NKE - 2.28.2014 - 10Q
 UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
FORM 10-Q
(Mark One)
x    QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934
For the Quarterly Period Ended February 28, 2014
¨    TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934
For the transition period from              to
Commission file number-001-10635
 
NIKE, Inc.
(Exact name of registrant as specified in its charter)
 
 
 
OREGON
 
93-0584541
(State or other jurisdiction of
incorporation or organization)
 
(I.R.S. Employer
Identification No.)
 
 
One Bowerman Drive,
Beaverton, Oregon
 
97005-6453
(Address of principal executive offices)
 
(Zip Code)
Registrant’s telephone number, including area code: (503) 671-6453
Indicate by check mark whether the registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days.    Yes  þ    No  ¨
Indicate by check mark whether the registrant has submitted electronically and posted on its corporate Web site, if any, every Interactive Data File required to be submitted and posted pursuant to Rule 405 of Regulation S-T (§ 232.405 of this chapter) during the preceding 12 months (or for such shorter period that the registrant was required to submit and post such files).    Yes  þ    No  ¨
Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, a non-accelerated filer, or a smaller reporting company. See the definitions of “large accelerated filer,” “accelerated filer” and “smaller reporting company” in Rule 12b-2 of the Exchange Act.
Large accelerated filer
þ
  
Accelerated filer
¨
 
 
 
 
Non-accelerated filer
¨
   (Do not check if a smaller reporting company)
Smaller Reporting Company
¨
Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Exchange Act).    Yes  ¨    No  þ
Shares of Common Stock outstanding as of April 1, 2014 were:
Class A
177,557,876

Class B
700,580,947

 
878,138,823



Table of Contents

NIKE, INC.
FORM 10-Q
Table of Contents
 
 
 
Page
ITEM 1.
 
 
 
 
 
 
ITEM 2.
ITEM 3.
ITEM 4.
 
 
 
ITEM 1.
ITEM 1A.
ITEM 2.
ITEM 6.
 
 


Table of Contents

PART I - FINANCIAL INFORMATION
ITEM 1. Financial Statements
NIKE, Inc. Unaudited Condensed Consolidated Balance Sheets
 
 
February 28,
 
May 31,
(In millions)
 
2014
 
2013
ASSETS
 
 
 
 
Current assets:
 
 
 
 
Cash and equivalents
 
$
1,864

 
$
3,337

Short-term investments (Note 5)
 
3,165

 
2,628

Accounts receivable, net
 
3,355

 
3,117

Inventories (Note 2)
 
3,825

 
3,530

Deferred income taxes (Note 6)
 
319

 
308

Prepaid expenses and other current assets (Notes 5 and 9)
 
882

 
780

Total current assets
 
13,410

 
13,700

Property, plant and equipment, net
 
2,736

 
2,452

Identifiable intangible assets, net (Note 3)
 
386

 
382

Goodwill (Note 3)
 
131

 
131

Deferred income taxes and other assets (Notes 5, 6, and 9)
 
1,140

 
1,015

TOTAL ASSETS
 
$
17,803

 
$
17,680

LIABILITIES AND SHAREHOLDERS’ EQUITY
 
 
 
 
Current liabilities:
 
 
 
 
Current portion of long-term debt (Note 5)
 
$
7

 
$
57

Notes payable (Note 5)
 
119

 
98

Accounts payable
 
1,480

 
1,669

Accrued liabilities (Notes 4, 5, and 9)
 
2,303

 
2,082

Income taxes payable (Note 6)
 
45

 
98

Liabilities of discontinued operations (Note 11)
 

 
18

Total current liabilities
 
3,954

 
4,022

Long-term debt (Note 5)
 
1,201

 
1,210

Deferred income taxes and other liabilities (Notes 5, 6, and 9)
 
1,515

 
1,292

Commitments and contingencies (Note 13)
 

 

Redeemable preferred stock
 

 

Shareholders’ equity:
 
 
 
 
Common stock at stated value
 
 
 
 
Class A convertible — 178 and 178 shares outstanding
 

 

Class B — 703 and 716 shares outstanding
 
3

 
3

Capital in excess of stated value
 
5,723

 
5,184

Accumulated other comprehensive income (Note 10)
 
33

 
274

Retained earnings
 
5,374

 
5,695

Total shareholders’ equity
 
11,133

 
11,156

TOTAL LIABILITIES AND SHAREHOLDERS’ EQUITY
 
$
17,803

 
$
17,680

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 Income
 
 
Three Months Ended February 28,
 
Nine Months Ended February 28,
(In millions, except per share data)
 
2014
 
2013
 
2014
 
2013
Income from continuing operations:
 
 
 
 
 
 
 
 
Revenues
 
$
6,972

 
$
6,187

 
$
20,374

 
$
18,616

Cost of sales
 
3,869

 
3,451

 
11,313

 
10,522

Gross profit
 
3,103

 
2,736

 
9,061

 
8,094

Demand creation expense
 
733

 
619

 
2,155

 
2,103

Operating overhead expense
 
1,433

 
1,244

 
4,155

 
3,655

Total selling and administrative expense
 
2,166

 
1,863

 
6,310

 
5,758

Interest expense (income), net
 
9

 
(2
)
 
25

 
(6
)
Other expense (income), net
 
45

 
17

 
86

 
(28
)
Income before income taxes
 
883

 
858

 
2,640

 
2,370

Income tax expense (Note 6)
 
198

 
196

 
638

 
602

NET INCOME FROM CONTINUING OPERATIONS
 
685

 
662

 
2,002

 
1,768

NET INCOME FROM DISCONTINUED OPERATIONS
 

 
204

 

 
49

NET INCOME
 
$
685

 
$
866

 
$
2,002

 
$
1,817

 
 
 
 
 
 
 
 
 
Earnings per share from continuing operations:
 
 
 
 
 
 
 
 
Basic earnings per common share
 
$
0.78

 
$
0.74

 
$
2.26

 
$
1.97

Diluted earnings per common share
 
$
0.76

 
$
0.73

 
$
2.20

 
$
1.93

 
 
 
 
 
 
 
 
 
Earnings per share from discontinued operations:
 
 
 
 
 
 
 
 
Basic earnings per common share
 
$

 
$
0.23

 
$

 
$
0.05

Diluted earnings per common share
 
$

 
$
0.22

 
$

 
$
0.05

 
 
 
 
 
 
 
 
 
Dividends declared per common share
 
$
0.24

 
$
0.21

 
$
0.69

 
$
0.60

The accompanying notes to the unaudited condensed consolidated financial statements are an integral part of this statement.

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Table of Contents

NIKE, Inc. Unaudited Condensed Consolidated Statements of Comprehensive Income
 
 
Three Months Ended February 28,
 
Nine Months Ended February 28,
(In millions)
 
2014
 
2013
 
2014
 
2013
Net income
 
$
685

 
$
866

 
$
2,002

 
$
1,817

Other comprehensive income (loss), net of tax:
 
 
 
 
 
 
 
 
Change in net foreign currency translation adjustment
 
(34
)
 
8

 
(51
)
 
38

Change in net gains (losses) on cash flow hedges
 
(21
)
 
82

 
(186
)
 
(41
)
Change in net gains (losses) on other
 
(2
)
 
2

 
(4
)
 
2

Change in release of cumulative translation loss related to Umbro
 

 
1

 

 
83

Total other comprehensive income (loss), net of tax
 
(57
)
 
93

 
(241
)
 
82

TOTAL COMPREHENSIVE INCOME
 
$
628

 
$
959

 
$
1,761

 
$
1,899


The accompanying notes to the unaudited condensed consolidated financial statements are an integral part of this statement.


