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Item 1. Financial Statements

2022-10-06 compared with 2022-04-05 · 110 added, 261 removed, 490 unchanged (43% of the section changed)

1 unchanged sentence

UNAUDITED CONDENSED CONSOLIDATED STATEMENTS OF INCOME

THREE MONTHS ENDED FEBRUARY 28, NINE MONTHS ENDED FEBRUARY 28,

THREE MONTHS ENDED AUGUST 31,

(In millions, except per share data)

2022 2021 2022 2021

Revenues $ 12,687 $ 12,248

17 unchanged sentences

UNAUDITED CONDENSED CONSOLIDATED STATEMENTS OF COMPREHENSIVE INCOME

THREE MONTHS ENDED FEBRUARY 28, NINE MONTHS ENDED FEBRUARY 28,

THREE MONTHS ENDED AUGUST 31,

(Dollars in millions)

2022 2021 2022 2021

Net income $ 1,468 $ 1,874

7 unchanged sentences

UNAUDITED CONDENSED CONSOLIDATED BALANCE SHEETS

FEBRUARY 28, MAY 31,

AUGUST 31, MAY 31,

(In millions)

24 unchanged sentences

Deferred income taxes and other liabilities 2,689 2,613

Commitments and contingencies (Note 12)

Redeemable preferred stock — —

5 unchanged sentences

Accumulated other comprehensive income (loss) 636 318

Retained earnings (deficit) 3,521 3,179

Retained earnings 3,535 3,476

Total shareholders' equity 15,822 15,281

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UNAUDITED CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS

NINE MONTHS ENDED FEBRUARY 28,

THREE MONTHS ENDED AUGUST 31,

(Dollars in millions)

22 unchanged sentences

Increase (decrease) in notes payable ( 1 ) 13

Repayment of borrowings — ( 196 )

Proceeds from exercise of stock options and other stock issuances 82 473

12 unchanged sentences

UNAUDITED CONDENSED CONSOLIDATED STATEMENTS OF SHAREHOLDERS' EQUITY

COMMON STOCK CAPITAL IN EXCESS OF STATED VALUE ACCUMULATED OTHER COMPREHENSIVE INCOME (LOSS) RETAINED EARNINGS (DEFICIT) TOTAL

COMMON STOCK CAPITAL IN EXCESS OF STATED VALUE ACCUMULATED OTHER COMPREHENSIVE INCOME (LOSS) RETAINED EARNINGS TOTAL

CLASS A CLASS B

1 unchanged sentence

SHARES AMOUNT SHARES AMOUNT

Balance at November 30, 2021 305 $ — 1,278 $ 3 $ 10,990 $ 145 $ 3,786 $ 14,924

Balance at May 31, 2022 305 $ — 1,266 $ 3 $ 11,484 $ 318 $ 3,476 $ 15,281

Stock options exercised 2 80 80

Repurchase of Class B common stock ( 9 ) ( 66 ) ( 925 ) ( 991 )

Dividends on common stock ($ 0.305 per share)

Dividends on common stock ($ 0.305 per share) and preferred stock ($ 0.10 per share)

( 482 ) ( 482 )

3 unchanged sentences

Other comprehensive income (loss) 318 318

Balance at February 28, 2022 305 $ — 1,271 $ 3 $ 11,186 $ 99 $ 3,521 $ 14,809

COMMON STOCK CAPITAL IN EXCESS OF STATED VALUE ACCUMULATED OTHER COMPREHENSIVE INCOME (LOSS) RETAINED EARNINGS (DEFICIT) TOTAL

Balance at August 31, 2022 305 $ — 1,259 $ 3 $ 11,648 $ 636 $ 3,535 $ 15,822

COMMON STOCK CAPITAL IN EXCESS OF STATED VALUE ACCUMULATED OTHER COMPREHENSIVE INCOME (LOSS) RETAINED EARNINGS TOTAL

CLASS A CLASS B

1 unchanged sentence

SHARES AMOUNT SHARES AMOUNT

Balance at November 30, 2020 305 $ — 1,270 $ 3 $ 9,336 $ ( 429 ) $ 1,730 $ 10,640

Stock options exercised 4 187 187

Dividends on common stock ($ 0.275 per share)

( 436 ) ( 436 )

Issuance of shares to employees, net of shares withheld for employee taxes ( 20 ) ( 14 ) ( 34 )

Stock-based compensation 142 142

Net income 1,449 1,449

Other comprehensive income (loss) ( 17 ) ( 17 )

Balance at February 28, 2021 305 $ — 1,274 $ 3 $ 9,645 $ ( 446 ) $ 2,729 $ 11,931

COMMON STOCK CAPITAL IN EXCESS OF STATED VALUE ACCUMULATED OTHER COMPREHENSIVE INCOME (LOSS) RETAINED EARNINGS (DEFICIT) 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

7 unchanged sentences

Other comprehensive income (loss) 313 313

Balance at February 28, 2022 305 $ — 1,271 $ 3 $ 11,186 $ 99 $ 3,521 $ 14,809

COMMON STOCK CAPITAL IN EXCESS OF STATED VALUE ACCUMULATED OTHER COMPREHENSIVE INCOME (LOSS) RETAINED EARNINGS (DEFICIT) TOTAL

