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Risk Management and Derivatives | 9 Months Ended
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Feb. 28, 2019
Derivative Instruments and Hedging Activities Disclosure [Abstract] |
Risk Management and Derivatives |
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 U.S. GAAP. The Company formally documents all relationships between designated hedging instruments and hedged items, as well as its risk management objectives and strategies for undertaking hedge transactions. This process includes linking all derivatives designated as hedges to either recognized assets, liabilities, or forecasted transactions and assessing, both at inception and on an ongoing basis, the effectiveness of the hedging relationships. The majority of derivatives outstanding as of February 28, 2019 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 table presents the fair values of derivative instruments included within the Unaudited Condensed Consolidated Balance Sheets as of February 28, 2019 and May 31, 2018. Refer to Note 4 — Fair Value Measurements for a description of how the financial instruments in the table below are valued.
|  | Derivative Assets |  | Derivative Liabilities
(In millions) |  | Balance Sheet Location |  | February 28, 2019 |  | May 31, 2018 |  | Balance Sheet Location |  | February 28, 2019 |  | May 31, 2018
Derivatives formally designated as hedging instruments: |  |  |  |  |  |  |  |  |  |  |  |
Foreign exchange forwards and options |  | Prepaid expenses and other current assets |  | $ | 343 |  |  | $ | 118 |  |  | Accrued liabilities |  | $ | 58 |  |  | $ | 156 |
Foreign exchange forwards and options |  | Deferred income taxes and other assets |  | 67 |  |  | 152 |  |  | Deferred income taxes and other liabilities |  | — |  |  | — |
Total derivatives formally designated as hedging instruments |  |  |  | 410 |  |  | 270 |  |  |  |  | 58 |  |  | 156 |
Derivatives not designated as hedging instruments: |  |  |  |  |  |  |  |  |  |  |  |
Foreign exchange forwards and options |  | Prepaid expenses and other current assets |  | 71 |  |  | 119 |  |  | Accrued liabilities |  | 25 |  |  | 26 |
Embedded derivatives |  | Prepaid expenses and other current assets |  | 1 |  |  | 3 |  |  | Accrued liabilities |  | 4 |  |  | 2 |
Foreign exchange forwards and options |  | Deferred income taxes and other assets |  | — |  |  | — |  |  | Deferred income taxes and other liabilities |  | — |  |  | — |
Embedded derivatives |  | Deferred income taxes and other assets |  | 6 |  |  | 8 |  |  | Deferred income taxes and other liabilities |  | 2 |  |  | 6 |
Total derivatives not designated as hedging instruments |  |  |  | 78 |  |  | 130 |  |  |  |  | 31 |  |  | 34 |
TOTAL DERIVATIVES |  |  |  | $ | 488 |  |  | $ | 400 |  |  |  |  | $ | 89 |  |  | $ | 190 |
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 for the three and nine months ended February 28, 2019 and 2018:
|  | Three Months Ended February 28, 2019 |  | Three Months Ended February 28, 2018
(In millions) |  | Total |  | Amount of Gain (Loss) on Cash Flow Hedge Activity |  | Total |  | Amount of Gain (Loss) on Cash Flow Hedge Activity
Revenues |  | $ | 9,611 |  |  | $ | 1 |  |  | $ | 8,984 |  |  | $ | 9 |
Cost of sales |  | 5,272 |  |  | 34 |  |  | 5,046 |  |  | (41 | )
Other (income) expense, net |  | (55 | ) |  | 18 |  |  | (1 | ) |  | (15 | )
Interest expense (income), net |  | 12 |  |  | (2 | ) |  | 13 |  |  | (1 | )
