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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 FEBRUARY 28, 2023
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
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 March 30, 2023, the number of shares of the Registrant's Common Stock outstanding were: |
Class A | 304,897,252 | |
Class B | 1,232,091,564 | |
| 1,536,988,816 | |
NIKE, INC.
FORM 10-Q
TABLE OF CONTENTS
| | | | | | | | |
| | PAGE |
PART I - FINANCIAL INFORMATION | |
ITEM 1. | | |
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ITEM 3. | | |
ITEM 4. | | |
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ITEM 1. | | |
ITEM 1A. | | |
ITEM 2. | | |
ITEM 6. | | |
| | |
PART I - FINANCIAL INFORMATION
ITEM 1. FINANCIAL STATEMENTS
NIKE, INC.
UNAUDITED CONDENSED CONSOLIDATED STATEMENTS OF INCOME
| | | | | | | | | | | | | | | | | |
| THREE MONTHS ENDED FEBRUARY 28, | | NINE MONTHS ENDED FEBRUARY 28, |
(In millions, except per share data) | 2023 | 2022 | | 2023 | 2022 |
Revenues | $ | 12,390 | | $ | 10,871 | | | $ | 38,392 | | $ | 34,476 | |
Cost of sales | 7,019 | | 5,804 | | | 21,695 | | 18,500 | |
Gross profit | 5,371 | | 5,067 | | | 16,697 | | 15,976 | |
Demand creation expense | 923 | | 854 | | | 2,968 | | 2,789 | |
Operating overhead expense | 3,036 | | 2,584 | | | 9,035 | | 7,980 | |
Total selling and administrative expense | 3,959 | | 3,438 | | | 12,003 | | 10,769 | |
Interest expense (income), net | (7) | | 53 | | | 22 | | 165 | |
Other (income) expense, net | (58) | | (94) | | | (283) | | (235) | |
Income before income taxes | 1,477 | | 1,670 | | | 4,955 | | 5,277 | |
Income tax expense | 237 | | 274 | | | 916 | | 670 | |
NET INCOME | $ | 1,240 | | $ | 1,396 | | | $ | 4,039 | | $ | 4,607 | |
Earnings per common share: | | | | | |
Basic | $ | 0.80 | | $ | 0.88 | | | $ | 2.59 | | $ | 2.91 | |
Diluted | $ | 0.79 | | $ | 0.87 | | | $ | 2.57 | | $ | 2.85 | |
Weighted average common shares outstanding: | | | | | |
Basic | 1,543.8 | | 1,579.0 | | | 1,556.7 | | 1,581.1 | |
Diluted | 1,564.8 | | 1,610.7 | | | 1,574.4 | | 1,615.8 | |
The accompanying Notes to the Unaudited Condensed Consolidated Financial Statements are an integral part of this statement.
NIKE, INC.
UNAUDITED CONDENSED CONSOLIDATED STATEMENTS OF COMPREHENSIVE INCOME
| | | | | | | | | | | | | | | | | |
| THREE MONTHS ENDED FEBRUARY 28, | | NINE MONTHS ENDED FEBRUARY 28, |
(Dollars in millions) | 2023 | 2022 | | 2023 | 2022 |
Net income | $ | 1,240 | | $ | 1,396 | | | $ | 4,039 | | $ | 4,607 | |
Other comprehensive income (loss), net of tax: | | | | | |
Change in net foreign currency translation adjustment | 153 | | (6) | | | 281 | | (289) | |
Change in net gains (losses) on cash flow hedges | (433) | | (29) | | | (279) | | 775 | |
Change in net gains (losses) on other | 23 | | (11) | | | (18) | | (7) | |
Total other comprehensive income (loss), net of tax | (257) | | (46) | | | (16) | | 479 | |
TOTAL COMPREHENSIVE INCOME | $ | 983 | | $ | 1,350 | | | $ | 4,023 | | $ | 5,086 | |
The accompanying Notes to the Unaudited Condensed Consolidated Financial Statements are an integral part of this statement.
NIKE, INC.