CLASS A CLASS B

(In millions, except per share data) SHARES AMOUNT SHARES AMOUNT

Balance at May 31, 2020 315 $ — 1,243 $ 3 $ 8,299 $ ( 56 ) $ ( 191 ) $ 8,055

Stock options exercised 19 844 844

Conversion to Class B Common Stock ( 10 ) 10 —

Dividends on common stock ($ 0.795 per share) and preferred stock ($ 0.10 per share)

( 1,256 ) ( 1,256 )

Issuance of shares to employees, net of shares withheld for employee taxes 2 35 ( 42 ) ( 7 )

Stock-based compensation 467 467

Net income 4,218 4,218

Other comprehensive income (loss) ( 390 ) ( 390 )

Balance at February 28, 2021 305 $ — 1,274 $ 3 $ 9,645 $ ( 446 ) $ 2,729 $ 11,931

Balance at August 31, 2021 305 $ — 1,278 $ 3 $ 10,521 $ ( 67 ) $ 3,886 $ 14,343

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

4 unchanged sentences

NOTE 4 Fair Value Measurements

Note 5 Short-Term Borrowings and Credit Lines

NOTE 5 Income Taxes

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NOTE 11 Operating Segments

NOTE 12 Contingencies

NOTE 13 Acquisitions and Divestitures

Note 14 Restructuring

NOTE 1 — SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES

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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, 2022, are not necessarily indicative of results to be expected for the entire fiscal year.

The extent to which the COVID-19 pandemic impacts the Company's financial statements depends on a number of factors, including the magnitude and duration of the pandemic.

There have been and may continue to be developments outside of the Company's control, including new COVID-19 variants, that require the Company to make adjustments to its operating plan, such as store operating hours and the timeline to return to normal production volumes in factories impacted by COVID-19.

Such developments and other potential impacts of COVID-19, such as new or prolonged factory closures, higher inventory levels or inventory shortages in various markets, other adverse impacts on the global supply chain, revised payment terms with certain of its wholesale customers, higher sales-related reserves, factory cancellation costs and a volatile effective tax rate driven by changes in the mix of earnings across its jurisdictions, among other factors, could have material adverse impacts on the Company's revenue growth as well as its overall profitability in future periods.

As a result of these circumstances, COVID-19 related disruptions are making it more challenging to compare the Company's performance, including its revenue growth and overall profitability, across quarters and fiscal years, and the Company expects that the operating environment could remain volatile as COVID-19 variants may continue to cause disruption to operations.

The results of operations for the three months ended August 31, 2022, 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, higher inventory levels in various markets, higher inventory obsolescence reserves, higher promotional activity, reduced demand for product, reduced orders from wholesale customers for product and order cancellations.

There could also be new 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.

NOTE 2 — INVENTORIES

Inventory balances of $ 7,700 million and $ 6,854 million at February 28, 2022 and May 31, 2021, respectively, were substantially all finished goods.

Inventory balances of $ 9,662 million and $ 8,420 million at August 31, 2022 and May 31, 2022, respectively, were substantially all finished goods.

NOTE 3 — ACCRUED LIABILITIES

Accrued liabilities included the following:

FEBRUARY 28, MAY 31,

AUGUST 31, MAY 31,

(Dollars in millions) 2022 2022

Compensation and benefits, excluding taxes $ 980 $ 1,297

Collateral received from counterparties to hedging instruments 962 486

Sales-related reserves 950 1,015

Dividends payable 486 436

Import and logistics costs 626 489

Allowance for expected loss on sale (1)

5 unchanged sentences

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, 2022 and May 31, 2021, and indicate the level in the fair value hierarchy in which the Company classifies the fair value measurement:

FEBRUARY 28, 2022

The following tables present information about the Company's financial assets 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:

AUGUST 31, 2022

(Dollars in millions)

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Time deposits 968 863 105

Agency securities 8 — 8

Total Level 2 7,275 6,473 802

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TOTAL $ 12,997 $ 8,574 $ 4,423

As of February 28, 2022, the Company held $ 4,077 million of available-for-sale debt securities with maturity dates within one year and $ 686 million with maturity dates over one year and less than five years in Short-term investments on the Unaudited Condensed Consolidated Balance Sheets.

As of August 31, 2022, the Company held $ 3,165 million of available-for-sale debt securities with maturity dates within one year and $ 1,485 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 $ 22 million and $ 8 million for the three months ended February 28, 2022 and 2021, respectively, and $ 57 million and $ 21 million for the nine months ended February 28, 2022 and 2021, respectively.

Included in Interest expense (income), net was interest income related to the Company's investment portfolio of $ 65 million and $ 17 million for the three months ended August 31, 2022 and 2021, 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:

FEBRUARY 28, 2022

AUGUST 31, 2022

DERIVATIVE ASSETS DERIVATIVE LIABILITIES

5 unchanged sentences

TOTAL $ 1,429 $ 1,052 $ 377 $ 43 $ 39 $ 4

(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 $ 107 million as of February 28, 2022.

As of that date, the Company received $ 62 million of cash collateral from various counterparties related to foreign exchange derivative instruments.

No amount of collateral was posted on the derivative liability balance as of February 28, 2022.

