NIKE, Inc. 10-Q

ITEM 1. FINANCIAL STATEMENTS NIKE, INC. UNAUDITED CONDENSED CONSOLIDATED STATEMENTS OF INCOME THREE MONTHS ENDED AUGUST 31, (In millions, except per share data) 2022 2021 Revenues $ 12,687 $ 12,248 Cost of sales 7,072 6,552 Gross profit 5,615 5,696 Demand creation expense 943 918 Operating overhead expense 2,977 2,654 Total selling and administrative expense 3,920 3,572 Interest expense (income), net 13 57 Other (income) expense, net ( 146 ) ( 39 ) Income before income taxes 1,828 2,106 Income tax expense 360 232 NET INCOME $ 1,468 $ 1,874 Earnings per common share: Basic $ 0.94 $ 1.18 Diluted $ 0.93 $ 1.16 Weighted average common shares outstanding: Basic 1,567.1 1,581.9 Diluted 1,585.8 1,619.6 The accompanying Notes to the Unaudited Condensed Consolidated Financial Statements are an integral part of this statement. 1 Table of Contents NIKE, INC. UNAUDITED CONDENSED CONSOLIDATED STATEMENTS OF COMPREHENSIVE INCOME THREE MONTHS ENDED AUGUST 31, (Dollars in millions) 2022 2021 Net income $ 1,468 $ 1,874 Other comprehensive income (loss), net of tax: Change in net foreign currency translation adjustment ( 226 ) ( 128 ) Change in net gains (losses) on cash flow hedges 555 438 Change in net gains (losses) on other ( 11 ) 3 Total other comprehensive income (loss), net of tax 318 313 TOTAL COMPREHENSIVE INCOME $ 1,786 $ 2,187 The accompanying Notes to the Unaudited Condensed Consolidated Financial Statements are an integral part of this statement. 2 Table of Contents NIKE, INC. UNAUDITED CONDENSED CONSOLIDATED BALANCE SHEETS AUGUST 31, MAY 31, (In millions) 2022 2022 ASSETS Current assets: Cash and equivalents $ 7,226 $ 8,574 Short-term investments 4,650 4,423 Accounts receivable, net 4,960 4,667 Inventories 9,662 8,420 Prepaid expenses and other current assets 2,379 2,129 Total current assets 28,877 28,213 Property, plant and equipment, net 4,778 4,791 Operating lease right-of-use assets, net 2,880 2,926 Identifiable intangible assets, net 283 286 Goodwill 282 284 Deferred income taxes and other assets 3,988 3,821 TOTAL ASSETS $ 41,088 $ 40,321 LIABILITIES AND SHAREHOLDERS' EQUITY Current liabilities: Current portion of long-term debt $ 500 $ 500 Notes payable 9 10 Accounts payable 3,371 3,358 Current portion of operating lease liabilities 424 420 Accrued liabilities 6,277 6,220 Income taxes payable 338 222 Total current liabilities 10,919 10,730 Long-term debt 8,922 8,920 Operating lease liabilities 2,736 2,777 Deferred income taxes and other liabilities 2,689 2,613 Commitments and contingencies (Note 12) Redeemable preferred stock — — Shareholders' equity: Common stock at stated value: Class A convertible — 305 and 305 shares outstanding — — Class B — 1,259 and 1,266 shares outstanding 3 3 Capital in excess of stated value 11,648 11,484 Accumulated other comprehensive income (loss) 636 318 Retained earnings 3,535 3,476 Total shareholders' equity 15,822 15,281 TOTAL LIABILITIES AND SHAREHOLDERS' EQUITY $ 41,088 $ 40,321 The accompanying Notes to the Unaudited Condensed Consolidated Financial Statements are an integral part of this statement. 3 Table of Contents NIKE, INC. UNAUDITED CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS THREE MONTHS ENDED AUGUST 31, (Dollars in millions) 2022 2021 Cash provided (used) by operations: Net income $ 1,468 $ 1,874 Adjustments to reconcile net income to net cash provided (used) by operations: Depreciation 169 177 Deferred income taxes ( 43 ) ( 145 ) Stock-based compensation 170 136 Amortization, impairment and other ( 9 ) ( 9 ) Net foreign currency adjustments 16 43 Changes in certain working capital components and other assets and liabilities: (Increase) decrease in accounts receivable ( 415 ) 36 (Increase) decrease in inventories ( 1,363 ) 101 (Increase) decrease