UNAUDITED CONDENSED CONSOLIDATED BALANCE SHEETS
| | | | | | | | | | | |
| FEBRUARY 28, | | MAY 31, |
(In millions) | 2023 | | 2022 |
ASSETS | | | |
Current assets: | | | |
Cash and equivalents | $ | 6,955 | | | $ | 8,574 | |
Short-term investments | 3,847 | | | 4,423 | |
Accounts receivable, net | 4,513 | | | 4,667 | |
Inventories | 8,905 | | | 8,420 | |
Prepaid expenses and other current assets | 1,815 | | | 2,129 | |
Total current assets | 26,035 | | | 28,213 | |
Property, plant and equipment, net | 4,939 | | | 4,791 | |
Operating lease right-of-use assets, net | 2,834 | | | 2,926 | |
Identifiable intangible assets, net | 277 | | | 286 | |
Goodwill | 281 | | | 284 | |
Deferred income taxes and other assets | 3,928 | | | 3,821 | |
TOTAL ASSETS | $ | 38,294 | | | $ | 40,321 | |
LIABILITIES AND SHAREHOLDERS' EQUITY | | | |
Current liabilities: | | | |
Current portion of long-term debt | $ | 500 | | | $ | 500 | |
Notes payable | 14 | | | 10 | |
Accounts payable | 2,675 | | | 3,358 | |
Current portion of operating lease liabilities | 435 | | | 420 | |
Accrued liabilities | 5,594 | | | 6,220 | |
Income taxes payable | 330 | | | 222 | |
Total current liabilities | 9,548 | | | 10,730 | |
Long-term debt | 8,925 | | | 8,920 | |
Operating lease liabilities | 2,692 | | | 2,777 | |
Deferred income taxes and other liabilities | 2,598 | | | 2,613 | |
Commitments and contingencies (Note 13) | | | |
Redeemable preferred stock | — | | | — | |
Shareholders' equity: | | | |
Common stock at stated value: | | | |
Class A convertible — 305 and 305 shares outstanding | — | | | — | |
Class B — 1,235 and 1,266 shares outstanding | 3 | | | 3 | |
Capital in excess of stated value | 12,074 | | | 11,484 | |
Accumulated other comprehensive income (loss) | 302 | | | 318 | |
Retained earnings | 2,152 | | | 3,476 | |
Total shareholders' equity | 14,531 | | | 15,281 | |
TOTAL LIABILITIES AND SHAREHOLDERS' EQUITY | $ | 38,294 | | | $ | 40,321 | |
The accompanying Notes to the Unaudited Condensed Consolidated Financial Statements are an integral part of this statement.
NIKE, INC.
UNAUDITED CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS
| | | | | | | | |
| NINE MONTHS ENDED FEBRUARY 28, |
(Dollars in millions) | 2023 | 2022 |
Cash provided (used) by operations: | | |
Net income | $ | 4,039 | | $ | 4,607 | |
Adjustments to reconcile net income to net cash provided (used) by operations: | | |
Depreciation | 516 | | 538 | |
Deferred income taxes | (216) | | (234) | |
Stock-based compensation | 556 | | 467 | |
Amortization, impairment and other | 107 | | 6 | |
Net foreign currency adjustments | (197) | | 3 | |
Changes in certain working capital components and other assets and liabilities: | | |
(Increase) decrease in accounts receivable | 109 | | 466 | |
(Increase) decrease in inventories | (527) | | (872) | |
(Increase) decrease in prepaid expenses, operating lease right-of-use assets and other current and non-current assets | (273) | | (639) | |
Increase (decrease) in accounts payable, accrued liabilities, operating lease liabilities and other current and non-current liabilities | (526) | | (305) | |
Cash provided (used) by operations | 3,588 | | 4,037 | |
Cash provided (used) by investing activities: | | |
Purchases of short-term investments | (4,844) | | (9,229) | |
Maturities of short-term investments | 2,470 | | 5,152 | |
Sales of short-term investments | 3,149 | | 2,921 | |
Additions to property, plant and equipment | (700) | | (516) | |
Other investing activities | 62 | | (39) | |
Cash provided (used) by investing activities | 137 | | (1,711) | |
Cash provided (used) by financing activities: | | |
Increase (decrease) in notes payable | 4 | | 4 | |
Proceeds from exercise of stock options and other stock issuances | 413 | | 959 | |
Repurchase of common stock | (4,101) | | (2,923) | |
Dividends — common and preferred | (1,488) | | (1,356) | |
Other financing activities | (94) | | (140) | |
Cash provided (used) by financing activities | (5,266) | | (3,456) | |
Effect of exchange rate changes on cash and equivalents | (78) | | (55) | |
Net increase (decrease) in cash and equivalents | (1,619) | | (1,185) | |
Cash and equivalents, beginning of period | 8,574 | | 9,889 | |
CASH AND EQUIVALENTS, END OF PERIOD | $ | 6,955 | | $ | 8,704 | |
Supplemental disclosure of cash flow information: | | |
Non-cash additions to property, plant and equipment | $ | 145 | | $ | 126 | |
Dividends declared and not paid | 527 | | 488 | |
The accompanying Notes to the Unaudited Condensed Consolidated Financial Statements are an integral part of this statement.