5

Table of Contents

NIKE, Inc. Unaudited Condensed Consolidated Statements of Cash Flows
 
 
Nine Months Ended February 28,
(In millions)
 
2014
 
2013
Cash provided by operations:
 
 
 
 
Net income
 
$
2,002

 
$
1,817

Income charges (credits) not affecting cash:
 
 
 
 
Depreciation
 
378

 
322

Deferred income taxes
 
(56
)
 
(56
)
Stock-based compensation (Note 7)
 
131

 
128

Amortization and other
 
102

 
37

Net gain on divestitures
 

 
(124
)
Changes in certain working capital components and other assets and liabilities:
 
 
 
 
(Increase) decrease in accounts receivable
 
(255
)
 
38

(Increase) in inventories
 
(343
)
 
(105
)
(Increase) in prepaid expenses and other current assets
 
(222
)
 
(79
)
(Decrease) in accounts payable, accrued liabilities and income taxes
 
(54
)
 
(286
)
Cash provided by operations
 
1,683

 
1,692

Cash (used) provided by investing activities:
 
 
 
 
Purchases of short-term investments
 
(4,146
)
 
(1,881
)
Maturities of short-term investments
 
3,030

 
885

Sales of short-term investments
 
555

 
938

Additions to property, plant and equipment
 
(670
)
 
(425
)
Disposals of property, plant and equipment
 
1

 
1

Proceeds from divestitures
 

 
786

Increase in other assets, net of other liabilities
 
(16
)
 
(18
)
Cash (used) provided by investing activities
 
(1,246
)
 
286

Cash used by financing activities:
 
 
 
 
Long-term debt payments, including current portion
 
(58
)
 
(47
)
Increase (decrease) in notes payable
 
37

 
(7
)
Payments on capital lease obligations
 
(9
)
 

Proceeds from exercise of stock options and other stock issuances
 
308

 
184

Excess tax benefits from share-based payment arrangements
 
108

 
34

Repurchase of common stock
 
(1,716
)
 
(1,432
)
Dividends — common and preferred
 
(587
)
 
(515
)
Cash used by financing activities
 
(1,917
)
 
(1,783
)
Effect of exchange rate changes
 
7

 
45

Net (decrease) increase in cash and equivalents
 
(1,473
)
 
240

Cash and equivalents, beginning of period
 
3,337

 
2,317

CASH AND EQUIVALENTS, END OF PERIOD
 
$
1,864

 
$
2,557

Supplemental disclosure of cash flow information:
 
 
 
 
Dividends declared and not paid
 
$
211

 
$
188

The accompanying notes to the unaudited condensed consolidated financial statements are an integral part of this statement.

6

Table of Contents

Notes to the Unaudited Condensed Consolidated Financial Statements
Note 1
Note 2
Note 3
Note 4
Note 5
Note 6
Note 7
Note 8
Note 9
Note 10
Note 11
Note 12
Note 13
 
 

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Table of Contents

NOTE 1 — Summary of Significant Accounting Policies
Basis of Presentation
The accompanying unaudited condensed consolidated financial statements reflect all normal 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, 2013 was derived from audited financial statements, but does not include all disclosures required by accounting principles generally accepted in the United States of America (“U.S. GAAP”). The interim financial information and notes thereto should be read in conjunction with the Company’s latest Annual Report on Form 10-K. The results of operations for the three and nine months ended February 28, 2014 are not necessarily indicative of results to be expected for the entire year.
The Company completed the sale of Cole Haan during the third quarter ended February 28, 2013 and completed the sale of Umbro during the second quarter ended November 30, 2012. As a result, the Company reports the operating results of Cole Haan and Umbro in the net income from discontinued operations line in the unaudited condensed consolidated statements of income for all periods presented. In addition, the liabilities associated with these businesses are reported as liabilities of discontinued operations, as appropriate, in the unaudited condensed consolidated balance sheets (refer to Note 11 — Discontinued Operations). Unless otherwise indicated, the disclosures accompanying the unaudited condensed consolidated financial statements reflect the Company’s continuing operations.
Reclassifications
Certain prior year amounts have been reclassified to conform to fiscal 2014 presentation.
Revisions
Certain prior year amounts have been revised in the unaudited condensed consolidated balance sheets to recognize certain inventory amounts held at third parties, which resulted in an increase in the amount of $96 million to both inventories and accrued liabilities. In addition, prior year amounts on the unaudited condensed consolidated statements of cash flows were revised to reflect the related cash flow impact of $36 million, which had no net impact on operating cash flows.
Additionally, prior period amounts in the unaudited condensed consolidated statements of cash flows were revised for non-cash additions to property, plant, and equipment, which increased cash provided by operations and decreased cash provided by investing activities in the amount of $24 million.
The Company assessed the materiality of these misstatements on prior periods’ financial statements in accordance with SEC Staff Accounting Bulletin ("SAB") No. 99, Materiality, codified in ASC 250 ("ASC 250"), Presentation of Financial Statements, and concluded that these misstatements were not material to any prior annual or interim periods. Future filings will include revisions to reflect the above adjustments.
Recently Adopted Accounting Standards
In July 2013, the Financial Accounting Standards Board ("FASB") issued an accounting standards update intended to provide guidance on the presentation of unrecognized tax benefits, reflecting the manner in which an entity would settle, at the reporting date, any additional income taxes that would result from the disallowance of a tax position when net operating loss carryforwards, similar tax losses, or tax credit carryforwards exist. This accounting standard will be effective for the Company beginning June 1, 2014; early adoption is permitted. The Company has early adopted this guidance and the adoption did not have a material impact on the Company's consolidated financial position or results of operations.
In July 2012, the FASB issued an accounting standards update intended to simplify how an entity tests indefinite-lived intangible assets other than goodwill for impairment by providing entities with an option to perform a qualitative assessment to determine whether further impairment testing is necessary. This accounting standard update was effective for the Company beginning June 1, 2013. The adoption did not have a material impact on the Company's consolidated financial position or results of operations.
In June 2011, the FASB issued guidance on the presentation of comprehensive income. This guidance required companies to present reclassification adjustments out of accumulated other comprehensive income by component in either the statement in which net income is presented or as a separate disclosure in the notes to the financial statements. This requirement was effective for the Company beginning June 1, 2013. As this guidance only amends the presentation of the components of comprehensive income, the adoption did not have an impact on the Company’s consolidated financial position or results of operations.
In December 2011, the FASB issued guidance enhancing disclosure requirements surrounding the nature of an entity’s right to offset related arrangements associated with its financial instruments and derivative instruments. This new guidance requires companies to disclose both gross and net information about instruments and transactions eligible for offset in the statement of financial position and instruments and transactions subject to master netting arrangements. This new guidance was effective for the Company beginning June 1, 2013. As this guidance only requires expanded disclosures, the adoption did not have an impact on the Company's consolidated financial position or results of operations.

NOTE 2 — Inventories
Inventory balances of $3,825 million and $3,530 million at February 28, 2014 and May 31, 2013, respectively, were substantially all finished goods.