in prepaid expenses, operating lease right-of-use assets and other current and non-current assets ( 128 ) ( 242 ) Increase (decrease) in accounts payable, accrued liabilities, operating lease liabilities and other current and non-current liabilities 492 ( 860 ) Cash provided (used) by operations 357 1,111 Cash provided (used) by investing activities: Purchases of short-term investments ( 2,469 ) ( 2,550 ) Maturities of short-term investments 1,432 2,096 Sales of short-term investments 948 1,037 Additions to property, plant and equipment ( 264 ) ( 184 ) Other investing activities 139 102 Cash provided (used) by investing activities ( 214 ) 501 Cash provided (used) by financing activities: Increase (decrease) in notes payable ( 1 ) 13 Proceeds from exercise of stock options and other stock issuances 82 473 Repurchase of common stock ( 983 ) ( 752 ) Dividends — common and preferred ( 480 ) ( 435 ) Other financing activities ( 22 ) ( 42 ) Cash provided (used) by financing activities ( 1,404 ) ( 743 ) Effect of exchange rate changes on cash and equivalents ( 87 ) ( 38 ) Net increase (decrease) in cash and equivalents ( 1,348 ) 831 Cash and equivalents, beginning of period 8,574 9,889 CASH AND EQUIVALENTS, END OF PERIOD $ 7,226 $ 10,720 Supplemental disclosure of cash flow information: Non-cash additions to property, plant and equipment $ 124 $ 103 Dividends declared and not paid 482 436 The accompanying Notes to the Unaudited Condensed Consolidated Financial Statements are an integral part of this statement. 4 Table of Contents NIKE, INC. UNAUDITED CONDENSED CONSOLIDATED STATEMENTS OF SHAREHOLDERS' EQUITY COMMON 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 2 80 80 Repurchase of Class B common stock ( 9 ) ( 66 ) ( 925 ) ( 991 ) Dividends on common stock ($ 0.305 per share) and preferred stock ($ 0.10 per share) ( 482 ) ( 482 ) Issuance of shares to employees, net of shares withheld for employee taxes ( 20 ) ( 2 ) ( 22 ) Stock-based compensation 170 170 Net income 1,468 1,468 Other comprehensive income (loss) 318 318 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 (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 10 469 469 Repurchase of Class B common stock ( 5 ) ( 29 ) ( 713 ) ( 742 ) Dividends on common stock ($ 0.275 per share) and preferred stock ($ 0.10 per share) ( 435 ) ( 435 ) Issuance of shares to employees, net of shares withheld for employee taxes ( 20 ) ( 19 ) ( 39 ) Stock-based compensation 136 136 Net income 1,874 1,874 Other comprehensive income (loss) 313 313 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. 5 Table of Contents NOTES TO THE UNAUDITED CONDENSED CONSOLIDATED FINANCIAL STATEMENTS NOTE 1 Summary of Significant Accounting Policies 7 NOTE 2 Inventories 7 NOTE 3 Accrued Liabilities 7 NOTE 4 Fair Value Measurements 7 NOTE 5 Income Taxes 9 NOTE 6 Stock-Based Compensation 10 NOTE 7 Earnings Per Share 11 NOTE 8 Risk Management and Derivatives 11 NOTE 9 Accumulated Other Comprehensive Income (Loss) 14 NOTE 10 Revenues 16 NOTE 11 Operating Segments 17 NOTE 12 Contingencies 19 NOTE 13 Acquisitions and Divestitures 19 6 Table of Contents 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 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 $ 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: 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 Import and logistics costs 626 489 Allowance for expected loss on sale (1) 389 397 Other 2,370 2,536 TOTAL ACCRUED LIABILITIES $ 6,277 $ 6,220 (1) Refer to Note 13 — Acquisitions and Divestitures for additional information. NOTE 4 — FAIR VALUE MEASUREMENTS The Company measures certain financial assets and liabilities at fair value on a recurring basis, including derivatives, equity securities and available-for-sale debt securities. For additional information about the Company's fair value policies, refer to Note 1 — Summary of Significant Accounting Policies of the Annual Report on Form 10-K for the fiscal year ended May 31, 2022. 