NIKE, INC.
UNAUDITED CONDENSED CONSOLIDATED STATEMENTS OF SHAREHOLDERS' EQUITY
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| 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 November 30, 2022 | 305 | | $ | — | | | 1,245 | | $ | 3 | | $ | 11,851 | | $ | 559 | | $ | 2,859 | | $ | 15,272 | |
Stock options exercised | | | | 3 | | | 153 | | | | 153 | |
Repurchase of Class B Common Stock | | | | (13) | | | (99) | | | (1,420) | | (1,519) | |
Dividends on common stock ($0.340 per share) | | | | | | | | (527) | | (527) | |
Issuance of shares to employees, net of shares withheld for employee taxes | | | | | | (23) | | | — | | (23) | |
Stock-based compensation | | | | | | 192 | | | | 192 | |
Net income | | | | | | | | 1,240 | | 1,240 | |
Other comprehensive income (loss) | | | | | | | (257) | | | (257) | |
Balance at February 28, 2023 | 305 | | $ | — | | | 1,235 | | $ | 3 | | $ | 12,074 | | $ | 302 | | $ | 2,152 | | $ | 14,531 | |
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| 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 November 30, 2021 | 305 | | $ | — | | | 1,278 | | $ | 3 | | $ | 10,990 | | $ | 145 | | $ | 3,786 | | $ | 14,924 | |
Stock options exercised | | | | 1 | | | 112 | | | | 112 | |
Repurchase of Class B Common Stock | | | | (8) | | | (57) | | | (1,165) | | (1,222) | |
Dividends on common stock ($0.305 per share) | | | | | | | | (488) | | (488) | |
Issuance of shares to employees, net of shares withheld for employee taxes | | | | | | (20) | | | (8) | | (28) | |
Stock-based compensation | | | | | | 161 | | | | 161 | |
Net income | | | | | | | | 1,396 | | 1,396 | |
Other comprehensive income (loss) | | | | | | | (46) | | | (46) | |
Balance at February 28, 2022 | 305 | | $ | — | | | 1,271 | | $ | 3 | | $ | 11,186 | | $ | 99 | | $ | 3,521 | | $ | 14,809 | |
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| 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, 2022 | 305 | | $ | — | | | 1,266 | | $ | 3 | | $ | 11,484 | | $ | 318 | | $ | 3,476 | | $ | 15,281 | |
Stock options exercised | | | | 6 | | | 302 | | | | 302 | |
Repurchase of Class B Common Stock | | | | (39) | | | (288) | | | (3,829) | | (4,117) | |
Dividends on common stock ($0.985 per share) and preferred stock ($0.10 per share) | | | | | | | | (1,535) | | (1,535) | |
Issuance of shares to employees, net of shares withheld for employee taxes | | | | 2 | | | 20 | | | 1 | | 21 | |
Stock-based compensation | | | | | | 556 | | | | 556 | |
Net income | | | | | | | | 4,039 | | 4,039 | |
Other comprehensive income (loss) | | | | | | | (16) | | | (16) | |
Balance at February 28, 2023 | 305 | | $ | — | | | 1,235 | | $ | 3 | | $ | 12,074 | | $ | 302 | | $ | 2,152 | | $ | 14,531 | |
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| 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, 2021 | 305 | | $ | — | | | 1,273 | | $ | 3 | | $ | 9,965 | | $ | (380) | | $ | 3,179 | | $ | 12,767 | |
Stock options exercised | | | | 14 | | | 837 | | | | 837 | |
Repurchase of Class B Common Stock | | | | (19) | | | (126) | | | (2,806) | | (2,932) | |
Dividends on common stock ($0.885 per share) and preferred stock ($0.10 per share) | | | | | | | | (1,406) | | (1,406) | |
Issuance of shares to employees, net of shares withheld for employee taxes | | | | 3 | | | 43 | | | (53) | | (10) | |
Stock-based compensation | | | | | | 467 | | | | 467 | |
Net income | | | | | | | | 4,607 | | 4,607 | |
Other comprehensive income (loss) | | | | | | | 479 | | | 479 | |
Balance at February 28, 2022 | 305 | | $ | — | | | 1,271 | | $ | 3 | | $ | 11,186 | | $ | 99 | | $ | 3,521 | | $ | 14,809 | |
The accompanying Notes to the Unaudited Condensed Consolidated Financial Statements are an integral part of this statement.
