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) 2023 2022 Revenues $ 12,939 $ 12,687 Cost of sales 7,219 7,072 Gross profit 5,720 5,615 Demand creation expense 1,069 943 Operating overhead expense 3,047 2,977 Total selling and administrative expense 4,116 3,920 Interest expense (income), net ( 34 ) 13 Other (income) expense, net ( 10 ) ( 146 ) Income before income taxes 1,648 1,828 Income tax expense 198 360 NET INCOME $ 1,450 $ 1,468 Earnings per common share: Basic $ 0.95 $ 0.94 Diluted $ 0.94 $ 0.93 Weighted average common shares outstanding: Basic 1,528.4 1,567.1 Diluted 1,543.3 1,585.8 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) 2023 2022 Net income $ 1,450 $ 1,468 Other comprehensive income (loss), net of tax: Change in net foreign currency translation adjustment 36 ( 226 ) Change in net gains (losses) on cash flow hedges ( 134 ) 555 Change in net gains (losses) on other 3 ( 11 ) Total other comprehensive income (loss), net of tax ( 95 ) 318 TOTAL COMPREHENSIVE INCOME $ 1,355 $ 1,786 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) 2023 2023 ASSETS Current assets: Cash and equivalents $ 6,178 $ 7,441 Short-term investments 2,612 3,234 Accounts receivable, net 4,749 4,131 Inventories 8,698 8,454 Prepaid expenses and other current assets 2,013 1,942 Total current assets 24,250 25,202 Property, plant and equipment, net 5,109 5,081 Operating lease right-of-use assets, net 2,939 2,923 Identifiable intangible assets, net 272 274 Goodwill 281 281 Deferred income taxes and other assets 3,935 3,770 TOTAL ASSETS $ 36,786 $ 37,531 LIABILITIES AND SHAREHOLDERS' EQUITY Current liabilities: Current portion of long-term debt $ — $ — Notes payable 6 6 Accounts payable 2,738 2,862 Current portion of operating lease liabilities 435 425 Accrued liabilities 4,987 5,723 Income taxes payable 295 240 Total current liabilities 8,461 9,256 Long-term debt 8,929 8,927 Operating lease liabilities 2,807 2,786 Deferred income taxes and other liabilities 2,618 2,558 Commitments and contingencies (Note 11) Redeemable preferred stock — — Shareholders' equity: Common stock at stated value: Class A convertible — 298 and 305 shares outstanding — — Class B — 1,226 and 1,227 shares outstanding 3 3 Capital in excess of stated value 12,590 12,412 Accumulated other comprehensive income (loss) 136 231 Retained earnings 1,242 1,358 Total shareholders' equity 13,971 14,004 TOTAL LIABILITIES AND SHAREHOLDERS' EQUITY $ 36,786 $ 37,531 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) 2023 2022 Cash provided (used) by operations: Net income $ 1,450 $ 1,468 Adjustments to reconcile net income to net cash provided (used) by operations: Depreciation 191 169 Deferred income taxes ( 68 ) ( 43 ) Stock-based compensation 196 170 Amortization, impairment and other ( 5 ) ( 9 ) Net foreign currency adjustments ( 7 ) 16 Changes in certain working capital components and other assets and liabilities: (Increase) decrease in accounts receivable ( 621 ) ( 415 ) (Increase) decrease in inventories ( 263 ) ( 1,363 ) (Increase) decrease in prepaid expenses, operating lease right-of-use assets and other current and non-current assets ( 225 ) ( 128 ) Increase (decrease) in accounts payable, accrued liabilities, operating lease liabilities and other current and non-current liabilities ( 714 ) 492 Cash provided (used) by operations ( 66 ) 357 Cash provided (used) by investing activities: Purchases of short-term investments ( 1,144 ) ( 2,469 ) Maturities of short-term investments 778 1,432 Sales of short-term investments 1,038 948 Additions to property, plant and equipment ( 253 ) ( 264 ) Other investing activities ( 1 ) 139 Cash provided (used) by investing activities 418 ( 214 ) Cash provided (used) by financing activities: Increase (decrease) in notes payable, net — ( 1 ) Proceeds from exercise of stock options and other stock issuances 99 82 Repurchase of common stock ( 1,133 ) ( 983 ) Dividends — common and preferred ( 524 ) ( 480 ) Other financing activities ( 41 ) ( 22 ) Cash provided (used) by financing activities ( 1,599 ) ( 1,404 ) Effect of exchange rate changes on cash and equivalents ( 16 ) ( 87 ) Net increase (decrease) in cash and equivalents ( 1,263 ) ( 1,348 ) Cash and equivalents, beginning of period 7,441 8,574 