7 Table of Contents 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) ASSETS AT FAIR VALUE CASH AND EQUIVALENTS SHORT-TERM INVESTMENTS Cash $ 746 $ 746 $ — Level 1: U.S. Treasury securities 3,855 7 3,848 Level 2: Commercial paper and bonds 720 31 689 Money market funds 5,579 5,579 — Time deposits 968 863 105 U.S. Agency securities 8 — 8 Total Level 2 7,275 6,473 802 TOTAL $ 11,876 $ 7,226 $ 4,650 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 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 $ 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: AUGUST 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) $ 1,426 $ 1,049 $ 377 $ 43 $ 39 $ 4 Embedded derivatives 3 3 — — — — 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 $ 43 million as of August 31, 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. 8 Table of Contents 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 8 — 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 $ 8,600 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. NOTE 5 — INCOME TAXES 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. 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. 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. 9 Table of Contents NOTE 6 — 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 further information. The following table summarizes the Company's total stock-based compensation expense recognized in Cost of sales or Operating overhead expense, as applicable: THREE MONTHS ENDED AUGUST 31, (Dollars in millions) 2022 2021 Stock options (1) $ 75 $ 65 ESPPs 15 15 Restricted stock and restricted stock units (1)(2) 80 56 TOTAL STOCK-BASED COMPENSATION EXPENSE $ 170 $ 136 (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 $ 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 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: THREE MONTHS ENDED AUGUST 31, 2022 2021 Dividend yield 0.8 % 0.7 % Expected volatility 27.0 % 25.2 % Weighted average expected life (in years) 5.8 5.9 Risk-free interest rate 2.7 % 0.8 % 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 options is based on an analysis of historical and expected future exercise patterns. The interest rate is based on the U.S. Treasury (constant maturity) risk-free rate in effect at the date of grant for periods corresponding with the expected term of the options. As of August 31, 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 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. 10 Table of Contents 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 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 Net income available to common stockholders $ 1,468 $ 1,874 Determination of shares: Weighted average common shares outstanding 1,567.1 1,581.9 Assumed conversion of dilutive stock options and awards 18.7 37.7 DILUTED WEIGHTED AVERAGE COMMON SHARES OUTSTANDING 1,585.8 1,619.6 Earnings per common share: Basic $ 0.94 $ 1.18 Diluted $ 0.93 $ 1.16 NOTE 8 — RISK MANAGEMENT AND DERIVATIVES The Company is exposed to global market risks, including the effect of changes in foreign currency exchange rates and interest rates, and uses derivatives to manage financial exposures that occur in the normal course of business. 