8

Table of Contents

NOTE 3 — Identifiable Intangible Assets and Goodwill
The following table summarizes the Company’s identifiable intangible asset balances as of February 28, 2014 and May 31, 2013:
 
 
As of February 28, 2014
 
As of May 31, 2013
(In millions)
 
Gross Carrying
Amount
 
Accumulated
Amortization
 
Net Carrying
Amount
 
Gross Carrying
Amount
 
Accumulated
Amortization
 
Net Carrying
Amount
Amortized intangible assets:
 
 
 
 
 
 
 
 
 
 
 
 
Patents
 
$
132

 
$
(40
)
 
$
92

 
$
119

 
$
(35
)
 
$
84

Trademarks
 
46

 
(37
)
 
9

 
43

 
(32
)
 
11

Other
 
19

 
(17
)
 
2

 
20

 
(16
)
 
4

TOTAL
 
$
197

 
$
(94
)
 
$
103

 
$
182

 
$
(83
)
 
$
99

Unamortized intangible assets — Trademarks
 
 
 
 
 
283

 
 
 
 
 
283

IDENTIFIABLE INTANGIBLE ASSETS, NET
 
 
 
 
 
$
386

 
 
 
 
 
$
382

Amortization expense, which is included in selling and administrative expense, was $3 million for each of the three month periods ended February 28, 2014 and 2013, respectively, and $11 million and $10 million for the nine month periods ended February 28, 2014 and 2013, respectively. The estimated amortization expense for intangible assets subject to amortization for the remainder of fiscal year 2014 and each of the years ending May 31, 2015 through May 31, 2018 is as follows: remainder of 2014: $3 million; 2015: $11 million; 2016: $10 million; 2017: $9 million; 2018: $8 million.
Goodwill was $131 million at February 28, 2014 and May 31, 2013; $64 million is included in the Converse segment and the remaining amounts are included in Global Brand Divisions for segment reporting purposes. There were no accumulated impairment balances for goodwill as of either period end.

NOTE 4 — Accrued Liabilities
Accrued liabilities included the following:
 
 
As of February 28,
 
As of May 31,
(In millions)
 
2014
 
2013
Compensation and benefits, excluding taxes
 
$
693

 
$
713

Endorsement compensation
 
237

 
264

Dividends payable
 
211

 
188

Taxes other than income taxes
 
188

 
192

Import and logistics costs
 
134

 
111

Advertising and marketing
 
127

 
77

Fair value of derivatives
 
111

 
34

Other(1)
 
602

 
503

TOTAL ACCRUED LIABILITIES
 
$
2,303

 
$
2,082

(1)
Other consists of various accrued expenses with no individual item accounting for more than 5% of the total accrued liabilities balance at February 28, 2014 and May 31, 2013.

NOTE 5 — Fair Value Measurements
The Company measures certain financial assets and liabilities at fair value on a recurring basis, including derivatives and available-for-sale securities. Fair value is the price the Company would receive to sell an asset or pay to transfer a liability in an orderly transaction with a market participant at the measurement date. The Company uses a three-level hierarchy established by the FASB that prioritizes fair value measurements based on the types of inputs used for the various valuation techniques (market approach, income approach, and cost approach).
The levels of hierarchy are described below:
Level 1: Observable inputs such as quoted prices in active markets for identical assets or liabilities.
Level 2: Inputs other than quoted prices that are observable for the asset or liability, either directly or indirectly; these include quoted prices for similar assets or liabilities in active markets and quoted prices for identical or similar assets or liabilities in markets that are not active.
Level 3: Unobservable inputs for which there is little or no market data available, which require the reporting entity to develop its own assumptions.

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The Company’s assessment of the significance of a particular input to the fair value measurement in its entirety requires judgment and considers factors specific to the asset or liability. Financial assets and liabilities are classified in their entirety based on the most conservative level of input that is significant to the fair value measurement.
Pricing vendors are utilized for certain Level 1 and Level 2 investments. These vendors either provide a quoted market price in an active market or use observable inputs without applying significant adjustments in their pricing. Observable inputs include broker quotes, interest rates and yield curves observable at commonly quoted intervals, volatilities and credit risks. The Company’s fair value processes include controls that are designed to ensure appropriate fair values are recorded. These controls include an analysis of period-over-period fluctuations and comparison to another independent pricing vendor.
The following tables present information about the Company’s financial assets and liabilities measured at fair value on a recurring basis as of February 28, 2014 and May 31, 2013, and indicate the fair value hierarchy of the valuation techniques utilized by the Company to determine such fair value.
 
 
As of February 28, 2014
 
 
Fair Value Measurements Using
 
Assets/Liabilities at Fair Value
 
 
(In millions)
 
Level 1
 
Level 2
 
Level 3
 
Balance Sheet Classification
ASSETS
 
 
 
 
 
 
 
 
 
 
Derivatives:
 
 
 
 
 
 
 
 
 
 
Foreign exchange forwards and options(1)
 
$

 
$
120

 
$

 
$
120

 
Other current assets and other long-term assets
Embedded derivatives
 

 
1

 

 
1

 
Other current assets
Interest rate swap contracts
 

 
7

 

 
7

 
Other long-term assets
Total derivatives
 

 
128

 

 
128

 
 
Available-for-sale securities:
 
 
 
 
 
 
 
 
 
 
U.S. Treasury securities
 

 

 

 

 
Cash and equivalents
U.S. Agency securities
 

 

 

 

 
Cash and equivalents
Commercial paper and bonds
 

 
150

 

 
150

 
Cash and equivalents
Money market funds
 

 
870

 

 
870

 
Cash and equivalents
U.S. Treasury securities
 
1,474

 

 

 
1,474

 
Short-term investments
U.S. Agency securities
 

 
868

 

 
868

 
Short-term investments
Commercial paper and bonds
 

 
823

 

 
823

 
Short-term investments
Non-marketable preferred stock
 

 

 
6

 
6

 
Other long-term assets
Total available-for-sale securities
 
1,474

 
2,711

 
6

 
4,191

 
 
TOTAL ASSETS
 
$
1,474

 
$
2,839

 
$
6

 
$
4,319

 
 
LIABILITIES
 
 
 
 
 
 
 
 
 
 
Derivatives:
 
 
 
 
 
 
 
 
 
 
Foreign exchange forwards and options(1)
 
$

 
$
116

 
$

 
$
116

 
Accrued liabilities and other long-term liabilities
Embedded derivatives
 

 
1

 

 
1

 
Accrued liabilities
TOTAL LIABILITIES
 
$

 
$
117

 
$

 
$
117

 
 
(1)
The Company’s derivative financial instruments are subject to master netting arrangements that allow for the offset of assets and liabilities in the event of default or early termination of the contract. The Company elects to record the gross assets and liabilities of its derivative financial instruments in the consolidated balance sheets. If the derivative financial instruments had been netted in the consolidated balance sheets, the asset and liability positions each would have been reduced by $70 million. No material amounts of collateral were received or posted on the Company’s derivative assets and liabilities as of February 28, 2014.

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Table of Contents

 
 
As of May 31, 2013
 
 
Fair Value Measurements Using
 
Assets/Liabilities at Fair Value
 
 
(In millions)
 
Level 1
 
Level 2
 
Level 3
 
Balance Sheet Classification
ASSETS
 
 
 
 
 
 
 
 
 
 
Derivatives:
 
 
 
 
 
 
 
 
 
 
Foreign exchange forwards and options(1)
 
$

 
$
278

 
$

 
$
278

 
Other current assets and other long-term assets
Interest rate swap contracts
 

 
11

 

 
11

 
Other current assets and other long-term assets
Total derivatives
 

 
289

 

 
289

 
 
Available-for-sale securities:
 
 
 
 
 
 
 
 
 
 
U.S. Treasury securities
 
425

 

 

 
425

 
Cash and equivalents
U.S. Agency securities(2)
 

 
395

 

 
395

 
Cash and equivalents
Commercial paper and bonds(2)
 

 
660

 

 
660

 
Cash and equivalents
Money market funds
 

 
836

 

 
836

 
Cash and equivalents
U.S. Treasury securities
 
1,583

 

 

 
1,583

 
Short-term investments
U.S. Agency securities(2)
 