CASH AND EQUIVALENTS, END OF PERIOD $ 6,178 $ 7,226 Supplemental disclosure of cash flow information: Non-cash additions to property, plant and equipment $ 148 $ 124 Dividends declared and not paid 519 482 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, 2023 305 $ — 1,227 $ 3 $ 12,412 $ 231 $ 1,358 $ 14,004 Stock options exercised 2 106 106 Conversion to Class B Common Stock ( 7 ) 7 — Repurchase of Class B Common Stock ( 10 ) ( 85 ) ( 1,047 ) ( 1,132 ) Dividends on common stock ($ 0.340 per share) and preferred stock $ 0.10 per share) ( 519 ) ( 519 ) Issuance of shares to employees, net of shares withheld for employee taxes ( 39 ) — ( 39 ) Stock-based compensation 196 196 Net income 1,450 1,450 Other comprehensive income (loss) ( 95 ) ( 95 ) Balance at August 31, 2023 298 $ — 1,226 $ 3 $ 12,590 $ 136 $ 1,242 $ 13,971 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 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 Accrued Liabilities 7 NOTE 3 Fair Value Measurements 8 NOTE 4 Income Taxes 9 NOTE 5 Stock-Based Compensation 10 NOTE 6 Earnings Per Share 11 NOTE 7 Risk Management and Derivatives 11 NOTE 8 Accumulated Other Comprehensive Income (Loss) 15 NOTE 9 Revenues 17 NOTE 10 Operating Segments 18 NOTE 11 Contingencies 20 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, 2023, 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, 2023 (the "Annual Report"). The results of operations for the three months ended August 31, 2023, are not necessarily indicative of results to be expected for the entire fiscal year. RECENTLY ADOPTED ACCOUNTING STANDARDS In September 2022, the Financial Accounting Standards Board (the "FASB") issued Accounting Standards Update 2022-04, Liabilities — Supplier Finance Programs (Subtopic 405-50): Disclosure of Supplier Finance Program Obligations. The new guidance requires qualitative and quantitative disclosure sufficient to enable users of the financial statements to understand the nature, activity during the period, changes from period to period and potential magnitude of such programs. The amendments are effective for fiscal years beginning after December 15, 2022, including interim periods within those fiscal periods, except for the amendment on rollforward information, which is effective for fiscal years beginning after December 15, 2023. The Company adopted the required guidance in the first quarter of fiscal 2024. Certain financial institutions offer voluntary supplier finance programs facilitated through a third-party platform that provide participating suppliers the option to finance valid payment obligations from the Company. The Company is not a party to agreements negotiated between participating suppliers and third-party financial institutions. The Company's obligations to its suppliers, including amounts due and payment terms, are not affected by a supplier's decision to participate in these programs and the Company does not provide guarantees to third parties in connection with these programs. As of August 31, 2023 and May 31, 2023, the Company had $ 953 million and $ 834 million, respectively, of outstanding supplier obligations confirmed as valid under these programs. These amounts are included within Accounts payable on the Unaudited Condensed Consolidated Balance Sheets. NOTE 2 — ACCRUED LIABILITIES Accrued liabilities included the following: AUGUST 31, MAY 31, (Dollars in millions) 2023 2023 Compensation and benefits, excluding taxes $ 1,133 $ 1,737 Sales-related reserves 1,003 994 Dividends payable 526 529 Import and logistics 439 370 Endorsement compensation 303 552 Other 1,583 1,541 TOTAL ACCRUED LIABILITIES $ 4,987 $ 5,723 7 Table of Contents NOTE 3 — 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 within the Annual Report. The following tables present information about the Company's financial assets measured at fair value on a recurring basis as of August 31, 2023 and May 31, 2023, and indicate the level in the fair value hierarchy in which the Company classifies the fair value measurement: AUGUST 31, 2023 (Dollars in millions) ASSETS AT FAIR VALUE CASH AND EQUIVALENTS SHORT-TERM INVESTMENTS Cash $ 1,432 $ 1,432 $ — Level 1: U.S. Treasury securities 2,022 4 2,018 Level 2: Commercial paper and bonds 549 13 536 Money