As of that date, the Company received $ 962 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 August 31, 2022.

DERIVATIVE ASSETS DERIVATIVE LIABILITIES

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(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 had posted $ 39 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 May 31, 2021.

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 8 — Risk Management and Derivatives.

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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 $ 9,719 million at February 28, 2022 and $ 10,275 million at May 31, 2021.

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 fair value of the Company's Long-term debt, including the current portion, was approximately $ 8,600 million at August 31, 2022 and $ 8,933 million at May 31, 2022.

The carrying amounts reflected on the Unaudited Condensed Consolidated Balance Sheets for Notes payable approximate fair value.

As of February 28, 2022 and May 31, 2021, the Company had no borrowings outstanding under its $ 3 billion commercial paper program.

On March 11, 2022, subsequent to the end of the third quarter of fiscal 2022, 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 10, 2023, 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 15, 2021, which would have matured on March 14, 2022.

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 5, 2022, no amounts were outstanding under this committed credit facility.

On March 11, 2022, the Company also entered into a five-year committed credit facility agreement with a syndicate of banks which provides for up to $ 2 billion of borrowings, with the option to increase borrowings up to $ 3 billion in total with lender approval.

The facility matures on March 11, 2027, with options to extend the maturity date up to an additional two years .

This facility replaces the prior $ 2 billion five-year credit facility agreement entered into on August 16, 2019, which would have matured on August 16, 2024.

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 SOFR for the applicable interest period plus 0.60 %.

The facility fee is 0.04 % of the total undrawn commitment.

As of April 5, 2022, 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, 2021.

NOTE 5 — INCOME TAXES

The effective tax rate was 12.7 % and 12.3 % for the nine months ended February 28, 2022 and 2021, respectively.

The increase in the Company's effective tax rate was primarily due to the impact of recently finalized U.S.

tax regulations published by the U.S.

Treasury and Internal Revenue Service ("IRS") on January 4, 2022.

These regulations overhaul various components of the foreign tax credit regime including the determination of creditable foreign taxes and limit the amount of foreign taxes that are creditable against U.S.

income taxes.

While these regulations are generally effective on March 7, 2022, some retroactive provisions limit the Company's ability to claim credits on certain foreign taxes as of the third quarter of fiscal 2022.

The increase in the Company's effective tax rate was partially offset by changes in discrete items compared to the first nine months of fiscal 2021, including the recognition of a reserve in the first quarter of fiscal 2021 related to Altera Corp.

Commissioner .

As of February 28, 2022, total gross unrecognized tax benefits, excluding related interest and penalties, were $ 871 million, $ 648 million of which would affect the Company's effective tax rate if recognized in future periods.

The effective tax rate was 19.7 % and 11.0 % for the three months ended August 31, 2022 and 2021, respectively.

The increase in the Company's effective tax rate was primarily due to a less favorable impact from stock-based compensation.

As of August 31, 2022, total gross unrecognized tax benefits, excluding related interest and penalties, were $ 861 million, $ 638 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.

The liability for payment of interest and penalties increased by $ 27 million during the nine months ended February 28, 2022.

As of February 28, 2022 and May 31, 2021, accrued interest and penalties related to uncertain tax positions were $ 230 million and $ 203 million, respectively, (excluding federal benefit) and included within Deferred income taxes and other liabilities on the Unaudited Condensed Consolidated Balance Sheets.

As of August 31, 2022 and May 31, 2022, accrued interest and penalties related to uncertain tax positions were $ 262 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.

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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.

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).

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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 FEBRUARY 28, NINE MONTHS ENDED FEBRUARY 28,

THREE MONTHS ENDED AUGUST 31,

(Dollars in millions)

2022 2021 2022 2021

Stock options (1)

$ 75 $ 73 $ 221 $ 250

ESPPs 15 15 44 50

Restricted stock and restricted stock units (1)(2)

71 54 202 167

TOTAL STOCK-BASED COMPENSATION EXPENSE $ 170 $ 136

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Accelerated stock option expense is primarily recorded for employees meeting certain retirement eligibility requirements.

An immaterial amount of accelerated stock option and restricted stock expense was also recorded for certain employees impacted by the Company's organizational realignment;

for more information see Note 14 — Restructuring.

(2) Includes expense for performance-based restricted stock units granted during the nine months ended February 28, 2022.

The income tax benefit related to stock-based compensation expense was $ 34 million and $ 67 million for the three months ended February 28, 2022 and 2021, respectively, and $ 307 million and $ 256 million for the nine months ended February 28, 2022 and 2021, respectively.

(2) Restricted stock units include RSUs and PSUs.

The income tax benefit related to stock-based compensation expense was $ 20 million and $ 186 million for the three months ended August 31, 2022 and 2021, respectively, and reported within Income tax expense.

STOCK OPTIONS

The weighted average fair value per share of the options granted during the nine months ended February 28, 2022 and 2021, computed as of the grant date using the Black-Scholes pricing model, was $ 37.53 and $ 26.75 , respectively.

The weighted average fair value per share of the options granted during the three months ended August 31, 2022 and 2021, computed as of the grant date using the Black-Scholes pricing model, was $ 32.13 and $ 38.64 , respectively.