 
631

 

 
631

 
Short-term investments
Commercial paper and bonds(2)
 

 
414

 

 
414

 
Short-term investments
Non-marketable preferred stock
 

 

 
5

 
5

 
Other long-term assets
Total available-for-sale securities
 
2,008

 
2,936

 
5

 
4,949

 
 
TOTAL ASSETS
 
$
2,008

 
$
3,225

 
$
5

 
$
5,238

 
 
LIABILITIES
 
 
 
 
 
 
 
 
 
 
Derivatives:
 
 
 
 
 
 
 
 
 
 
Foreign exchange forwards and options(1)
 
$

 
$
34

 
$

 
$
34

 
Accrued liabilities and other long-term liabilities
TOTAL LIABILITIES
 
$

 
$
34

 
$

 
$
34

 
 
(1)
The Company’s derivative financial instruments are subject to master netting arrangements that allow for the offset of assets and liabilities in the event of default or early termination of the contract. The Company elects to record the gross assets and liabilities of its derivative financial instruments in the consolidated balance sheets. If the derivative financial instruments had been netted in the consolidated balance sheets, the asset and liability positions each would have been reduced by $34 million. No material amounts of collateral were received or posted on the Company’s derivative assets and liabilities as of May 31, 2013.
(2)
Amounts have been revised to reflect proper classification between U.S. Agency securities and commercial paper and bonds.
Derivative financial instruments include foreign exchange forwards and options, embedded derivatives, and interest rate swap contracts. The fair value of derivative contracts is determined using observable market inputs such as the daily market foreign currency rates, forward pricing curves, currency volatilities, currency correlations, and interest rates, and considers nonperformance risk of the Company and that of its counterparties. Adjustments relating to these nonperformance risks were not material at February 28, 2014 or May 31, 2013. Refer to Note 9 — Risk Management and Derivatives for additional detail.
Available-for-sale securities comprise investments in U.S. Treasury and Agency securities, money market funds, corporate commercial paper, and bonds. These securities are valued using market prices on both active markets (Level 1) and less active markets (Level 2).
The Company’s Level 3 assets comprise investments in certain non-marketable preferred stock. These investments are valued using internally developed models with unobservable inputs. These Level 3 investments are an immaterial portion of the Company's portfolio. Changes in Level 3 investment assets were immaterial during the nine months ended February 28, 2014 and the year ended May 31, 2013.
No transfers among the levels within the fair value hierarchy occurred during the nine months ended February 28, 2014 or the year ended May 31, 2013.
As of February 28, 2014 and May 31, 2013, the Company had no assets or liabilities that were required to be measured at fair value on a non-recurring basis.
Short-Term Investments
As of February 28, 2014 and May 31, 2013, short-term investments consisted of available-for-sale securities. As of February 28, 2014, the Company held $2,303 million of available-for-sale securities with maturity dates within one year from the purchase date and $862 million with maturity dates over one year and less than five years from the purchase date within short-term investments. As of May 31, 2013, the Company held $2,229 million of available-for-sale securities with maturity dates within one year from purchase date and $399 million with maturity dates over one year and less than five years from purchase date within short-term investments.

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Short-term investments classified as available-for-sale consist of the following at fair value:
 
 
As of February 28,
 
As of May 31,
(In millions)
 
2014
 
2013
Available-for-sale securities:
 
 
 
 
U.S. Treasury and Agency
 
$
2,342

 
$
2,214

Commercial paper and bonds
 
823

 
414

TOTAL AVAILABLE-FOR-SALE SECURITIES
 
$
3,165

 
$
2,628

Included in interest expense (income), net was interest income related to cash and equivalents and short-term investments of $3 million and $6 million for each of the three month periods ended February 28, 2014 and 2013, respectively, and $9 million and $20 million for each of the nine month periods ended February 28, 2014 and 2013, respectively.
Financial Assets and Liabilities Not Recorded at Fair Value
The Company’s long-term debt is recorded at adjusted cost, net of amortized premiums and discounts and interest rate swap fair value adjustments. The fair value of long-term debt is estimated based upon quoted prices for similar instruments (Level 2). The fair value of the Company’s long-term debt, including the current portion, was approximately $1,131 million at February 28, 2014 and $1,219 million at May 31, 2013.
The carrying amounts reflected in the consolidated balance sheets for notes payable approximate fair value.

NOTE 6 — Income Taxes
The effective tax rate on continuing operations was 24.2% and 25.4% for the nine month periods ended February 28, 2014 and 2013, respectively. The decrease in the Company’s effective tax rate was due to an increase in the amount of earnings from lower tax rate jurisdictions.
As of February 28, 2014, total gross unrecognized tax benefits, excluding related interest and penalties, were $563 million, $353 million of which would affect the Company’s effective tax rate if recognized in future periods. As of May 31, 2013, total gross unrecognized tax benefits, excluding related interest and penalties, were $447 million. The liability for payment of interest and penalties increased $42 million during the nine months ended February 28, 2014. As of February 28, 2014 and May 31, 2013, accrued interest and penalties related to uncertain tax positions were $154 million and $112 million, respectively (excluding federal benefit).
The Company is subject to taxation primarily in the U.S., China, the Netherlands, and Brazil, as well as various state and other foreign jurisdictions. The Company has concluded substantially all U.S. federal income tax matters through fiscal 2010. The Company is currently under audit by the Internal Revenue Service for the 2011 through 2013 tax years, including the validation of foreign tax credits taken. Many issues are at an advanced stage in the examination process, the most significant of which includes the negotiation of a U.S. Unilateral Advanced Pricing Agreement that covers intercompany transfer pricing issues for fiscal years May 31, 2011 through May 31, 2015. The Company’s major foreign jurisdictions, China, the Netherlands and Brazil, have concluded substantially all income tax matters through calendar 2005, fiscal 2008 and calendar 2008, respectively. 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 $185 million within the next 12 months.

NOTE 7 — Stock-Based Compensation
In 1990, the Board of Directors adopted, and the shareholders approved, the NIKE, Inc. 1990 Stock Incentive Plan (the “1990 Plan”). The 1990 Plan provides for the issuance of up to 326 million previously unissued shares of Class B Common Stock in connection with stock options and other awards granted under the 1990 Plan. The 1990 Plan authorizes the grant of non-statutory stock options, incentive stock options, stock appreciation rights, restricted stock, restricted stock units, and performance-based awards. The exercise price for stock options and stock appreciation rights may not be less than the fair market value of the underlying shares on the date of grant. A committee of the Board of Directors administers the 1990 Plan. The committee has the authority to determine the employees to whom awards will be made, the amount of the awards, and the other terms and conditions of the awards. Substantially all stock option grants outstanding under the 1990 Plan were granted in the first quarter of each fiscal year, vest ratably over four years, and expire 10 years from the date of grant.
In addition to the 1990 Plan, the Company gives employees the right to purchase shares at a discount to the market price under employee stock purchase plans (“ESPPs”). Employees are eligible to participate through payroll deductions of up to 10% of their compensation. At the end of each six-month offering period, shares are purchased by the participants at 85% of the lower of the fair market value at the beginning or the end of the offering period.
The Company accounts for stock-based compensation by estimating the fair value of options granted under the 1990 Plan and employees’ purchase rights under the ESPPs using the Black-Scholes option pricing model. The Company recognizes this fair value as operating overhead expense over the vesting period using the straight-line method.