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 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. All derivatives are recognized on the Unaudited Condensed Consolidated Balance Sheets at fair value and classified based on the instrument's maturity date. 11 Table of Contents The following tables present the fair values of derivative instruments included within the Unaudited Condensed Consolidated Balance Sheets: DERIVATIVE ASSETS BALANCE SHEET LOCATION AUGUST 31, MAY 31, (Dollars in millions) 2022 2022 Derivatives formally designated as hedging instruments: Foreign exchange forwards and options Prepaid expenses and other current assets $ 990 $ 639 Foreign exchange forwards and options Deferred income taxes and other assets 377 206 Total derivatives formally designated as hedging instruments 1,367 845 Derivatives not designated as hedging instruments: Foreign exchange forwards and options Prepaid expenses and other current assets 59 30 Embedded derivatives Prepaid expenses and other current assets 3 5 Total derivatives not designated as hedging instruments 62 35 TOTAL DERIVATIVE ASSETS $ 1,429 $ 880 DERIVATIVE LIABILITIES BALANCE SHEET LOCATION AUGUST 31, MAY 31, (Dollars in millions) 2022 2022 Derivatives formally designated as hedging instruments: Foreign exchange forwards and options Accrued liabilities $ 16 $ 37 Foreign exchange forwards and options Deferred income taxes and other liabilities 4 11 Total derivatives formally designated as hedging instruments 20 48 Derivatives not designated as hedging instruments: Foreign exchange forwards and options Accrued liabilities 23 28 Embedded derivatives Accrued liabilities — 1 Total derivatives not designated as hedging instruments 23 29 TOTAL DERIVATIVE LIABILITIES $ 43 $ 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: THREE MONTHS ENDED AUGUST 31, 2022 2021 (Dollars in millions) TOTAL AMOUNT OF GAIN (LOSS) ON CASH FLOW HEDGE ACTIVITY TOTAL AMOUNT OF GAIN (LOSS) ON CASH FLOW HEDGE ACTIVITY Revenues $ 12,687 $ ( 9 ) $ 12,248 $ ( 21 ) Cost of sales 7,072 109 6,552 ( 66 ) Demand creation expense 943 ( 1 ) 918 1 Other (income) expense, net ( 146 ) 82 ( 39 ) ( 9 ) Interest expense (income), net 13 ( 2 ) 57 ( 2 ) 12 Table of Contents The following tables present the amounts affecting the Unaudited Condensed Consolidated Statements of Income: (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 AUGUST 31, LOCATION OF GAIN (LOSS) RECLASSIFIED FROM ACCUMULATED OTHER COMPREHENSIVE INCOME (LOSS) INTO INCOME THREE MONTHS ENDED AUGUST 31, 2022 2021 2022 2021 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) — — Interest expense (income), net ( 2 ) ( 2 ) TOTAL DESIGNATED CASH FLOW HEDGES $ 800 $ 388 $ 179 $ ( 97 ) (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. (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. AMOUNT OF GAIN (LOSS) RECOGNIZED IN INCOME ON DERIVATIVES LOCATION OF GAIN (LOSS) RECOGNIZED IN INCOME ON DERIVATIVES THREE MONTHS ENDED AUGUST 31, (Dollars in millions) 2022 2021 Derivatives not designated as hedging instruments: Foreign exchange forwards and options $ 50 $ 23 Other (income) expense, net Embedded derivatives 11 ( 5 ) Other (income) expense, net CASH FLOW HEDGES All changes in fair value of derivatives designated as cash flow hedge instruments are recorded in Accumulated other comprehensive income (loss) until Net income is affected by the variability of cash flows of the hedged transaction. Effective hedge results are classified in the Unaudited Condensed Consolidated Statements of Income in the same manner as the underlying exposure. When it is no longer probable the forecasted hedged transaction will occur in the initially identified time period, hedge accounting is discontinued and the Company accounts for the associated derivative as an undesignated instrument as discussed below. Additionally, the gains and losses associated with derivatives no longer designated as cash flow hedge instruments in Accumulated other comprehensive income (loss) are recognized immediately in Other (income) expense, net, if it is probable the forecasted hedged transaction will not occur by the end of the initially identified time period or within an additional two-month period thereafter. 