The weighted average assumptions used to estimate these fair values were as follows:

NINE MONTHS ENDED FEBRUARY 28,

THREE MONTHS ENDED AUGUST 31,

Dividend yield 0.8 % 0.7 %

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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 February 28, 2022, the Company had $ 484 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.

As of August 31, 2022, the Company had $ 370 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.

RESTRICTED STOCK AND RESTRICTED STOCK UNITS

The weighted average fair value per share of restricted stock and restricted stock units granted for the nine months ended February 28, 2022 and 2021, computed as of the grant date, was $ 158.94 and $ 112.44 , respectively.

During the nine months ended February 28, 2022, under the Stock Incentive Plan, the Company granted performance-based restricted stock units (PSUs), which were historically in the form of cash-based long-term incentive awards under the Company's Long-Term Incentive Plan.

The Company estimates the fair value of these PSUs as of the grant date using a Monte Carlo simulation.

The weighted average fair value per share of PSUs granted for the nine months ended February 28, 2022, computed as of the grant date, was $ 250.52 .

The impact of granting PSUs during the nine months ended February 28, 2022, was not material to the Company's Unaudited Condensed Consolidated Financial Statements.

As of February 28, 2022, the Company had $ 629 million of unrecognized compensation costs from restricted stock, restricted stock units and PSUs, 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.

The weighted average fair value per share of restricted stock and RSUs granted for the three months ended August 31, 2022 and 2021, computed as of the grant date, was $ 112.83 and $ 161.46 , respectively.

The weighted average fair value per share of PSUs granted for the three months ended August 31, 2022 and 2021, computed as of the grant date, was $ 137.77 and $ 247.06 , respectively.

The impact of granting PSUs for the three months ended August 31, 2022 and 2021, was not material to the Company's Unaudited Condensed Consolidated Financial Statements.

As of August 31, 2022, the Company had $ 659 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 2.4 years.

NOTE 7 — 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 restricted stock, restricted stock units and options, including shares under ESPPs, to purchase an additional 9.3 million shares of common stock outstanding for the three months ended February 28, 2022, because the awards were anti-dilutive.

The amount of anti-dilutive awards for the three months ended February 28, 2021, was insignificant.

For the nine months ended February 28, 2022 and 2021, the computations of diluted earnings per common share excluded 9.4 million and 11.6 million shares of common stock outstanding, respectively, because the awards were anti-dilutive.

THREE MONTHS ENDED FEBRUARY 28, NINE MONTHS ENDED FEBRUARY 28,

The computations of diluted earnings per common share excluded restricted stock, restricted stock units and options, including shares under ESPPs, to purchase an estimated additional 23.8 million and 1.1 million shares of common stock outstanding for the three months ended August 31, 2022 and 2021, respectively, because the awards were assumed to be anti-dilutive.

THREE MONTHS ENDED AUGUST 31,

(In millions, except per share data)

2022 2021 2022 2021

Net income available to common stockholders $ 1,468 $ 1,874

8 unchanged sentences

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, 2022, 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.

As of and for the three months ended August 31, 2022, 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, 2022, are designated as foreign currency cash flow hedges, primarily for Euro/U.S.

Dollar, British Pound/Euro, Chinese Yuan/U.S.

Dollar and Japanese Yen/U.S.

The majority of derivatives outstanding as of August 31, 2022, 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.

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DERIVATIVE ASSETS

BALANCE SHEET LOCATION FEBRUARY 28, MAY 31,

BALANCE SHEET LOCATION AUGUST 31, MAY 31,

(Dollars in millions)

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DERIVATIVE LIABILITIES

BALANCE SHEET LOCATION FEBRUARY 28, MAY 31,

BALANCE SHEET LOCATION AUGUST 31, MAY 31,

(Dollars in millions)

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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:

THREE MONTHS ENDED FEBRUARY 28,

(Dollars in millions)

TOTAL AMOUNT OF GAIN (LOSS)

HEDGE ACTIVITY TOTAL AMOUNT OF GAIN (LOSS)

HEDGE ACTIVITY

Revenues $ 10,871 $ ( 22 ) $ 10,357 $ 16

Cost of sales 5,804 17 5,638 ( 35 )

Demand creation expense 854 — 711 1

Other (income) expense, net ( 94 ) 45 ( 22 ) ( 26 )

Interest expense (income), net 53 ( 2 ) 64 ( 2 )

NINE MONTHS ENDED FEBRUARY 28,

THREE MONTHS ENDED AUGUST 31,

(Dollars in millions)

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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,

2022 2021 2022 2021

Derivatives designated as

cash flow hedges:

Foreign exchange forwards

$ ( 37 ) $ ( 38 ) Revenues $ ( 22 ) $ 16

Foreign exchange forwards

4 ( 99 ) Cost of sales 17 ( 35 )

Foreign exchange forwards

— 1 Demand creation expense — 1

Foreign exchange forwards

31 ( 24 ) Other (income) expense, net 45 ( 26 )

Interest rate swaps (2)

— — Interest expense (income), net ( 2 ) ( 2 )

TOTAL DESIGNATED CASH FLOW HEDGES $ ( 2 ) $ ( 160 ) $ 38 $ ( 46 )

(1) For the three months ended February 28, 2022 and 2021, 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.

