includes the expense associated with stock appreciation rights. Accelerated stock option expense is primarily recorded for employees meeting certain retirement eligibility requirements.
The income tax benefit related to stock-based compensation expense was $81 million and $37 million for the three months ended August 31, 2020 and 2019, respectively.
STOCK OPTIONS
The weighted average fair value per share of the options granted during the three months ended August 31, 2020 and 2019, computed as of the grant date using the Black-Scholes pricing model, was $22.55 and $18.33, respectively. The weighted average assumptions used to estimate these fair values were as follows:
 THREE MONTHS ENDED AUGUST 31,
20202019
Dividend yield1.0 %1.1 %
Expected volatility27.2 %22.9 %
Weighted average expected life (in years)6.06.0
Risk-free interest rate0.3 %1.7 %
Expected volatilities are based on the historical volatility of the Company's common stock, the implied volatility in market traded options on the Company's common stock with a term greater than one year, as well as 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.
As of August 31, 2020, the Company had $378 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 2.4 years.
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RESTRICTED STOCK AND RESTRICTED STOCK UNITS
The weighted average fair value per share of restricted stock and restricted stock units granted for the three months ended August 31, 2020 and 2019, computed as of the grant date, was $98.47 and $84.19, respectively. As of August 31, 2020, the Company had $394 million of unrecognized compensation costs from restricted stock and restricted stock units, net of estimated forfeitures, to be recognized in Cost of sales or Operating overhead expense, as applicable, over a weighted average remaining period of 2.7 years.
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, and restricted stock to purchase an additional 2.1 million and 19.1 million shares of common stock outstanding for the three months ended August 31, 2020 and 2019, respectively, because the options were anti-dilutive.
 THREE MONTHS ENDED AUGUST 31,
(In millions, except per share data)
20202019
Net income available to common stockholders$1,518 $1,367 
Determination of shares:
Weighted average common shares outstanding1,561.8 1,562.4 
Assumed conversion of dilutive stock options and awards31.5 35.1 
DILUTED WEIGHTED AVERAGE COMMON SHARES OUTSTANDING1,593.3 1,597.5 
Earnings per common share:
Basic$0.97 $0.87 
Diluted$0.95 $0.86 

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. As of and for the three months ended August 31, 2020, there have been no material changes to the Company's hedging program or strategy from what was disclosed within the Annual Report on Form 10-K. For additional information about the Company's derivatives and hedging policies refer to Note 1 — Summary of Significant Accounting Policies and Note 14 — Risk Management and Derivatives of the Annual Report on Form 10-K for the fiscal year ended May 31, 2020.
The majority of derivatives outstanding as of August 31, 2020 are designated as foreign currency cash flow hedges, primarily for Euro/U.S. Dollar, Japanese Yen/U.S. Dollar, Chinese Yuan/U.S. Dollar, and British Pound/Euro, 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.
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The following tables present the fair values of derivative instruments included within the Unaudited Condensed Consolidated Balance Sheets as of August 31, 2020 and May 31, 2020:
 DERIVATIVE ASSETS
BALANCE SHEET LOCATIONAUGUST 31,MAY 31,
(Dollars in millions)
20202020
Derivatives formally designated as hedging instruments:
Foreign exchange forwards and optionsPrepaid expenses and other current assets$13 $43 
Foreign exchange forwards and optionsDeferred income taxes and other assets3 1 
Total derivatives formally designated as hedging instruments16 44 
Derivatives not designated as hedging instruments:
Foreign exchange forwards and optionsPrepaid expenses and other current assets30 48 
Embedded derivativesPrepaid expenses and other current assets 1 
Foreign exchange forwards and optionsDeferred income taxes and other assets2 2 
Total derivatives not designated as hedging instruments32 51 
TOTAL DERIVATIVE ASSETS$48 $95 
DERIVATIVE LIABILITIES
BALANCE SHEET LOCATIONAUGUST 31,MAY 31,
(Dollars in millions)
20202020
Derivatives formally designated as hedging instruments:
Foreign exchange forwards and optionsAccrued liabilities$488 $173 
Foreign exchange forwards and optionsDeferred income taxes and other liabilities144 17 
Total derivatives formally designated as hedging instruments632 190 
Derivatives not designated as hedging instruments:
Foreign exchange forwards and optionsAccrued liabilities23 15 
Embedded derivativesAccrued liabilities1 2 
Total derivatives not designated as hedging instruments24 17 
TOTAL DERIVATIVE LIABILITIES$656 $207 
The following table presents 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 months ended August 31, 2020 and 2019:
THREE MONTHS ENDED AUGUST 31,
20202019
(Dollars in millions)
TOTALAMOUNT OF
GAIN (LOSS)
ON CASH FLOW
HEDGE ACTIVITY
TOTALAMOUNT OF
GAIN (LOSS)
ON CASH FLOW
HEDGE ACTIVITY
Revenues$10,594 $14 $10,660 $8 
Cost of sales5,853 114 5,789 75 
Demand creation expense677 1 1,018  
Other (income) expense, net(14)8 (33)46