NOTES TO THE UNAUDITED CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
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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, 2022, 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 for the fiscal year ended May 31, 2022. The results of operations for the three and nine months ended February 28, 2023, are not necessarily indicative of results to be expected for the entire fiscal year.
The uncertain state of the global economy or worsening macroeconomic conditions could affect the Company’s business, including, among other things, potential impacts of inflation and rising interest rates on consumer behavior, higher inventory levels in various markets, higher inventory obsolescence reserves, higher promotional activity, reduced demand for product, reduced orders from wholesale customers for products and order cancellations. There could also be new or prolonged COVID-19 related restrictions or disruptions. Any of these factors, among others, could have material adverse impacts on the Company’s revenue growth as well as overall profitability in future periods.
RECENTLY ISSUED ACCOUNTING STANDARDS
In September 2022, the Financial Accounting Standards Board (the “FASB”) issued Accounting Standards Update (“ASU”) ASU 2022-04, Liabilities – Supplier Finance Programs (Subtopic 405-50): Disclosure of Supplier Finance Program Obligations, which enhances transparency surrounding the use of supplier finance programs. The new guidance requires qualitative and quantitative disclosure sufficient to enable users of the financial statements to understand the nature, activity during the period, changes from period to period and potential magnitude of such programs. The amendments are effective for fiscal years beginning after December 15, 2022, including interim periods within those fiscal years, except for the amendment on rollforward information, which is effective for fiscal years beginning after December 15, 2023. The Company is currently evaluating the ASU to determine its impact on the Company’s disclosures.
Inventory balances of $8,905 million and $8,420 million at February 28, 2023 and May 31, 2022, respectively, were substantially all finished goods.
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NOTE 3 — ACCRUED LIABILITIES |
Accrued liabilities included the following:
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| FEBRUARY 28, | | MAY 31, |
(Dollars in millions) | 2023 | | 2022 |
Compensation and benefits, excluding taxes | $ | 1,445 | | | $ | 1,297 | |
Sales-related reserves | 1,067 | | 1,015 | |
Dividends payable | 531 | | 485 | |
Endorsement compensation | 498 | | 496 | |
Allowance for expected loss on sale(1) | — | | 397 | |
Other | 2,053 | | 2,530 |
TOTAL ACCRUED LIABILITIES | $ | 5,594 | | | $ | 6,220 | |
(1) Refer to Note 14 — Acquisitions and Divestitures for additional information.
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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, 2022.