(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)

THREE MONTHS ENDED AUGUST 31, LOCATION OF GAIN (LOSS)

RECLASSIFIED FROM ACCUMULATED

OTHER COMPREHENSIVE INCOME

(LOSS) INTO INCOME NINE MONTHS ENDED FEBRUARY 28,

(LOSS) INTO INCOME THREE MONTHS ENDED AUGUST 31,

2022 2021 2022 2021

Derivatives designated as

cash flow hedges:

Foreign exchange forwards

$ ( 74 ) $ ( 32 ) Revenues $ ( 63 ) $ 56

Foreign exchange forwards

522 ( 539 ) Cost of sales ( 79 ) 110

Foreign exchange forwards

( 3 ) 4 Demand creation expense 1 2

Foreign exchange forwards

304 ( 183 ) Other (income) expense, net 56 ( 31 )

Derivatives designated as cash flow hedges:

Foreign exchange forwards and options $ 25 $ ( 6 ) Revenues $ ( 9 ) $ ( 21 )

Foreign exchange forwards and options 487 265 Cost of sales 109 ( 66 )

Foreign exchange forwards and options ( 5 ) ( 1 ) Demand creation expense ( 1 ) 1

Foreign exchange forwards and options 293 130 Other (income) expense, net 82 ( 9 )

Interest rate swaps (2)

1 unchanged sentence

TOTAL DESIGNATED CASH FLOW HEDGES $ 800 $ 388 $ 179 $ ( 97 )

(1) For the nine months ended February 28, 2022 and 2021, 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.

(1) For the three months ended August 31, 2022 and 2021, 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.

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ON DERIVATIVES

THREE MONTHS ENDED FEBRUARY 28, NINE MONTHS ENDED FEBRUARY 28,

THREE MONTHS ENDED AUGUST 31,

(Dollars in millions)

2022 2021 2022 2021

Derivatives not designated as hedging instruments:

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In rare circumstances, the additional period of time may exceed two months due to extenuating circumstances related to the nature of the forecasted transaction that are outside the control or influence of the Company.

The total notional amount of outstanding foreign currency derivatives designated as cash flow hedges was approximately $ 17.2 billion as of February 28, 2022.

Approximately $ 305 million of deferred net gains (net of tax) on both outstanding and matured derivatives in Accumulated other comprehensive income (loss) as of February 28, 2022, are expected to be reclassified to Net income during the next 12 months concurrent with the underlying hedged transactions also being recorded in Net income.

The total notional amount of outstanding foreign currency derivatives designated as cash flow hedges was approximately $ 15.9 billion as of August 31, 2022.

Approximately $ 971 million of deferred net gains (net of tax) on both outstanding and matured derivatives in Accumulated other comprehensive income (loss) as of August 31, 2022, are expected to be reclassified to Net income during the next 12 months concurrent with the underlying hedged transactions also being recorded in Net income.

Actual amounts ultimately reclassified to Net income are dependent on the exchange rates in effect when derivative contracts currently outstanding mature.

As of February 28, 2022, the maximum term over which the Company hedges exposures to the variability of cash flows for its forecasted transactions was 27 months.

As of August 31, 2022, the maximum term over which the Company hedges exposures to the variability of cash flows for its forecasted transactions was 33 months.

UNDESIGNATED DERIVATIVE INSTRUMENTS

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These undesignated instruments are recorded at fair value as a derivative asset or liability on the Unaudited Condensed Consolidated Balance Sheets with their corresponding change in fair value recognized in Other (income) expense, net, together with the remeasurement gain or loss from the hedged balance sheet position and/or embedded derivative contract.

The total notional amount of outstanding undesignated derivative instruments was $ 3.2 billion as of February 28, 2022.

The total notional amount of outstanding undesignated derivative instruments was $ 4 billion as of August 31, 2022.

EMBEDDED DERIVATIVES

Embedded derivative contracts are treated as foreign currency forward contracts that are bifurcated from the related contract and recorded at fair value as a derivative asset or liability on the Unaudited Condensed Consolidated Balance Sheets with their corresponding change in fair value recognized in Other (income) expense, net, through the date the foreign currency fluctuations cease to exist.

As of February 28, 2022, the total notional amount of embedded derivatives outstanding was approximately $ 589 million.

As of August 31, 2022, the total notional amount of embedded derivatives outstanding was approximately $ 434 million.

The Company's bilateral credit-related contingent features generally require the owing entity, either the Company or the derivative counterparty, to post collateral for the portion of the fair value in excess of $ 50 million should the fair value of outstanding derivatives per counterparty be greater than $ 50 million.

Additionally, a certain level of decline in credit rating of either the Company or the counterparty could trigger collateral requirements.

As of February 28, 2022, the Company was in compliance with all credit risk-related contingent features, and derivative instruments with such features were in a net asset position of approximately $ 375 million.

As of August 31, 2022, the Company was in compliance with all credit risk-related contingent features, and derivative instruments with such features were in a net asset position of approximately $ 1.4 billion.

Accordingly, the Company was not required to post cash collateral as a result of these contingent features.

Further, $ 62 million of collateral was received on the Company's derivative asset balance as of February 28, 2022.