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 $ 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 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. 13 Table of Contents UNDESIGNATED DERIVATIVE INSTRUMENTS The Company may elect to enter into foreign exchange forwards to mitigate the change in fair value of specific assets and liabilities on the Unaudited Condensed Consolidated Balance Sheets and/or embedded derivative contracts. 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 $ 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 August 31, 2022, the total notional amount of embedded derivatives outstanding was approximately $ 434 million. CREDIT RISK 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 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, $ 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. For additional information related to the Company's derivative financial instruments and collateral, refer to Note 4 — Fair Value Measurements. NOTE 9 — ACCUMULATED OTHER COMPREHENSIVE INCOME (LOSS) The changes in Accumulated other comprehensive income (loss), net of tax, were as follows: (Dollars in millions) FOREIGN CURRENCY TRANSLATION ADJUSTMENT (1) CASH FLOW HEDGES NET INVESTMENT HEDGES (1) OTHER TOTAL Balance at May 31, 2022 $ ( 520 ) $ 779 $ 115 $ ( 56 ) $ 318 Other comprehensive income (loss): Other comprehensive gains (losses) before reclassifications (2) ( 272 ) 716 — ( 3 ) 441 Reclassifications to net income of previously deferred (gains) losses (3) 46 ( 161 ) — ( 8 ) ( 123 ) Total other comprehensive income (loss) ( 226 ) 555 — ( 11 ) 318 Balance at August 31, 2022 $ ( 746 ) $ 1,334 $ 115 $ ( 67 ) $ 636 (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 , $( 84 ) million, $ 0 million , $ 1 million and $( 83 ) million, respectively. (3) Net of tax (benefit) expense of $ 0 million , $ 18 million, $ 0 million , $ 3 million and $ 21 million, respectively. 14 Table of Contents (Dollars in millions) FOREIGN CURRENCY TRANSLATION ADJUSTMENT (1) CASH FLOW HEDGES NET INVESTMENT HEDGES (1) OTHER TOTAL Balance at May 31, 2021 $ 2 $ ( 435 ) $ 115 $ ( 62 ) $ ( 380 ) Other comprehensive income (loss): Other comprehensive gains (losses) before reclassifications (2) ( 128 ) 349 — 8 229 Reclassifications to net income of previously deferred (gains) losses (3) — 89 — ( 5 ) 84 Total other comprehensive income (loss) ( 128 ) 438 — 3 313 Balance at August 31, 2021 $ ( 126 ) $ 3 $ 115 $ ( 59 ) $ ( 67 ) (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 , $( 39 ) million, $ 0 million , $( 2 ) million and $( 41 ) million, respectively. (3) Net of tax (benefit) expense of $ 0 million , $( 8 ) million, $ 0 million , $ 1 million and $( 7 ) million, respectively. The following table summarizes the reclassifications from Accumulated other comprehensive income (loss) to the Unaudited Condensed Consolidated Statements of Income: AMOUNT OF GAIN (LOSS) RECLASSIFIED FROM ACCUMULATED OTHER COMPREHENSIVE INCOME (LOSS) INTO INCOME LOCATION OF GAIN (LOSS) RECLASSIFIED FROM ACCUMULATED OTHER COMPREHENSIVE INCOME (LOSS) INTO INCOME THREE MONTHS ENDED AUGUST 31, (Dollars in millions) 2022 2021 Gains (losses) on foreign currency translation adjustment $ ( 46 ) $ — Other (income) expense, net Total before tax ( 46 ) — Tax (expense) benefit — — Gain (loss) net of tax ( 46 ) — Gains (losses) on cash flow hedges: Foreign exchange forwards and options $ ( 9 ) $ ( 21 ) Revenues Foreign exchange forwards and options 109 ( 66 ) Cost of sales Foreign exchange forwards and options ( 1 ) 1 Demand creation expense Foreign exchange forwards and options 82 ( 9 ) Other (income) expense, net