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Table of Contents

The following table summarizes the Company’s total stock-based compensation expense recognized in selling and administrative expense: 
 
 
Three Months Ended February 28,
 
Nine Months Ended February 28,
(In millions)
 
2014
 
2013
 
2014
 
2013
Stock options(1)
 
$
32

 
$
32

 
$
93

 
$
90

ESPPs
 
5

 
4

 
16

 
14

Restricted stock
 
6

 
9

 
22

 
24

TOTAL STOCK-BASED COMPENSATION EXPENSE
 
$
43

 
$
45

 
$
131

 
$
128

(1)
Expense for stock options includes the expense associated with stock appreciation rights. Accelerated stock option expense is recorded for employees eligible for accelerated stock option vesting upon retirement. Accelerated stock option expense for the three month periods ended February 28, 2014 and 2013 was $3 million and $6 million, respectively, and for the nine month periods ended February 28, 2014 and 2013 was $11 million and $16 million, respectively.
As of February 28, 2014, the Company had $210 million of unrecognized compensation costs from stock options, net of estimated forfeitures, to be recognized as selling and administrative expense over a weighted average remaining period of 2.3 years.
The weighted average fair value per share of the options granted during the nine month periods ended February 28, 2014 and 2013, as computed using the Black-Scholes pricing model, was $14.88 and $12.71, respectively. The weighted average assumptions used to estimate these fair values are as follows:
 
 
Nine Months Ended February 28,
  
 
2014
 
2013
Dividend yield
 
1.3
%
 
1.5
%
Expected volatility
 
27.9
%
 
35.0
%
Weighted average expected life (in years)
 
5.3

 
5.3

Risk-free interest rate
 
1.3
%
 
0.6
%
The Company estimates the expected volatility based on the implied volatility in market traded options on the Company’s common stock with a term greater than one year, along with 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.

NOTE 8 — Earnings Per Share
The following is a reconciliation from basic earnings per share to diluted earnings per share. Options to purchase an additional 0.1 million and 14.5 million shares of common stock were outstanding for the three month periods ended February 28, 2014 and 2013, respectively, and options to purchase an additional 0.0 million and 12.6 million shares of common stock were outstanding for the nine month periods ended February 28, 2014 and 2013, respectively, but were not included in the computation of diluted earnings per share because the options were anti-dilutive.
 
 
Three Months Ended February 28,
 
Nine Months Ended February 28,
(In millions, except per share data)
 
2014
 
2013
 
2014
 
2013
Determination of shares:
 
 
 
 
 
 
 
 
Weighted average common shares outstanding
 
882.3

 
893.9

 
886.6

 
898.9

Assumed conversion of dilutive stock options and awards
 
22.5

 
17.8

 
22.5

 
17.6

DILUTED WEIGHTED AVERAGE COMMON SHARES OUTSTANDING
 
904.8

 
911.7

 
909.1

 
916.5

 
 
 
 
 
 
 
 
 
Earnings per share from continuing operations:
 
 
 
 
 
 
 
 
Basic earnings per common share
 
$
0.78

 
$
0.74

 
$
2.26

 
$
1.97

Diluted earnings per common share
 
$
0.76

 
$
0.73

 
$
2.20

 
$
1.93

 
 
 
 
 
 
 
 
 
Earnings per share from discontinued operations:
 
 
 
 
 
 
 
 
Basic earnings per common share
 
$

 
$
0.23

 
$

 
$
0.05

Diluted earnings per common share
 
$

 
$
0.22

 
$

 
$
0.05

 
 
 
 
 
 
 
 
 
Basic earnings per common share for NIKE, Inc.
 
$
0.78

 
$
0.97

 
$
2.26

 
$
2.02

Diluted earnings per common share for NIKE, Inc.
 
$
0.76

 
$
0.95

 
$
2.20

 
$
1.98



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NOTE 9 — Risk Management and Derivatives
The Company is exposed to global market risks, including the effect of changes in foreign currency exchange rates and interest rates, and uses derivatives to manage financial exposures that occur in the normal course of business. The Company does not hold or issue derivatives for trading or speculative purposes.
The Company may elect to designate certain derivatives as hedging instruments under the accounting standards for derivatives and hedging. The Company formally documents all relationships between designated hedging instruments and hedged items as well as its risk management objective and strategy for undertaking hedge transactions. This process includes linking all derivatives designated as hedges to either recognized assets or liabilities or forecasted transactions.
The majority of derivatives outstanding as of February 28, 2014 are designated as cash flow or fair value hedges. All derivatives are recognized on the balance sheet at fair value and classified based on the instrument’s maturity date. The total notional amount of outstanding derivatives as of February 28, 2014 was approximately $12 billion, which primarily comprises cash flow hedges for Euro/U.S. Dollar, British Pound/Euro, and Japanese Yen/U.S. Dollar currency pairs. As of February 28, 2014, there were outstanding currency forward contracts with maturities up to 24 months.
The following table presents the fair values of derivative instruments included within the consolidated balance sheets as of February 28, 2014 and May 31, 2013: 
 
 
Asset Derivatives
 
Liability Derivatives
(In millions)
 
Balance Sheet
Location
 
February 28,
2014
 
May 31,
2013
 
Balance Sheet 
Location
 
February 28,
2014
 
May 31,
2013
Derivatives formally designated as hedging instruments:
 
 
 
 
 
 
 
 
 
 
 
 
Foreign exchange forwards and options
 
Prepaid expenses and other current assets
 
$
79

 
$
141

 
Accrued liabilities
 
$
82

 
$
12

Foreign exchange forwards and options
 
Deferred income taxes and other long-term assets
 
20

 
79

 
Deferred income taxes and other long-term liabilities
 
6

 

Interest rate swap contracts
 
Deferred income taxes and other long-term assets
 
7

 
11

 
Deferred income taxes and other long-term liabilities
 

 

Total derivatives formally designated as hedging instruments
 
 
 
106

 
231

 
 
 
88

 
12

Derivatives not designated as hedging instruments:
 
 
 
 
 
 
 
 
 
 
 
 
Foreign exchange forwards and options
 
Prepaid expenses and other current assets
 
21

 
58

 
Accrued liabilities
 
28

 
22

Embedded derivatives
 
Prepaid expenses and other current assets
 
1

 

 
Accrued liabilities
 
1

 

Total derivatives not designated as hedging instruments
 
 
 
22

 
58

 
 
 
29

 
22

TOTAL DERIVATIVES
 
 
 
$
128

 
$
289

 
 
 
$
117

 
$
34


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Table of Contents

The following tables present the amounts affecting the consolidated statements of income for the three and nine months ended February 28, 2014 and 2013:

(In millions)
 
Amount of Gain (Loss) Recognized in Other Comprehensive Income on Derivatives(1)
 
Amount of Gain (Loss) Reclassified From Accumulated Other Comprehensive Income into Income(1)
Three Months Ended February 28,
 
Nine Months Ended February 28,
 
Location of Gain (Loss) Reclassified From  Accumulated Other Comprehensive Income into Income(1)
 
Three Months Ended February 28,
 
Nine Months Ended February 28,
2014
 
2014
 
2014
 
2014
Derivatives designated as cash flow hedges:
 
 
 
 
 
 
 
 
 
 
Foreign exchange forwards and options
 
$
(20
)
 
$
(39
)
 
Revenue
 
$
(1
)
 
$
20

Foreign exchange forwards and options
 
(12
)
 
(100
)
 
Cost of sales
 
(5
)
 
18

Foreign exchange forwards and options
 
1

 
4

 
Selling and administrative expense
 

 

Foreign exchange forwards and options
 
(5
)
 
(28
)
 
Other expense (income), net
 
(5
)
 
6

Total designated cash flow hedges
 
$
(36
)
 
$
(163
)
 
 
 
$
(11
)
 
$
44

Derivatives designated as net investment hedges:
 
 
 
 
 
 
 
 
 
 
Foreign exchange forwards and options
 
$

 
$

 
Other expense (income), net
 
$

 
$

(1)
For the three and nine months ended February 28, 2014, the amounts recorded in other expense (income), net as a result of hedge ineffectiveness and the discontinuance of cash flow hedges because the forecasted transactions were no longer probable of occurring were immaterial.