Further, $ 962 million of collateral was received on the Company's derivative asset balance as of August 31, 2022.

The Company considers the impact of the risk of counterparty default to be immaterial.

5 unchanged sentences

CASH FLOW HEDGES NET INVESTMENT HEDGES (1)

Balance at November 30, 2021 $ ( 281 ) $ 369 $ 115 $ ( 58 ) $ 145

Other comprehensive income (loss):

Other comprehensive gains (losses) before reclassifications (2)

( 6 ) 4 — ( 7 ) ( 9 )

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

— ( 33 ) — ( 4 ) ( 37 )

Total other comprehensive income (loss) ( 6 ) ( 29 ) — ( 11 ) ( 46 )

Balance at February 28, 2022 $ ( 287 ) $ 340 $ 115 $ ( 69 ) $ 99

(1) The accumulated foreign currency translation adjustment and net investment hedge gains/losses related to an investment in a foreign subsidiary are reclassified to Net income upon sale or upon complete or substantially complete liquidation of the respective entity.

(2) Net of tax benefit (expense) of $ 0 million , $ 6 million, $ 0 million , $ 2 million and $ 8 million, respectively.

(3) Net of tax (benefit) expense of $ 0 million , $ 5 million, $ 0 million , $ 1 million and $ 6 million, respectively.

(Dollars in millions)

FOREIGN CURRENCY TRANSLATION ADJUSTMENT (1)

CASH FLOW HEDGES NET INVESTMENT HEDGES (1)

Balance at November 30, 2020 $ ( 98 ) $ ( 371 ) $ 115 $ ( 75 ) $ ( 429 )

Other comprehensive income (loss):

Other comprehensive gains (losses) before reclassifications (2)

99 ( 163 ) — ( 6 ) ( 70 )

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

( 1 ) 46 — 8 53

Total other comprehensive income (loss) 98 ( 117 ) — 2 ( 17 )

Balance at February 28, 2021 $ — $ ( 488 ) $ 115 $ ( 73 ) $ ( 446 )

(2) Net of tax benefit (expense) of $ 0 million , $( 3 ) million, $ 0 million , $ 1 million and $( 2 ) million, respectively.

(3) Net of tax (benefit) expense of $ 0 million , $ 0 million , $ 0 million , $ 0 million and $ 0 million , respectively.

(Dollars in millions)

FOREIGN CURRENCY TRANSLATION ADJUSTMENT (1)

CASH FLOW HEDGES NET INVESTMENT HEDGES (1)

Balance at May 31, 2022 $ ( 520 ) $ 779 $ 115 $ ( 56 ) $ 318

5 unchanged sentences

Total other comprehensive income (loss) ( 226 ) 555 — ( 11 ) 318

Balance at February 28, 2022 $ ( 287 ) $ 340 $ 115 $ ( 69 ) $ 99

Balance at August 31, 2022 $ ( 746 ) $ 1,334 $ 115 $ ( 67 ) $ 636

11 unchanged sentences

Total other comprehensive income (loss) ( 128 ) 438 — 3 313

Balance at February 28, 2021 $ — $ ( 488 ) $ 115 $ ( 73 ) $ ( 446 )

Balance at August 31, 2021 $ ( 126 ) $ 3 $ 115 $ ( 59 ) $ ( 67 )

6 unchanged sentences

(LOSS) INTO INCOME

THREE MONTHS ENDED FEBRUARY 28, NINE MONTHS ENDED FEBRUARY 28,

THREE MONTHS ENDED AUGUST 31,

(Dollars in millions)

2022 2021 2022 2021

Gains (losses) on foreign currency translation adjustment $ — $ 1 $ — $ 2 Other expense (income), net

Gains (losses) on foreign currency translation adjustment $ ( 46 ) $ — Other (income) expense, net

Total before tax ( 46 ) —

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The following tables present the Company's Revenues disaggregated by reportable operating segment, major product line and distribution channel:

THREE MONTHS ENDED FEBRUARY 28, 2022

(Dollars in millions)

NORTH AMERICA EUROPE, MIDDLE EAST & AFRICA GREATER CHINA ASIA PACIFIC & LATIN AMERICA GLOBAL BRAND DIVISIONS TOTAL NIKE BRAND CONVERSE CORPORATE TOTAL NIKE, INC.

Footwear $ 2,532 $ 1,569 $ 1,554 $ 1,005 $ — $ 6,660 $ 503 $ — $ 7,163

Apparel 1,207 1,083 548 394 — 3,232 29 — 3,261

Equipment 143 127 58 62 — 390 7 — 397

Other — — — — 41 41 28 ( 19 ) 50

TOTAL REVENUES $ 3,882 $ 2,779 $ 2,160 $ 1,461 $ 41 $ 10,323 $ 567 $ ( 19 ) $ 10,871

Sales to Wholesale Customers $ 1,769 $ 1,858 $ 1,241 $ 860 $ — $ 5,728 $ 303 $ — $ 6,031

Sales through Direct to Consumer 2,113 921 919 601 — 4,554 236 — 4,790

Other — — — — 41 41 28 ( 19 ) 50

TOTAL REVENUES $ 3,882 $ 2,779 $ 2,160 $ 1,461 $ 41 $ 10,323 $ 567 $ ( 19 ) $ 10,871

THREE MONTHS ENDED FEBRUARY 28, 2021

(Dollars in millions)

NORTH AMERICA EUROPE, MIDDLE EAST & AFRICA GREATER CHINA ASIA PACIFIC & LATIN AMERICA GLOBAL BRAND DIVISIONS TOTAL NIKE BRAND CONVERSE CORPORATE TOTAL NIKE, INC.