market funds 4,154 4,154 — Time deposits 581 575 6 U.S. Agency securities 52 — 52 Total Level 2 5,336 4,742 594 TOTAL $ 8,790 $ 6,178 $ 2,612 MAY 31, 2023 (Dollars in millions) ASSETS AT FAIR VALUE CASH AND EQUIVALENTS SHORT-TERM INVESTMENTS Cash $ 1,767 $ 1,767 $ — Level 1: U.S. Treasury securities 2,655 — 2,655 Level 2: Commercial paper and bonds 543 15 528 Money market funds 5,157 5,157 — Time deposits 507 502 5 U.S. Agency securities 46 — 46 Total Level 2 6,253 5,674 579 TOTAL $ 10,675 $ 7,441 $ 3,234 As of August 31, 2023, the Company held $ 1,945 million of available-for-sale debt securities with maturity dates within one year and $ 667 million with maturity dates greater than one year and less than five years in Short-term investments on the Unaudited Condensed Consolidated Balance Sheets. The fair value of the Company's available-for-sale debt securities approximates their amortized cost. Included in Interest expense (income), net was interest income related to the Company's investment portfolio of $ 99 million and $ 65 million for the three months ended August 31, 2023 and 2022, respectively. 8 Table of Contents 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, 2023 DERIVATIVE ASSETS DERIVATIVE LIABILITIES (Dollars in millions) ASSETS AT FAIR VALUE OTHER CURRENT ASSETS OTHER LONG-TERM ASSETS LIABILITIES AT FAIR VALUE ACCRUED LIABILITIES OTHER LONG-TERM LIABILITIES Level 2: Foreign exchange forwards and options (1) $ 491 $ 420 $ 71 $ 235 $ 177 $ 58 (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 $ 233 million as of August 31, 2023. As of that date, the Company received $ 7 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, 2023. MAY 31, 2023 DERIVATIVE ASSETS DERIVATIVE LIABILITIES (Dollars in millions) ASSETS AT FAIR VALUE OTHER CURRENT ASSETS OTHER LONG-TERM ASSETS LIABILITIES AT FAIR VALUE ACCRUED LIABILITIES OTHER LONG-TERM LIABILITIES Level 2: Foreign exchange forwards and options (1) $ 557 $ 493 $ 64 $ 180 $ 128 $ 52 (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 $ 178 million as of May 31, 2023. As of that date, the Company received $ 36 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, 2023. For additional information related to the Company's derivative financial instruments and credit risk, refer to Note 7 — 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 $ 7,768 million at August 31, 2023 and $ 7,889 million at May 31, 2023. The carrying amounts reflected on the Unaudited Condensed Consolidated Balance Sheets for Notes payable approximate fair value. NOTE 4 — INCOME TAXES The effective tax rate was 12.0 % and 19.7 % for the three months ended August 31, 2023 and 2022, respectively. The decrease in the Company's effective tax rate was primarily due to the impact of temporary relief provided by the Internal Revenue Service ("IRS") relating to U.S. foreign tax credit regulations. On July 21, 2023, the IRS issued Notice 2023-55 which specifically delayed the application of certain U.S. foreign tax credit regulations that had previously limited the Company's ability to claim credits on certain foreign taxes for the fiscal year ended May 31, 2023. As a result of this new guidance, the Company recognized a one-time tax benefit related to prior year tax positions in the first three months of fiscal 2024. On August 16, 2022, the U.S. government enacted the Inflation Reduction Act of 2022 that included, among other provisions, changes to the U.S. corporate income tax system, including a fifteen percent minimum tax based on "adjusted financial statement income," which was effective for the Company beginning June 1, 2023. Based on the Company's current analysis of the provisions, these tax law changes are not expected to have a material impact on the Company's financial statements for fiscal 2024. As of August 31, 2023, total gross unrecognized tax benefits, excluding related interest and penalties, were $ 931 million, $ 644 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, 2023, total gross unrecognized tax benefits, excluding related interest and penalties, were $ 936 million. As of August 31, 2023 and May 31, 2023, accrued interest and penalties related 9 Table of Contents to uncertain tax positions were $ 274 million and $ 268 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 $ 20 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. NOTE 5 — 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"). For additional information, refer to Note 9 — Common Stock and Stock-Based Compensation within the Annual Report. 