The following tables present information about the Company's financial assets measured at fair value on a recurring basis as of February 28, 2023 and May 31, 2022, and indicate the level in the fair value hierarchy in which the Company classifies the fair value measurement:
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| FEBRUARY 28, 2023 |
(Dollars in millions) | ASSETS AT FAIR VALUE | CASH AND EQUIVALENTS | SHORT-TERM INVESTMENTS |
Cash | $ | 1,105 | | $ | 1,105 | | $ | — | |
Level 1: | | | |
U.S. Treasury securities | 3,185 | | 1 | | 3,184 | |
Level 2: | | | |
Commercial paper and bonds | 583 | | 8 | | 575 | |
Money market funds | 5,114 | | 5,114 | | — | |
Time deposits | 781 | | 727 | | 54 | |
U.S. Agency securities | 34 | | — | | 34 | |
Total Level 2 | 6,512 | | 5,849 | | 663 | |
TOTAL | $ | 10,802 | | $ | 6,955 | | $ | 3,847 | |
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| MAY 31, 2022 |
(Dollars in millions) | ASSETS AT FAIR VALUE | CASH AND EQUIVALENTS | SHORT-TERM INVESTMENTS |
Cash | $ | 839 | | $ | 839 | | $ | — | |
Level 1: | | | |
U.S. Treasury securities | 3,801 | | 8 | | 3,793 | |
Level 2: | | | |
Commercial paper and bonds | 660 | | 37 | | 623 | |
Money market funds | 6,458 | | 6,458 | | — | |
Time deposits | 1,237 | | 1,232 | | 5 | |
U.S. Agency securities | 2 | | — | | 2 | |
Total Level 2 | 8,357 | | 7,727 | | 630 | |
TOTAL | $ | 12,997 | | $ | 8,574 | | $ | 4,423 | |
As of February 28, 2023, the Company held $3,089 million of available-for-sale debt securities with maturity dates within one year and $758 million with maturity dates greater than 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 $83 million and $22 million for the three months ended February 28, 2023 and 2022, respectively, and $196 million and $57 million for the nine months ended February 28, 2023 and 2022, respectively.
The following tables present information about the Company's derivative assets and liabilities measured at fair value on a recurring basis and indicate the level in the fair value hierarchy in which the Company classifies the fair value measurement:
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| FEBRUARY 28, 2023 |
| DERIVATIVE ASSETS | | DERIVATIVE LIABILITIES |
(Dollars 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) | $ | 651 | | $ | 551 | | $ | 100 | | | $ | 176 | | $ | 112 | | $ | 64 | |
Embedded derivatives | 5 | | 5 | | — | | | 2 | | 2 | | — | |
TOTAL | $ | 656 | | $ | 556 | | $ | 100 | | | $ | 178 | | $ | 114 | | $ | 64 | |
(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 $175 million as of February 28, 2023. As of that date, the Company received $100 million of cash collateral from counterparties related to foreign exchange derivative instruments. No amount of collateral was posted on the derivative liability balance as of February 28, 2023.
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| MAY 31, 2022 |
| DERIVATIVE ASSETS | | DERIVATIVE LIABILITIES |
(Dollars 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) | $ | 875 | | $ | 669 | | $ | 206 | | | $ | 76 | | $ | 65 | | $ | 11 | |
Embedded derivatives | 5 | | 5 | | — | | | 1 | | 1 | | — | |
TOTAL | $ | 880 | | $ | 674 | | $ | 206 | | | $ | 77 | | $ | 66 | | $ | 11 | |
(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, 2022. As of that date, the Company received $486 million of cash collateral from counterparties related to foreign exchange derivative instruments. No amount of collateral was posted on the derivative liability balance as of May 31, 2022
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
The Company's Long-term debt is recorded at adjusted cost, net of unamortized premiums, discounts and debt issuance costs. The fair value of long-term debt is estimated based upon quoted prices for similar instruments or quoted prices for identical instruments in inactive markets (Level 2). The fair value of the Company's Long-term debt, including the current portion, was approximately $8,241 million at February 28, 2023 and $8,933 million at May 31, 2022.
For fair value information regarding Notes payable, refer to Note 5 — Short-term Borrowings and Credit Lines..
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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 February 28, 2023 and May 31, 2022, the Company had no borrowings outstanding under its $3 billion commercial paper program.
On March 10, 2023, subsequent to the end of the third quarter of fiscal 2023, the Company entered into a 364-day committed credit facility agreement with a syndicate of banks, which provides for up to $1 billion of borrowings, with an option to increase borrowings up to $1.5 billion in total with lender approval. The facility matures on March 8, 2024, with an option to extend the maturity date an additional 364 days. This facility replaces the prior $1 billion 364-day credit facility agreement entered into on March 11, 2022, which matured on March 10, 2023. Based on the Company's current long-term senior unsecured debt ratings of AA- and A1 from Standard and Poor's Corporation and Moody's Investor Services, respectively, the interest rate charged on any outstanding borrowings would be the prevailing Term Secured Overnight Financing Rate (Term SOFR) for the applicable interest period plus 0.60%. The facility fee is 0.02% of the total undrawn commitment. As of April 6, 2023, no amounts were outstanding under this committed credit facility.