Footwear $ 2,382 $ 1,606 $ 1,614 $ 903 $ — $ 6,505 $ 513 $ — $ 7,018

Apparel 1,087 898 616 365 — 2,966 28 — 2,994

Equipment 95 105 49 47 — 296 6 — 302

Other — — — — 6 6 23 14 43

TOTAL REVENUES $ 3,564 $ 2,609 $ 2,279 $ 1,315 $ 6 $ 9,773 $ 570 $ 14 $ 10,357

Sales to Wholesale Customers $ 1,894 $ 1,805 $ 1,269 $ 846 $ — $ 5,814 $ 366 $ — $ 6,180

Sales through Direct to Consumer 1,670 804 1,010 469 — 3,953 181 — 4,134

Other — — — — 6 6 23 14 43

TOTAL REVENUES $ 3,564 $ 2,609 $ 2,279 $ 1,315 $ 6 $ 9,773 $ 570 $ 14 $ 10,357

NINE MONTHS ENDED FEBRUARY 28, 2022

THREE MONTHS ENDED AUGUST 31, 2022

(Dollars in millions)

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TOTAL REVENUES $ 5,510 $ 3,333 $ 1,656 $ 1,535 $ 14 $ 12,048 $ 643 $ ( 4 ) $ 12,687

NINE MONTHS ENDED FEBRUARY 28, 2021

THREE MONTHS ENDED AUGUST 31, 2021

(Dollars in millions)

9 unchanged sentences

TOTAL REVENUES $ 4,879 $ 3,307 $ 1,982 $ 1,465 $ 7 $ 11,640 $ 629 $ ( 21 ) $ 12,248

For the three and nine months ended February 28, 2022 and 2021, Global Brand Divisions revenues included NIKE Brand licensing and other miscellaneous revenues that are not part of a geographic operating segment.

For the three months ended August 31, 2022 and 2021, Global Brand Divisions revenues included NIKE Brand licensing and other miscellaneous revenues that are not part of a geographic operating segment.

Converse Other revenues were primarily attributable to licensing businesses.

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

As of February 28, 2022 and May 31, 2021, the Company did not have any contract assets and had an immaterial amount of contract liabilities recorded in Accrued liabilities on the Unaudited Condensed Consolidated Balance Sheets.

As of August 31, 2022 and May 31, 2022, the Company did not have any contract assets and had an immaterial amount of contract liabilities recorded in Accrued liabilities on the Unaudited Condensed Consolidated Balance Sheets.

NOTE 11 — OPERATING SEGMENTS

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Accounts receivable, net, Inventories and Property, plant and equipment, net for operating segments are regularly reviewed by management and are therefore provided below.

THREE MONTHS ENDED FEBRUARY 28, NINE MONTHS ENDED FEBRUARY 28,

THREE MONTHS ENDED AUGUST 31,

(Dollars in millions)

2022 2021 2022 2021

North America $ 5,510 $ 4,879

19 unchanged sentences

INCOME BEFORE INCOME TAXES $ 1,828 $ 2,106

FEBRUARY 28, MAY 31,

AUGUST 31, MAY 31,

(Dollars in millions)

18 unchanged sentences

TOTAL INVENTORIES $ 9,662 $ 8,420

FEBRUARY 28, MAY 31,

AUGUST 31, MAY 31,

(Dollars in millions)

9 unchanged sentences

TOTAL PROPERTY, PLANT AND EQUIPMENT, NET $ 4,778 $ 4,791

(1) Excludes assets held-for-sale as of February 28, 2022 and May 31, 2021.

(1) Excludes assets held-for-sale as of August 31, 2022 and May 31, 2022.

See Note 13 — Acquisitions and Divestitures for additional information.

NOTE 12 — CONTINGENCIES

In the ordinary course of business, the Company is subject to various legal proceedings, claims and government investigations relating to its business, products and actions of its employees and representatives, including contractual and employment relationships, product liability, antitrust, customs, intellectual property and other matters.

The outcome of these legal matters is inherently uncertain, and the Company cannot predict the eventual outcome of currently pending matters, the timing of their ultimate resolution or the eventual losses, fines, penalties or consequences relating to those matters.

When a loss related to a legal proceeding or claim is probable and reasonably estimable, the Company accrues its best estimate for the ultimate resolution of the matter.

If one or more legal matters were to be resolved against the Company in a reporting period for amounts above management's expectations, the Company's financial position, operating results and cash flows for that reporting period could be materially adversely affected.

In the opinion of management, based on its current knowledge and after consultation with counsel, the Company does not believe any currently pending legal matters will have a material adverse impact on the Company's results of operations, financial position or cash flows, except as described below.

BELGIAN CUSTOMS CLAIM

The Company has received claims for certain years from the Belgian Customs Authorities for alleged underpaid duties related to products imported beginning in fiscal 2018.