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) 2023 2022 Stock options (1) $ 76 $ 75 ESPPs 21 15 Restricted stock and restricted stock units (1)(2) 99 80 TOTAL STOCK-BASED COMPENSATION EXPENSE $ 196 $ 170 (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 $ 17 million and $ 20 million for the three months ended August 31, 2023 and 2022, respectively, and reported within Income tax expense. STOCK OPTIONS The weighted average fair value per share of stock options granted during the three months ended August 31, 2023 and 2022, computed as of the grant date using the Black-Scholes pricing model, was $ 34.79 and $ 32.13 , respectively. The weighted average assumptions used to estimate these fair values were as follows: THREE MONTHS ENDED AUGUST 31, 2023 2022 Dividend yield 1.1 % 0.8 % Expected volatility 29.2 % 27.0 % Weighted average expected life (in years) 5.8 5.8 Risk-free interest rate 4.2 % 2.7 % Expected volatilities are based on an analysis of the historical volatility of the Company's common stock, the implied volatility in market-traded options on the Company's common stock with a term greater than one year , as well as other factors. The weighted average expected life of stock options is based on an analysis of historical and expected future exercise patterns. The interest 10 Table of Contents rate is based on the U.S. Treasury (constant maturity) risk-free rate in effect at the date of grant for periods corresponding with the expected term of the stock options. As of August 31, 2023, the Company had $ 387 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 three months ended August 31, 2023 and 2022, computed as of the grant date, was $ 106.85 and $ 127.16 , respectively. As of August 31, 2023, the Company had $ 676 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 2.3 years. NOTE 6 — EARNINGS PER SHARE The following is a reconciliation from basic earnings per common share to diluted earnings per common share. The computations of diluted earnings per common share exclude restricted stock, restricted stock units and options, including shares under ESPPs, to purchase an estimated additional 33.7 million and 23.8 million shares of common stock outstanding for the three months ended August 31, 2023 and 2022, respectively, because the awards were assumed to be anti-dilutive. THREE MONTHS ENDED AUGUST 31, (In millions, except per share data) 2023 2022 Net income available to common stockholders $ 1,450 $ 1,468 Determination of shares: Weighted average common shares outstanding 1,528.4 1,567.1 Assumed conversion of dilutive stock options and awards 14.9 18.7 DILUTED WEIGHTED AVERAGE COMMON SHARES OUTSTANDING 1,543.3 1,585.8 Earnings per common share: Basic $ 0.95 $ 0.94 Diluted $ 0.94 $ 0.93 NOTE 7 — 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, 2023, there have been no material changes to the Company's hedging program or strategy from what was disclosed within the Annual Report. For additional information about the Company's derivatives and hedging policies, refer to Note 1 — Summary of Significant Accounting Policies and Note 12 — Risk Management and Derivatives within the Annual Report. The majority of derivatives outstanding as of August 31, 2023, 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. Dollar currency pairs. All derivatives are recognized on the Unaudited Condensed Consolidated Balance Sheets at fair value and classified based on the instrument's maturity date. The following tables present the fair values of derivative instruments included within the Unaudited Condensed Consolidated Balance Sheets: 11 Table of Contents DERIVATIVE ASSETS BALANCE SHEET LOCATION AUGUST 31, MAY 31, (Dollars in millions) 2023 2023 Derivatives formally designated as hedging instruments: Foreign exchange forwards and options Prepaid expenses and other current assets $ 406 $ 480 Foreign exchange forwards and options Deferred income taxes and other assets 71 64 Total derivatives formally designated as