There have been no other changes to the credit lines reported in the Company's Annual Report on Form 10-K for the fiscal year ended May 31, 2022.
The effective tax rate was 18.5% and 12.7% for the nine months ended February 28, 2023 and 2022, respectively. The increase in the Company's effective tax rate was primarily due to a less favorable impact from stock-based compensation and a shift in the Company's earnings mix.
As of February 28, 2023, total gross unrecognized tax benefits, excluding related interest and penalties, were $941 million, $657 million of which would affect the Company's effective tax rate if recognized in future periods. 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, 2022, total gross unrecognized tax benefits, excluding related interest and penalties, were $848 million. As of February 28, 2023 and May 31, 2022, accrued interest and penalties related to uncertain tax positions were $282 million and $248 million, respectively, (excluding federal benefit) and included within Deferred income taxes and other liabilities on the Unaudited Condensed Consolidated Balance Sheets.
The Company is subject to taxation in the U.S., as well as various state and foreign jurisdictions. The Company is currently under audit by the U.S. 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.
Tax years after 2011 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 $30 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 prior periods, and the Company's income taxes related to prior periods in the Netherlands could increase.
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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 and stock awards, including restricted stock and restricted stock units. Restricted stock units include both time-vesting restricted stock units (RSUs) as well as performance-based restricted stock units (PSUs). 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, 2022 for additional information.
The following table summarizes the Company's total stock-based compensation expense recognized in Cost of sales or Operating overhead expense, as applicable:
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| THREE MONTHS ENDED FEBRUARY 28, | | NINE MONTHS ENDED FEBRUARY 28, |
(Dollars in millions) | 2023 | 2022 | | 2023 | 2022 |
Stock options(1) | $ | 78 | | $ | 75 | | | $ | 232 | | $ | 221 | |
ESPPs | 20 | | 15 | | | 53 | | 44 | |
Restricted stock and restricted stock units(1)(2) | 94 | | 71 | | | 271 | | 202 | |
TOTAL STOCK-BASED COMPENSATION EXPENSE | $ | 192 | | $ | 161 | | | $ | 556 | | $ | 467 | |
(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.
(2)Restricted stock units include RSUs and PSUs.
The income tax benefit related to stock-based compensation expense was $22 million and $34 million for the three months ended February 28, 2023 and 2022, respectively, and $44 million and $307 million for the nine months ended February 28, 2023 and 2022, respectively, and reported within Income tax expense.
STOCK OPTIONS
The weighted average fair value per share of stock options granted during the nine months ended February 28, 2023 and 2022, computed as of the grant date using the Black-Scholes pricing model, was $31.31 and $37.53, respectively. The weighted average assumptions used to estimate these fair values were as follows:
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| NINE MONTHS ENDED FEBRUARY 28, |
| 2023 | 2022 |
Dividend yield | 0.9 | % | 0.8 | % |
Expected volatility | 27.1 | % | 24.9 | % |
Weighted average expected life (in years) | 5.8 | 5.8 |
Risk-free interest rate | 3.3 | % | 0.9 | % |
Expected volatilities are based on an analysis of 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 stock 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 stock options.
As of February 28, 2023, the Company had $502 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 2.6 years.
RESTRICTED STOCK AND RESTRICTED STOCK UNITS
The weighted average fair value per share of restricted stock and RSUs granted for the nine months ended February 28, 2023 and 2022, computed as of the grant date, was $110.27 and $158.94, respectively.
The weighted average fair value per share of PSUs granted for the nine months ended February 28, 2023 and 2022, computed as of the grant date, was $134.71 and $250.52, respectively.
As of February 28, 2023, the Company had $727 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 2.5 years.
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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 exclude restricted stock, restricted stock units and options, including shares under ESPPs, to purchase an estimated additional 29.5 million and 9.3 million shares of common stock outstanding for the three months ended February 28, 2023 and 2022, respectively, and 31.8 million and 9.4 million shares of common stock outstanding for the nine months ended February 28, 2023 and 2022, respectively, because the awards were assumed to be anti-dilutive.