(In millions)
 
Amount of Gain (Loss) Recognized in Other Comprehensive Income on Derivatives(1)
 
Amount of Gain (Loss) Reclassified From Accumulated Other Comprehensive Income into Income(1)
Three Months Ended February 28,
 
Nine Months Ended February 28,
 
Location of Gain (Loss) Reclassified From  Accumulated Other Comprehensive Income into Income(1)
 
Three Months Ended February 28,
 
Nine Months Ended February 28,
2013
 
2013
 
2013
 
2013
Derivatives designated as cash flow hedges:
 
 
 
 
 
 
 
 
 
 
Foreign exchange forwards and options
 
$
37

 
$
41

 
Revenue
 
$
(3
)
 
$
(28
)
Foreign exchange forwards and options
 
60

 
17

 
Cost of sales
 
26

 
109

Foreign exchange forwards and options
 
(1
)
 
(3
)
 
Selling and administrative expense
 
1

 
2

Foreign exchange forwards and options
 
25

 
15

 
Other expense (income), net
 
(4
)
 
9

Total designated cash flow hedges
 
$
121

 
$
70

 
 
 
$
20

 
$
92

Derivatives designated as net investment hedges:
 
 
 
 
 
 
 
 
 
 
Foreign exchange forwards and options
 
$

 
$

 
Other expense (income), net
 
$

 
$

(1)
For the three and nine months ended February 28, 2013, the amounts recorded in other expense (income), net as a result of hedge ineffectiveness and the discontinuance of cash flow hedges because the forecasted transactions were no longer probable of occurring were immaterial.

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Table of Contents

 
 
Amount of Gain (Loss) Recognized in Income on Derivatives
 
Location of Gain (Loss) 
Recognized in Income on Derivatives
 
 
Three Months Ended February 28,
 
Nine Months Ended February 28,
 
(In millions)
 
2014
 
2013
 
2014
 
2013
 
Derivatives designated as fair value hedges:
 
 
 
 
 
 
 
 
 
 
Interest rate swaps(1)
 
$
1

 
$
1

 
$
3

 
$
4

 
Interest expense (income), net
Derivatives not designated as hedging instruments:
 
 
 
 
 
 
 
 
 
 
Foreign exchange forwards and options
 
$
(11
)
 
$
37

 
$
(50
)
 
$
(14
)
 
Other expense (income), net
Embedded derivatives
 
$
1

 
$

 
$

 
$
(3
)
 
Other expense (income), net
(1)
All interest rate swap agreements meet the shortcut method requirements under the accounting standards for derivatives and hedging. Accordingly, changes in the fair values of the interest rate swap agreements are considered to exactly offset changes in the fair value of the underlying long-term debt. Refer to “Fair Value Hedges” in this note for additional detail.
Refer to Note 4 — Accrued Liabilities for derivative instruments recorded in accrued liabilities, and Note 5 — Fair Value Measurements for a description of how the above financial instruments are valued.
Cash Flow Hedges
The purpose of the Company’s foreign currency hedging activities is to protect the Company from the risk that the eventual cash flows resulting from transactions in foreign currencies will be adversely affected by changes in exchange rates. Foreign currency exposures that the Company may elect to hedge in this manner include product cost exposures, non-functional currency denominated external and intercompany revenues, selling and administrative expenses, investments in U.S. Dollar-denominated available-for-sale debt securities, and certain other intercompany transactions.
Product cost exposures are primarily generated through non-functional currency denominated product purchases and the foreign currency adjustment program described below. NIKE entities primarily purchase products in two ways: (1) Certain NIKE entities purchase product from the NIKE Trading Company (“NTC”), a wholly-owned sourcing hub that buys NIKE branded products from third party factories, predominantly in U.S. Dollars. The NTC, whose functional currency is the U.S. Dollar, then sells the products to NIKE entities in their respective functional currencies. When the NTC sells to a NIKE entity with a different functional currency, the result is a foreign currency exposure for the NTC. (2) Other NIKE entities purchase product directly from third party factories in U.S. Dollars. These purchases generate a foreign currency exposure for those NIKE entities with a functional currency other than the U.S. Dollar.
In January 2012, the Company implemented a foreign currency adjustment program with certain factories. The program is designed to more effectively manage foreign currency risk by assuming certain of the factories’ foreign currency exposures, some of which are natural offsets to the Company's existing foreign currency exposures. Under this program, the Company’s payments to these factories are adjusted for rate fluctuations in the basket of currencies (“factory currency exposure index”) in which the labor, materials, and overhead costs incurred by the factories in the production of NIKE branded products (“factory input costs”) are denominated. For the portion of the indices denominated in the local or functional currency of the factory, the Company may elect to place formally designated cash flow hedges. For all currencies within the indices, excluding the U.S. Dollar and the local or functional currency of the factory, an embedded derivative contract is created upon the factory’s acceptance of NIKE’s purchase order. Embedded derivative contracts are separated from the related purchase order and their accounting treatment is described further below.
The Company’s policy permits the utilization of derivatives to reduce its foreign currency exposures where internal netting or other strategies cannot be effectively employed. Hedged transactions are denominated primarily in Euros, British Pounds, and Japanese Yen. The Company may enter into hedge contracts typically starting up to 12 to 18 months in advance of the forecasted transaction and may place incremental hedges for up to 100% of the exposure by the time the forecasted transaction occurs.
All changes in fair value of derivatives designated as cash flow hedges, excluding any ineffective portion, are recorded in other comprehensive income until net income is affected by the variability of cash flows of the hedged transaction. In most cases, amounts recorded in other comprehensive income will be released to net income some time after the maturity of the related derivative. Effective hedge results are classified within the consolidated statements of income in the same manner as the underlying exposure, with the results of hedges of non-functional currency denominated revenues and product cost exposures, excluding embedded derivatives as described below, recorded in revenues or cost of sales, when the underlying hedged transaction affects consolidated net income. Results of hedges of selling and administrative expense are recorded together with those costs when the related expense is recorded. Results of hedges of anticipated purchases and sales of U.S. Dollar-denominated available-for-sale securities are recorded in other expense (income), net when the securities are sold. Results of hedges of certain anticipated intercompany transactions are recorded in other expense (income), net when the transaction occurs. The Company classifies the cash flows at settlement from these designated cash flow hedge derivatives in the same category as the cash flows from the related hedged items, generally within the cash provided by operations component of the cash flow statement.
Premiums paid on options are initially recorded as deferred charges. The Company assesses the effectiveness of options based on the total cash flows method and records total changes in the options’ fair value to other comprehensive income to the degree they are effective.
The Company formally assesses, both at a hedge’s inception and on an ongoing basis, whether the derivatives that are used in the hedging transaction have been highly effective in offsetting changes in the cash flows of hedged items and whether those derivatives may be expected to remain highly effective in future periods. Effectiveness for cash flow hedges is assessed based on forward rates. Ineffectiveness was not material for the three and nine months ended February 28, 2014 and 2013.
The Company discontinues hedge accounting prospectively when (1) it determines that the derivative is no longer highly effective in offsetting changes in the cash flows of a hedged item (including hedged items such as firm commitments or forecasted transactions); (2) the derivative expires or is sold, terminated, or exercised; (3) it is no longer probable that the forecasted transaction will occur; or (4) management determines that designating the derivative as a hedging instrument is no longer appropriate.