The Company disputes these claims and has engaged in the appellate process.

At this time, the Company is unable to estimate the range of loss and cannot predict the final outcome as it could take several years to reach a resolution on this matter.

If this matter is ultimately resolved against the Company, the amounts owed, including fines, penalties and other consequences relating to the matter, could have a material adverse effect on the Company's results of operations, financial position and cash flows.

NOTE 13 — ACQUISITIONS AND DIVESTITURES

As previously disclosed in the Annual Report on Form 10-K for the fiscal year ended May 31, 2021, the Company remains committed to selling its legal entities in Argentina, Chile and Uruguay and granting distribution rights to third-party distributors.

As such, the assets and liabilities of the entities have remained classified as held-for-sale on the Unaudited Condensed Consolidated Balance Sheets.

As of February 28, 2022, held-for-sale assets were $ 201 million, primarily consisting of $ 75 million of Accounts receivable, net and $ 60 million of Inventories;

held-for-sale liabilities were $ 51 million, primarily consisting of $ 27 million of Accrued liabilities and $ 19 million of Accounts payable.

During the fourth quarter of fiscal 2022, the Company entered into separate definitive agreements to sell its entities in Argentina and Uruguay, as well as its entity in Chile, to third-party distributors.

The related assets and liabilities of these entities within the Company’s APLA operating segment were classified as held-for-sale on the Consolidated Balance Sheets within Prepaid expenses and other current assets and Accrued liabilities, respectively, until the transactions closed.

During the first quarter of fiscal 2023, the sale of the Company’s entity in Chile to a third-party distributor was completed.

The impacts from the transaction were not material to the Company’s Unaudited Condensed Consolidated Financial Statements.

ARGENTINA AND URUGUAY

As of August 31, 2022, held-for-sale assets were $ 99 million, primarily consisting of $ 38 million of Inventories and $ 23 million of Accounts receivable, net;

held-for-sale liabilities were $ 33 million.

Additionally, the Company has recognized cumulative expected net losses of $ 389 million within Other (income) expense, net, classified within Corporate, and a corresponding allowance within Accrued liabilities on the Unaudited Condensed Consolidated Balance Sheets.

A majority of these losses were recognized in fiscal 2020 upon meeting the held-for-sale criteria and are largely due to the anticipated release of the cumulative net foreign currency translation losses.

As of May 31, 2022, held-for-sale assets were $ 100 million, primarily consisting of $ 37 million of Inventories and $ 31 million of Accounts receivable, net;

held-for-sale liabilities were $ 72 million, primarily consisting of $ 25 million of Accounts payable and $ 22 million of Accrued liabilities.

As of February 28, 2022, the Company has recognized a total expected net loss related to the Argentina, Chile and Uruguay transaction of $ 344 million within Other (income) expense, net, classified within Corporate, and a corresponding allowance within Accrued liabilities on the Unaudited Condensed Consolidated Balance Sheets.

The initial expected loss of $ 405 million recognized in fiscal 2020 and the subsequent adjustments for changes in fair value are largely due to the anticipated release of the cumulative foreign currency translation losses.

These losses will be reclassified from Accumulated other comprehensive income (loss) to Net income upon sale of the legal entities.

NOTE 14 — RESTRUCTURING

In fiscal 2021, the Company announced a new digitally empowered phase of its Consumer Direct Offense strategy:

Consumer Direct Acceleration.

During fiscal 2021, the Company substantially completed a series of leadership and operating model changes to streamline and speed up the strategic execution of the Consumer Direct Acceleration.

For the three and nine months ended February 28, 2022 , the Co mpany recognized an immaterial amount of related employee termination costs and, to a lesser extent, stock-based compensation expense.

During the three months ended February 28, 2021, the Company recognized employee termination costs of $ 23 million and $ 6 million within Operating overhead expense and Cost of sales, respectively, and made cash payments of $ 99 million.

For the nine months ended February 28, 2021, the Company recognized employee termination costs of $ 168 million and $ 36 million within Operating overhead expense and Cost of sales, respectively, and made cash payments of $ 170 million.

Additionally, the related stock-based compensation expense recorded within Operating overhead expense and Cost of sales was immaterial for the three months ended February 28, 2021, and was $ 40 million and $ 4 million, respectively, for the nine months ended February 28, 2021 .

For all periods presented these costs were classified within Corporate.

held-for-sale liabilities were $ 37 million.

Subsequent to the end of the first quarter of fiscal 2023, the sale of the Company’s entities in Argentina and Uruguay to a third-party distributor was completed.

The net loss on the sale of these entities totaled approximately $ 550 million, $ 389 million of which was recognized by the Company in prior periods.

Upon completion of the sale, the remaining loss, primarily due to the devaluation of the local currency and cash equivalents included in the transfer of assets, will be recognized in the second quarter of fiscal 2023 within Other (income) expense, net, classified within Corporate.

Compared sentence by sentence after normalising whitespace, quotation marks, case and digits, so re-formatting and restated figures do not read as changed language. Wording changes appear as one removal and one addition. The current filing and the prior one are authoritative.

What changed 10-Q

Item 1. Financial Statements