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| THREE MONTHS ENDED FEBRUARY 28, | | NINE MONTHS ENDED FEBRUARY 28, |
(In millions, except per share data) | 2023 | 2022 | | 2023 | 2022 |
Net income available to common stockholders | $ | 1,240 | | $ | 1,396 | | | $ | 4,039 | | $ | 4,607 | |
Determination of shares: | | | | | |
Weighted average common shares outstanding | 1,543.8 | | 1,579.0 | | | 1,556.7 | | 1,581.1 | |
Assumed conversion of dilutive stock options and awards | 21.0 | | 31.7 | | | 17.7 | | 34.7 | |
DILUTED WEIGHTED AVERAGE COMMON SHARES OUTSTANDING | 1,564.8 | | 1,610.7 | | | 1,574.4 | | 1,615.8 | |
Earnings per common share: | | | | | |
Basic | $ | 0.80 | | $ | 0.88 | | | $ | 2.59 | | $ | 2.91 | |
Diluted | $ | 0.79 | | $ | 0.87 | | | $ | 2.57 | | $ | 2.85 | |
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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 nine months ended February 28, 2023, 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, 2022.
The majority of derivatives outstanding as of February 28, 2023, are designated as foreign currency cash flow hedges, primarily for Euro/U.S. Dollar, Chinese Yuan/U.S. Dollar, British Pound/Euro and Japanese Yen/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 tables present the fair values of derivative instruments included within the Unaudited Condensed Consolidated Balance Sheets:
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| DERIVATIVE ASSETS |
| BALANCE SHEET LOCATION | FEBRUARY 28, | | MAY 31, |
(Dollars in millions) | 2023 | | 2022 |
Derivatives formally designated as hedging instruments: | | | | |
Foreign exchange forwards and options | Prepaid expenses and other current assets | $ | 530 | | | $ | 639 | |
Foreign exchange forwards and options | Deferred income taxes and other assets | 100 | | | 206 | |
Total derivatives formally designated as hedging instruments | | 630 | | | 845 | |
Derivatives not designated as hedging instruments: | | | | |
Foreign exchange forwards and options | Prepaid expenses and other current assets | 21 | | | 30 | |
Embedded derivatives | Prepaid expenses and other current assets | 5 | | | 5 | |
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Total derivatives not designated as hedging instruments | | 26 | | | 35 | |
TOTAL DERIVATIVE ASSETS | | $ | 656 | | | $ | 880 | |
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| DERIVATIVE LIABILITIES |
| BALANCE SHEET LOCATION | FEBRUARY 28, | | MAY 31, |
(Dollars in millions) | 2023 | | 2022 |
Derivatives formally designated as hedging instruments: | | | | |
Foreign exchange forwards and options | Accrued liabilities | $ | 93 | | | $ | 37 | |
Foreign exchange forwards and options | Deferred income taxes and other liabilities | 64 | | | 11 | |
Total derivatives formally designated as hedging instruments | | 157 | | | 48 | |
Derivatives not designated as hedging instruments: | | | | |
Foreign exchange forwards and options | Accrued liabilities | 19 | | | 28 | |
Embedded derivatives | Accrued liabilities | 2 | | | 1 | |
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Total derivatives not designated as hedging instruments | | 21 | | | 29 | |
TOTAL DERIVATIVE LIABILITIES | | $ | 178 | | | $ | 77 | |
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:
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| THREE MONTHS ENDED FEBRUARY 28, |
| 2023 | | 2022 |
(Dollars in millions) | TOTAL | AMOUNT OF GAIN (LOSS) ON CASH FLOW HEDGE ACTIVITY | | TOTAL | AMOUNT OF GAIN (LOSS) ON CASH FLOW HEDGE ACTIVITY |
Revenues | $ | 12,390 | | $ | 14 | | | $ | 10,871 | | $ | (22) | |
Cost of sales | 7,019 | | 182 | | | 5,804 | | 17 | |
Demand creation expense | 923 | | (1) | | | 854 | | — | |
Other (income) expense, net | (58) | | 90 | | | (94) | | 45 | |
Interest expense (income), net | (7) | | (2) | | | 53 | | (2) | |
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| NINE MONTHS ENDED FEBRUARY 28, |