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Table of Contents

When the Company discontinues hedge accounting because it is no longer probable that the forecasted transaction will occur in the originally expected period, but is expected to occur within an additional two-month period of time thereafter, the gain or loss on the derivative remains in accumulated other comprehensive income and is reclassified to net income when the forecasted transaction affects consolidated net income. However, if it is probable that a forecasted transaction will not occur by the end of the originally specified time period or within an additional two-month period of time thereafter, the gains and losses that were accumulated in other comprehensive income will be recognized immediately in other expense (income), net. In all situations in which hedge accounting is discontinued and the derivative remains outstanding, the Company will carry the derivative at its fair value on the balance sheet, recognizing future changes in the fair value in other expense (income), net. For the three and nine months ended February 28, 2014 and 2013, the amounts recorded in other expense (income), net as a result of the discontinuance of cash flow hedging because the forecasted transaction was no longer probable of occurring were immaterial.
As of February 28, 2014, $7 million of deferred net losses (net of tax) on both outstanding and matured derivatives accumulated in other comprehensive income 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 that are currently outstanding mature. As of February 28, 2014, the maximum term over which the Company is hedging exposures to the variability of cash flows for its forecasted transactions is 24 months.
Fair Value Hedges
The Company is also exposed to the risk of changes in the fair value of certain fixed-rate debt attributable to changes in interest rates. Derivatives currently used by the Company to hedge this risk are receive-fixed, pay-variable interest rate swaps. As of February 28, 2014, all interest rate swap agreements are designated as fair value hedges of the related long-term debt and meet the shortcut method requirements under the accounting standards for derivatives and hedging. Accordingly, changes in the fair values of the interest rate swap agreements are considered to exactly offset changes in the fair value of the underlying long-term debt. The cash flows associated with the Company’s fair value hedges are periodic interest payments while the swaps are outstanding, which are reflected within the cash provided by operations component of the cash flow statement. The Company recorded no ineffectiveness from its interest rate swaps designated as fair value hedges for the three and nine months ended February 28, 2014 or 2013.
Net Investment Hedges
The Company has hedged and may, in the future, hedge the risk of variability in foreign-currency-denominated net investments in wholly-owned international operations. All changes in fair value of the derivatives designated as net investment hedges, except ineffective portions, are reported in the cumulative translation adjustment component of other comprehensive income along with the foreign currency translation adjustments on those investments. The Company classifies the cash flows at settlement of its net investment hedges within the cash provided or used by investing activities component of the cash flow statement. The Company assesses hedge effectiveness based on changes in forward rates. The Company recorded no ineffectiveness from its net investment hedges for the three and nine months ended February 28, 2014 or 2013.
Embedded Derivatives
As part of the foreign currency adjustment program described above, an embedded derivative contract is created upon the factory’s acceptance of NIKE’s purchase order for currencies within the factory currency exposure indices that are neither the U.S. Dollar nor the local or functional currency of the factory. Embedded derivative contracts are treated as foreign currency forward contracts that are bifurcated from the related purchase order and recorded at fair value as a derivative asset or liability on the balance sheet with their corresponding change in fair value recognized in other expense (income), net from the date a purchase order is accepted by a factory through the date the purchase price is no longer subject to foreign currency fluctuations. At February 28, 2014, the notional amount of embedded derivatives outstanding was approximately $112 million.
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 balance sheet and/or the embedded derivative contracts explained above. These forwards are not designated as hedging instruments under the accounting standards for derivatives and hedging. Accordingly, these undesignated instruments are recorded at fair value as a derivative asset or liability on the balance sheet with their corresponding change in fair value recognized in other expense (income), net, together with the re-measurement gain or loss from the hedged balance sheet position or embedded derivative contract. The Company classifies the cash flows at settlement from undesignated instruments in the same category as the cash flows from the related hedged items, generally within the cash provided by operations component of the cash flow statement.
Credit Risk
The Company is exposed to credit-related losses in the event of nonperformance by counterparties to hedging instruments. The counterparties to all derivative transactions are major financial institutions with investment grade credit ratings. However, this does not eliminate the Company’s exposure to credit risk with these institutions. This credit risk is limited to the unrealized gains in such contracts should any of these counterparties fail to perform as contracted. To manage this risk, the Company has established strict counterparty credit guidelines that are continually monitored.
The Company’s derivative contracts contain credit risk related contingent features designed to protect against significant deterioration in counterparties’ creditworthiness and their ultimate ability to settle outstanding derivative contracts in the normal course of business. 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 also trigger collateral requirements. As of February 28, 2014, the Company was in compliance with all credit risk related contingent features and the aggregate fair value of its derivative instruments with credit risk related contingent features in a net liability position was $46 million. Accordingly, the Company was not required to post any collateral as a result of these contingent features. Further, as of February 28, 2014, those counterparties which were required to post collateral complied with such requirements. Given the considerations described above, the Company considers the impact of the risk of counterparty default to be immaterial.

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Table of Contents


NOTE 10 — Accumulated Other Comprehensive Income
The changes in accumulated other comprehensive income, net of tax, were as follows:
(In millions)
 
Foreign Currency Translation Adjustment(1)
 
Cash Flow Hedges
 
Net Investment Hedges(1)
 
Other
 
Total
Balance at November 30, 2013
 
$
24

 
$
28

 
$
95

 
$
(57
)
 
$
90

Other comprehensive gains (losses) before reclassifications (2)
 
(34
)
 
(31
)
 

 
(3
)
 
(68
)
Reclassifications to net income of previously deferred (gains) losses (3)
 

 
10

 

 
1

 
11

Other comprehensive income (loss)
 
(34
)
 
(21
)
 

 
(2
)
 
(57
)
Balance at February 28, 2014
 
$
(10
)
 
$
7

 
$
95

 
$
(59
)
 
$
33

(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, $5 million, $0 million, $0 million, and $5 million, respectively.
(3)
Net of tax (benefit) expense of $0 million, $(1) million, $0 million, $0 million, and $(1) million, respectively.
(In millions)
 
Foreign Currency Translation Adjustment(1)
 
Cash Flow Hedges
 
Net Investment Hedges(1)
 
Other
 
Total
Balance at May 31, 2013
 
$
41

 
$
193

 
$
95

 
$
(55
)
 
$
274

Other comprehensive gains (losses) before reclassifications (2)
 
(51
)
 
(151
)
 

 
(7
)
 
(209
)
Reclassifications to net income of previously deferred (gains) losses (3)
 

 
(35
)
 

 
3

 
(32
)
Other comprehensive income (loss)
 
(51
)
 
(186
)
 

 
(4
)
 
(241
)
Balance at February 28, 2014
 
$
(10
)
 
$
7

 
$
95

 
$
(59
)
 
$
33

(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, $12 million, $0 million, $0 million, and $12 million, respectively.
(3)
Net of tax (benefit) expense of $0 million, $9 million, $0 million, $0 million, and $9 million, respectively.