Interest rate swaps ( 2 ) ( 2 ) Interest expense (income), net Total before tax 179 ( 97 ) Tax (expense) benefit ( 18 ) 8 Gain (loss) net of tax 161 ( 89 ) Gains (losses) on other 11 6 Other (income) expense, net Total before tax 11 6 Tax (expense) benefit ( 3 ) ( 1 ) Gain (loss) net of tax 8 5 Total net gain (loss) reclassified for the period $ 123 $ ( 84 ) 15 Table of Contents NOTE 10 — REVENUES DISAGGREGATION OF REVENUES The following tables present the Company's Revenues disaggregated by reportable operating segment, major product line and distribution channel: THREE MONTHS ENDED AUGUST 31, 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. Revenues by: Footwear $ 3,805 $ 2,012 $ 1,233 $ 1,064 $ — $ 8,114 $ 577 $ — $ 8,691 Apparel 1,494 1,153 374 413 — 3,434 20 — 3,454 Equipment 211 168 49 58 — 486 8 — 494 Other — — — — 14 14 38 ( 4 ) 48 TOTAL REVENUES $ 5,510 $ 3,333 $ 1,656 $ 1,535 $ 14 $ 12,048 $ 643 $ ( 4 ) $ 12,687 Revenues by: Sales to Wholesale Customers $ 3,027 $ 2,203 $ 839 $ 914 $ — $ 6,983 $ 344 $ — $ 7,327 Sales through Direct to Consumer 2,483 1,130 817 621 — 5,051 261 — 5,312 Other — — — — 14 14 38 ( 4 ) 48 TOTAL REVENUES $ 5,510 $ 3,333 $ 1,656 $ 1,535 $ 14 $ 12,048 $ 643 $ ( 4 ) $ 12,687 THREE MONTHS ENDED AUGUST 31, 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. Revenues by: Footwear $ 3,264 $ 1,983 $ 1,449 $ 1,022 $ — $ 7,718 $ 567 $ — $ 8,285 Apparel 1,430 1,159 476 385 — 3,450 24 — 3,474 Equipment 185 165 57 58 — 465 9 — 474 Other — — — — 7 7 29 ( 21 ) 15 TOTAL REVENUES $ 4,879 $ 3,307 $ 1,982 $ 1,465 $ 7 $ 11,640 $ 629 $ ( 21 ) $ 12,248 Revenues by: Sales to Wholesale Customers $ 2,678 $ 2,224 $ 1,114 $ 927 $ — $ 6,943 $ 369 $ — $ 7,312 Sales through Direct to Consumer 2,201 1,083 868 538 — 4,690 231 — 4,921 Other — — — — 7 7 29 ( 21 ) 15 TOTAL REVENUES $ 4,879 $ 3,307 $ 1,982 $ 1,465 $ 7 $ 11,640 $ 629 $ ( 21 ) $ 12,248 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 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. 16 Table of Contents NOTE 11 — OPERATING SEGMENTS The Company's operating segments are evidence of the structure of the Company's internal organization. The NIKE Brand segments are defined by geographic regions for operations participating in NIKE Brand sales activity. Each NIKE Brand geographic segment operates predominantly in one industry: the design, development, marketing and selling of athletic footwear, apparel and equipment. The Company's reportable operating segments for the NIKE Brand are: North America; Europe, Middle East & Africa (EMEA); Greater China; and Asia Pacific & Latin America (APLA), and include results for the NIKE and Jordan brands. The Company's NIKE Direct operations are managed within each NIKE Brand geographic operating segment. Converse is also a reportable segment for the Company and operates in one industry: the design, marketing, licensing and selling of athletic lifestyle sneakers, apparel and accessories. Global Brand Divisions is included within the NIKE Brand for presentation purposes to align with the way management views the Company. Global Brand Divisions revenues include NIKE Brand licensing and other miscellaneous revenues that are not part of a geographic operating segment. Global Brand Divisions costs represent demand creation and operating overhead expense that include product creation and design expenses centrally managed for the NIKE Brand, as well as costs associated with NIKE Direct global digital operations and enterprise technology. Corporate consists primarily of unallocated general and administrative expenses, including expenses associated with centrally managed departments; depreciation and amortization related to the Company's headquarters; unallocated insurance, benefit and compensation