| 2023 | | 2022 |
(Dollars in millions) | TOTAL | AMOUNT OF GAIN (LOSS) ON CASH FLOW HEDGE ACTIVITY | | TOTAL | AMOUNT OF GAIN (LOSS) ON CASH FLOW HEDGE ACTIVITY |
Revenues | $ | 38,392 | | $ | 9 | | | $ | 34,476 | | $ | (63) | |
Cost of sales | 21,695 | | 464 | | | 18,500 | | (79) | |
Demand creation expense | 2,968 | | (4) | | | 2,789 | | 1 | |
Other (income) expense, net | (283) | | 297 | | | (235) | | 56 | |
Interest expense (income), net | 22 | | (6) | | | 165 | | (5) | |
The following tables present the amounts affecting the Unaudited Condensed Consolidated Statements of Income:
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(Dollars 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 FEBRUARY 28, | | LOCATION OF GAIN (LOSS) RECLASSIFIED FROM ACCUMULATED OTHER COMPREHENSIVE INCOME (LOSS) INTO INCOME | | THREE MONTHS ENDED FEBRUARY 28, |
2023 | 2022 | | | 2023 | 2022 |
Derivatives designated as cash flow hedges: | | | | | | | |
Foreign exchange forwards and options | $ | 30 | | $ | (37) | | | Revenues | | $ | 14 | | $ | (22) | |
Foreign exchange forwards and options | (141) | | 4 | | | Cost of sales | | 182 | | 17 | |
Foreign exchange forwards and options | 1 | | — | | | Demand creation expense | | (1) | | — | |
Foreign exchange forwards and options | (65) | | 31 | | | Other (income) expense, net | | 90 | | 45 | |
Interest rate swaps(2) | — | | — | | | Interest expense (income), net | | (2) | | (2) | |
TOTAL DESIGNATED CASH FLOW HEDGES | $ | (175) | | $ | (2) | | | | | $ | 283 | | $ | 38 | |
(1)For the three months ended February 28, 2023 and 2022, the amounts recorded in Other (income) expense, net as a result of the discontinuance of cash flow hedges because the forecasted transactions were no longer probable of occurring were immaterial.
(2)Gains and losses associated with terminated interest rate swaps, which were previously designated as cash flow hedges and recorded in Accumulated other comprehensive income (loss), will be released through Interest expense (income), net over the term of the issued debt.
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(Dollars 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) |
NINE MONTHS ENDED FEBRUARY 28, | | LOCATION OF GAIN (LOSS) RECLASSIFIED FROM ACCUMULATED OTHER COMPREHENSIVE INCOME (LOSS) INTO INCOME | | NINE MONTHS ENDED FEBRUARY 28, |
2023 | 2022 | | | 2023 | 2022 |
Derivatives designated as cash flow hedges: | | | | | | | |
Foreign exchange forwards and options | $ | 52 | | $ | (74) | | | Revenues | | $ | 9 | | $ | (63) | |
Foreign exchange forwards and options | 245 | | 522 | | | Cost of sales | | 464 | | (79) | |
Foreign exchange forwards and options | (2) | | (3) | | | Demand creation expense | | (4) | | 1 | |
Foreign exchange forwards and options | 181 | | 304 | | | Other (income) expense, net | | 297 | | 56 | |
Interest rate swaps(2) | — | | — | | | Interest expense (income), net | | (6) | | (5) | |
TOTAL DESIGNATED CASH FLOW HEDGES | $ | 476 | | $ | 749 | | | | | $ | 760 | | $ | (90) | |
(1)For the nine months ended February 28, 2023 and 2022, the amounts recorded in Other (income) expense, net as a result of the discontinuance of cash flow hedges because the forecasted transactions were no longer probable of occurring were immaterial.
(2)Gains and losses associated with terminated interest rate swaps, which were previously designated as cash flow hedges and recorded in Accumulated other comprehensive income (loss), will be released through Interest expense (income), net over the term of the issued debt.
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| AMOUNT OF GAIN (LOSS) RECOGNIZED IN INCOME ON DERIVATIVES | LOCATION OF GAIN (LOSS) RECOGNIZED IN INCOME ON DERIVATIVES |
| THREE MONTHS ENDED FEBRUARY 28, | | NINE MONTHS ENDED FEBRUARY 28, |
(Dollars in millions) | 2023 | 2022 | | 2023 | 2022 |
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