hedging instruments 477 544 Derivatives not designated as hedging instruments: Foreign exchange forwards and options Prepaid expenses and other current assets 14 13 Total derivatives not designated as hedging instruments 14 13 TOTAL DERIVATIVE ASSETS $ 491 $ 557 DERIVATIVE LIABILITIES BALANCE SHEET LOCATION AUGUST 31, MAY 31, (Dollars in millions) 2023 2023 Derivatives formally designated as hedging instruments: Foreign exchange forwards and options Accrued liabilities $ 142 $ 93 Foreign exchange forwards and options Deferred income taxes and other liabilities 58 52 Total derivatives formally designated as hedging instruments 200 145 Derivatives not designated as hedging instruments: Foreign exchange forwards and options Accrued liabilities 35 35 Total derivatives not designated as hedging instruments 35 35 TOTAL DERIVATIVE LIABILITIES $ 235 $ 180 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, 2023 2022 (Dollars in millions) TOTAL AMOUNT OF GAIN (LOSS) ON CASH FLOW HEDGE ACTIVITY TOTAL AMOUNT OF GAIN (LOSS) ON CASH FLOW HEDGE ACTIVITY Revenues $ 12,939 $ 1 $ 12,687 $ ( 9 ) Cost of sales 7,219 86 7,072 109 Demand creation expense 1,069 — 943 ( 1 ) Other (income) expense, net ( 10 ) 35 ( 146 ) 82 Interest expense (income), net ( 34 ) ( 2 ) 13 ( 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, 2023 2022 2023 2022 Derivatives designated as cash flow hedges: Foreign exchange forwards and options $ ( 18 ) $ 25 Revenues $ 1 $ ( 9 ) Foreign exchange forwards and options ( 2 ) 487 Cost of sales 86 109 Foreign exchange forwards and options — ( 5 ) Demand creation expense — ( 1 ) Foreign exchange forwards and options ( 10 ) 293 Other (income) expense, net 35 82 Interest rate swaps (2) — — Interest expense (income), net ( 2 ) ( 2 ) TOTAL DESIGNATED CASH FLOW HEDGES $ ( 30 ) $ 800 $ 120 $ 179 (1) For the three months ended August 31, 2023 and 2022, the amounts recorded in Other (income) expense, net as a result of the discontinuance of cash flow hedges because the forecasted transactions were no longer probable of occurring were immaterial. (2) Gains and losses associated with terminated interest rate swaps, which were previously designated as cash flow hedges and recorded in Accumulated other comprehensive income (loss), will be released through Interest expense (income), net over the term of the issued debt. 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) 2023 2022 Derivatives not designated as hedging instruments: Foreign exchange forwards and options and embedded derivatives $ ( 27 ) $ 61 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 $ 18.3 billion as of August 31, 2023. Approximately $ 313 million of deferred net gains (net of tax) on both outstanding and matured derivatives in Accumulated other comprehensive income (loss) as of August 31, 2023, 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, 2023, the maximum term over which the Company hedges exposures to the variability of cash flows for its forecasted transactions was 27 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. 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. The total notional amount of outstanding undesignated derivative instruments was $ 3.7 billion as of August 31, 2023. 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, 2023, 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 $ 256 million. Accordingly, the Company was not required to post cash collateral as a result of these contingent features. Further, $ 7 million of collateral was received on the Company's derivative asset balance as of August 31, 2023. 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 3 — Fair Value Measurements . 14 Table of Contents NOTE 8 — 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, 2023 $ ( 253 ) $ 431 $ 115 $ ( 62 ) $ 231 Other comprehensive income (loss): Other comprehensive gains (losses) before reclassifications (2) 36 ( 23 ) — — 13 Reclassifications to net income of previously deferred (gains) losses (3) — ( 111 ) — 3 ( 108 ) Total other comprehensive income (loss) 36 ( 134 ) — 3 ( 95 ) Balance at August 31, 2023 $ ( 217 ) $ 297 $ 115 $ ( 59 ) $ 136 (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 , $ 7 million, $ 0 million , $ 0 million and $ 7 million, respectively. (3) Net of tax (benefit) expense of $ 0 million , $ 9 million, $ 0 million , $( 1 ) million and $ 8 million, respectively. (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. 