programs, including stock-based compensation; and certain foreign currency gains and losses, including certain hedge gains and losses. The primary financial measure used by the Company to evaluate performance of individual operating segments is earnings before interest and taxes (EBIT), which represents Net income before Interest expense (income), net and Income tax expense in the Unaudited Condensed Consolidated Statements of Income. As part of the Company's centrally managed foreign exchange risk management program, standard foreign currency rates are assigned twice per year to each NIKE Brand entity in the Company's geographic operating segments and to Converse. These rates are set approximately nine and twelve months in advance of the future selling seasons to which they relate (specifically, for each currency, one standard rate applies to the fall and holiday selling seasons and one standard rate applies to the spring and summer selling seasons) based on average market spot rates in the calendar month preceding the date they are established. Inventories and Cost of sales for geographic operating segments and Converse reflect the use of these standard rates to record non-functional currency product purchases in the entity's functional currency. Differences between assigned standard foreign currency rates and actual market rates are included in Corporate, together with foreign currency hedge gains and losses generated from the Company's centrally managed foreign exchange risk management program and other conversion gains and losses. Accounts receivable, net, Inventories and Property, plant and equipment, net for operating segments are regularly reviewed by management and are therefore provided below. 17 Table of Contents THREE MONTHS ENDED AUGUST 31, (Dollars in millions) 2022 2021 REVENUES North America $ 5,510 $ 4,879 Europe, Middle East & Africa 3,333 3,307 Greater China 1,656 1,982 Asia Pacific & Latin America 1,535 1,465 Global Brand Divisions 14 7 Total NIKE Brand 12,048 11,640 Converse 643 629 Corporate ( 4 ) ( 21 ) TOTAL NIKE, INC. REVENUES $ 12,687 $ 12,248 EARNINGS BEFORE INTEREST AND TAXES North America $ 1,377 $ 1,434 Europe, Middle East & Africa 975 875 Greater China 541 701 Asia Pacific & Latin America 500 481 Global Brand Divisions ( 1,187 ) ( 987 ) Converse 209 204 Corporate ( 574 ) ( 545 ) Interest expense (income), net 13 57 TOTAL NIKE, INC. INCOME BEFORE INCOME TAXES $ 1,828 $ 2,106 AUGUST 31, MAY 31, (Dollars in millions) 2022 2022 ACCOUNTS RECEIVABLE, NET North America $ 2,050 $ 1,850 Europe, Middle East & Africa 1,614 1,351 Greater China 205 406 Asia Pacific & Latin America (1) 623 664 Global Brand Divisions 86 113 Total NIKE Brand 4,578 4,384 Converse 255 230 Corporate 127 53 TOTAL ACCOUNTS RECEIVABLE, NET $ 4,960 $ 4,667 INVENTORIES North America $ 4,699 $ 4,098 Europe, Middle East & Africa 2,139 1,887 Greater China 1,115 1,044 Asia Pacific & Latin America (1) 837 686 Global Brand Divisions 197 197 Total NIKE Brand 8,987 7,912 Converse 319 279 Corporate 356 229 TOTAL INVENTORIES $ 9,662 $ 8,420 18 Table of Contents AUGUST 31, MAY 31, (Dollars in millions) 2022 2022 PROPERTY, PLANT AND EQUIPMENT, NET North America $ 683 $ 639 Europe, Middle East & Africa 873 920 Greater China 290 303 Asia Pacific & Latin America (1) 255 274 Global Brand Divisions 794 789 Total NIKE Brand 2,895 2,925 Converse 45 49 Corporate 1,838 1,817 TOTAL PROPERTY, PLANT AND EQUIPMENT, NET $ 4,778 $ 4,791 (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 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. CHILE 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. 19 Table of Contents 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 $ 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. 20 Table of Contents