18

Table of Contents

The following table summarizes the reclassifications from accumulated other comprehensive income to the unaudited condensed consolidated statements of income:
 
 
Amount of Gain (Loss) Reclassified from Accumulated Other Comprehensive Income into Income
 
 
 
 
Three Months Ended February 28,
 
Nine Months Ended February 28,
 
Location of Gain (Loss) Reclassified from Accumulated Other Comprehensive Income into Income
(In millions)
 
2014
 
2014
 
Gains (losses) on cash flow hedges:
 
 
 
 
 
 
Foreign exchange forwards and options
 
$
(1
)
 
$
20

 
Revenue
Foreign exchange forwards and options
 
(5
)
 
18

 
Cost of sales
Foreign exchange forwards and options
 

 

 
Selling and administrative expense
Foreign exchange forwards and options
 
(5
)
 
6

 
Other expense (income), net
Total before tax
 
(11
)
 
44

 
 
Tax benefit (expense)
 
1

 
(9
)
 
 
Gain (loss) net of tax
 
(10
)
 
35

 
 
 
 
 
 
 
 
 
Gains (losses) on other
 
(1
)
 
(3
)
 
Other expense (income), net
Total before tax
 
(1
)
 
(3
)
 
 
Tax benefit (expense)
 

 

 
 
Gain (loss) net of tax
 
(1
)
 
(3
)
 
 
 
 


 


 
 
Total net gain (loss) reclassified for the period
 
$
(11
)
 
$
32

 
 

NOTE 11 — Discontinued Operations
During the year ended May 31, 2013, the Company divested of Umbro and Cole Haan, allowing it to focus its resources on driving growth in the NIKE, Jordan, Converse, and Hurley brands. 
On February 1, 2013, the Company completed the sale of Cole Haan to Apax Partners for an agreed upon purchase price of $570 million and received at closing $561 million, net of $9 million of purchase price adjustments. The transaction resulted in a gain on sale of $231 million, net of $137 million in tax expense; this gain was included in the net income (loss) from discontinued operations line item on the consolidated statements of income for the year ended May 31, 2013. There were no adjustments to these recorded amounts as of February 28, 2014. Beginning November 30, 2012, the Company classified the Cole Haan disposal group as held-for-sale and presented the results of Cole Haan's operations in the net income (loss) from discontinued operations line item on the consolidated statements of income. From this date until the sale, the assets and liabilities of Cole Haan were recorded in the assets of discontinued operations and liabilities of discontinued operations line items on the consolidated balance sheets, respectively. Previously, these amounts were reported in the Company's segment presentation as “Other Businesses.”
Under the sale agreement, the Company agreed to provide certain transition services to Cole Haan for an expected period of 3 to 9 months from the date of sale. These services are complete. The Company will also license NIKE proprietary Air and Lunar technologies to Cole Haan for a transition period. The continuing cash flows related to these items are not significant to Cole Haan and the Company will have no significant continuing involvement with Cole Haan beyond the transition services. Additionally, preexisting guarantees of certain Cole Haan lease payments remain in place after the sale; the maximum exposure under the guarantees is $35 million at February 28, 2014. The fair value of the guarantees is not material.
On November 30, 2012, the Company completed the sale of certain assets of Umbro to Iconix Brand Group (“Iconix”) for $225 million. The Umbro disposal group was classified as held-for-sale as of November 30, 2012 and the results of Umbro's operations are presented in the net loss from discontinued operations line item on the consolidated statements of income. The remaining liabilities of Umbro are recorded in the liabilities of discontinued operations line items on the consolidated balance sheets. Previously, these amounts were reported in the Company's segment presentation as “Other Businesses.” Upon meeting the held-for-sale criteria, the Company recorded a loss of $107 million, net of tax, on the sale of Umbro and the loss was included in the net income (loss) from discontinued operations line item on the consolidated statements of income for the year ended May 31, 2013. The loss on sale was calculated as the net sales price less Umbro assets of $248 million, including intangibles, goodwill, and fixed assets, other miscellaneous charges of $22 million, and the release of the associated cumulative translation adjustment of $129 million. The tax benefit on the loss was $67 million. There were no adjustments to these recorded amounts as of February 28, 2014.
Under the sale agreement, the Company provided transition services to Iconix while certain markets were transitioned to Iconix-designated licensees. These transition services are complete and the Company has wound down the remaining operations of Umbro.

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Table of Contents

Summarized results of the Company's discontinued operations are as follows:
 
 
Three Months Ended February 28,
 
Nine Months Ended February 28,
(In millions)
 
2014
 
2013
 
2014
 
2013
Revenues
 
$

 
$
132

 
$

 
$
513

Income before income taxes
 

 
345

 

 
107

Income tax expense
 

 
141

 

 
58

Net income from discontinued operations
 
$

 
$
204

 
$

 
$
49

As of February 28, 2014 and May 31, 2013, the aggregate components of liabilities classified as discontinued operations and included in current liabilities consisted of the following:
 
 
As of February 28,
 
As of May 31,
(In millions)
 
2014
 
2013
Accounts payable
 
$

 
$
1

Accrued liabilities
 

 
17

TOTAL LIABILITIES
 
$

 
$
18

There were no assets of discontinued operations as of February 28, 2014 and May 31, 2013.

NOTE 12 — Operating Segments
The Company’s operating segments are evidence of the structure of the Company's internal organization. The Company's operating segments have changed beginning in the first quarter of fiscal 2014 to mirror the changes in the structure of the Company’s internal organization that were effective during the first quarter of fiscal 2014. The NIKE Brand segments continue to be defined by geographic regions for operations participating in NIKE Brand sales activity and also include the results of NIKE Golf and Hurley, which are now managed within the geographies. Previously, NIKE Golf and Hurley were combined with Converse and reported as "Other Businesses."
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, Western Europe, Central & Eastern Europe, Greater China, Japan, and Emerging Markets. The Company’s NIKE Brand Direct to Consumer operations are managed within each geographic operating segment. Converse is also a reportable segment for NIKE, Inc., and operates in one industry: the design, marketing, licensing, and selling of casual sneakers, apparel, and accessories. Prior period segment information has been restated to reflect these changes.
Global Brand Divisions is included within the NIKE Brand for presentation purposes to align with the way management views the Company. Global Brand Divisions primarily represent NIKE Brand licensing businesses that are not part of a geographic operating segment, demand creation and operating overhead expenses that are centrally managed for the NIKE Brand, and costs associated with product development and supply chain operations.
Corporate consists largely of unallocated general and administrative expenses, including expenses associated with centrally managed departments; depreciation and amortization related to the Company’s headquarters; unallocated insurance and benefit programs, including stock-based compensation; certain foreign currency gains and losses, including certain hedge gains and losses; and other items.
The primary financial measure used by the Company to evaluate performance of individual operating segments is earnings before interest and taxes (commonly referred to as “EBIT”), which represents net income before interest expense (income), net and income taxes in the consolidated statements of income. Reconciling items for EBIT represent corporate expense items that are not allocated to the operating segments for management reporting.
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 Converse. These rates are set approximately nine months in advance of the future selling season 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 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, inventories and property, plant and equipment for operating segments are regularly reviewed by management and are therefore provided below.

20

Table of Contents

 
 
Three Months Ended February 28,
 
Nine Months Ended February 28,
(In millions)
 
2014
 
2013
 
2014
 
2013
REVENUE
 
 
 
 
 
 
 
 
North America
 
$
3,069

 
$
2,737

 
$
9,005

 
$
8,167

Western Europe
 
1,292

 
1,057

 
3,667

 
3,141

Central & Eastern Europe
 
356

 
303

 
1,017

 
882

Greater China
 
697

 
641

 
1,900

 
1,800

Japan
 
177

 
195

 
545

 
632

Emerging Markets
 
937

 
867

 
2,869

 
2,838

Global Brand Divisions
 
26

 
29

 
89

 
84

Total NIKE Brand
 
6,554

 
5,829

 
19,092

 
17,544

Converse
 
420

 
361

 
1,274

 
1,095

Corporate
 
(2
)
 
(3
)
 
8

 
(23
)
TOTAL NIKE CONSOLIDATED REVENUES
 
$
6,972

 
$
6,187

 
$
20,374

 
$
18,616

EARNINGS BEFORE INTEREST AND TAXES