15 Table of Contents 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) 2023 2022 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 1 ( 9 ) Revenues Foreign exchange forwards and options 86 109 Cost of sales Foreign exchange forwards and options — ( 1 ) Demand creation expense Foreign exchange forwards and options 35 82 Other (income) expense, net Interest rate swaps ( 2 ) ( 2 ) Interest expense (income), net Total before tax 120 179 Tax (expense) benefit ( 9 ) ( 18 ) Gain (loss) net of tax 111 161 Gains (losses) on other ( 4 ) 11 Other (income) expense, net Total before tax ( 4 ) 11 Tax (expense) benefit 1 ( 3 ) Gain (loss) net of tax ( 3 ) 8 Total net gain (loss) reclassified for the period $ 108 $ 123 16 Table of Contents NOTE 9 — 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, 2023 (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 $ 3,733 $ 2,260 $ 1,287 $ 1,141 $ — $ 8,421 $ 522 $ — $ 8,943 Apparel 1,479 1,137 401 371 — 3,388 20 — 3,408 Equipment 211 213 47 60 — 531 11 — 542 Other — — — — 13 13 35 ( 2 ) 46 TOTAL REVENUES $ 5,423 $ 3,610 $ 1,735 $ 1,572 $ 13 $ 12,353 $ 588 $ ( 2 ) $ 12,939 Revenues by: Sales to Wholesale Customers $ 2,772 $ 2,379 $ 895 $ 937 $ — $ 6,983 $ 329 $ — $ 7,312 Sales through Direct to Consumer 2,651 1,231 840 635 — 5,357 224 — 5,581 Other — — — — 13 13 35 ( 2 ) 46 TOTAL REVENUES $ 5,423 $ 3,610 $ 1,735 $ 1,572 $ 13 $ 12,353 $ 588 $ ( 2 ) $ 12,939 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 For the three months ended August 31, 2023 and 2022, Global Brand Divisions revenues include 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, 2023 and May 31, 2023, the Company did no t have any contract assets and had an immaterial amount of contract liabilities recorded in Accrued liabilities on the Unaudited Condensed Consolidated Balance Sheets. 17 Table of Contents NOTE 10 — 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. 18 Table of Contents THREE MONTHS ENDED AUGUST 31, (Dollars in millions) 2023 2022 REVENUES North America $ 5,423 $ 5,510 Europe, Middle East & Africa 3,610 3,333 Greater China 1,735 1,656 Asia Pacific & Latin America 1,572 1,535 Global Brand Divisions 13 14 Total NIKE Brand 12,353 12,048 Converse 588 643 Corporate ( 2 ) ( 4 ) TOTAL NIKE, INC. REVENUES $ 12,939 $ 12,687 EARNINGS BEFORE INTEREST AND TAXES North America $ 1,434 $ 1,377 Europe, Middle East & Africa 930 975 Greater China 525 541 Asia Pacific & Latin America 414 500 Global Brand Divisions ( 1,205 ) ( 1,187 ) Converse 167 209 Corporate ( 651 ) ( 574 ) Interest expense (income), net ( 34 ) 13 TOTAL NIKE, INC. INCOME BEFORE INCOME TAXES $ 1,648 $ 1,828 AUGUST 31, MAY 31, (Dollars in millions) 2023 2023 ACCOUNTS RECEIVABLE, NET North America $ 1,932 $ 1,653 Europe, Middle East & Africa 1,562 1,197 Greater China 161 162 Asia Pacific & Latin America 687 700 Global Brand Divisions 84 96 Total NIKE Brand 4,426 3,808 Converse 240 235 Corporate 83 88 TOTAL ACCOUNTS RECEIVABLE, NET $ 4,749 $ 4,131 INVENTORIES North America $ 3,761 $ 3,806 Europe, Middle East & Africa 2,220 2,167 Greater China 1,182 973 Asia Pacific & Latin America 1,072 894 Global Brand Divisions 222 232 Total NIKE Brand 8,457 8,072 Converse 300 305 Corporate ( 59 ) 77 TOTAL INVENTORIES (1) $ 8,698 $ 8,454 (1) Inventories as of August 31, 2023 and May 31, 2023, were substantially all finished goods. 19 Table of Contents AUGUST 31, MAY 31, (Dollars in millions) 2023 2023 PROPERTY, PLANT AND EQUIPMENT, NET North America $ 792 $ 794 Europe, Middle East & Africa 1,043 1,009 Greater China 276 292 Asia Pacific & Latin America 275 279 Global Brand Divisions 889 840 Total NIKE Brand 3,275 3,214 Converse 36 38 Corporate 1,798 1,829 TOTAL PROPERTY, PLANT AND EQUIPMENT, NET $ 5,109 $ 5,081 NOTE 11 — 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, tax, 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 Belgian Customs and other government 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. The Company has issued bank guarantees in order to appeal the claims. 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. 20 Table of Contents