|  | Nine Months Ended February 28, 2019 |  | Nine Months Ended February 28, 2018
(In millions) |  | Total |  | Amount of Gain (Loss) on Cash Flow Hedge Activity |  | Total |  | Amount of Gain (Loss) on Cash Flow Hedge Activity
Revenues |  | $ | 28,933 |  |  | $ | 9 |  |  | $ | 26,608 |  |  | $ | 24 |
Cost of sales |  | 16,092 |  |  | — |  |  | 15,030 |  |  | (17 | )
Other (income) expense, net |  | (50 | ) |  | 9 |  |  | 35 |  |  | (33 | )
Interest expense (income), net |  | 37 |  |  | (5 | ) |  | 42 |  |  | (5 | )
The following tables present the amounts affecting the Unaudited Condensed Consolidated Statements of Income for the three and nine months ended February 28, 2019 and 2018:
(In millions) | Amount of Gain (Loss) Recognized in Other Comprehensive Income (Loss) on Derivatives(1) |  | Amount of Gain (Loss) Reclassified from Accumulated Other Comprehensive Income (Loss) into Income(1)
Three Months Ended February 28, |  | Location of Gain (Loss) Reclassified from Accumulated Other Comprehensive Income (Loss) into Income |  | Three Months Ended February 28,
2019 |  | 2018 |  |  | 2019 |  | 2018
Derivatives designated as cash flow hedges: |  |  |  |  |  |  |  |  |
Foreign exchange forwards and options | $ | (50 | ) |  | $ | 7 |  |  | Revenues |  | $ | 1 |  |  | $ | 9 |
Foreign exchange forwards and options | (1 | ) |  | (118 | ) |  | Cost of sales |  | 34 |  |  | (41 | )
Foreign exchange forwards and options | 2 |  |  | — |  |  | Demand creation expense |  | — |  |  | — |
Foreign exchange forwards and options | 7 |  |  | (47 | ) |  | Other (income) expense, net |  | 18 |  |  | (15 | )
Interest rate swaps(2) | — |  |  | — |  |  | Interest expense (income), net |  | (2 | ) |  | (1 | )
Total designated cash flow hedges | $ | (42 | ) |  | $ | (158 | ) |  |  |  | $ | 51 |  |  | $ | (48 | )
(1) | For the three months ended February 28, 2019 and 2018, 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.
(In millions) | Amount of Gain (Loss) Recognized in Other Comprehensive Income (Loss) on Derivatives(1) |  | Amount of Gain (Loss) Reclassified from Accumulated Other Comprehensive Income (Loss) into Income(1)
Nine Months Ended February 28, |  | Location of Gain (Loss) Reclassified from Accumulated Other Comprehensive Income (Loss) into Income |  | Nine Months Ended February 28,
2019 |  | 2018 |  |  | 2019 |  | 2018
Derivatives designated as cash flow hedges: |  |  |  |  |  |  |  |  |
Foreign exchange forwards and options | $ | (31 | ) |  | $ | 26 |  |  | Revenues |  | $ | 9 |  |  | $ | 24 |
Foreign exchange forwards and options | 273 |  |  | (382 | ) |  | Cost of sales |  | — |  |  | (17 | )
Foreign exchange forwards and options | 2 |  |  | 1 |  |  | Demand creation expense |  | — |  |  | — |
Foreign exchange forwards and options | 112 |  |  | (169 | ) |  | Other (income) expense, net |  | 9 |  |  | (33 | )
Interest rate swaps(2) | — |  |  | — |  |  | Interest expense (income), net |  | (5 | ) |  | (5 | )
Total designated cash flow hedges | $ | 356 |  |  | $ | (524 | ) |  |  |  | $ | 13 |  |  | $ | (31 | )
(1) | For the nine months ended February 28, 2019 and 2018, 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 |  |
|  | Three Months Ended February 28, |  | Nine Months Ended February 28, |  | Location of Gain (Loss) Recognized in Income on Derivatives
(In millions) |  | 2019 |  | 2018 |  | 2019 |  | 2018 |
Derivatives not designated as hedging instruments: |  |  |  |  |  |  |  |  |  |
Foreign exchange forwards and options |  | $ | (59 | ) |  | $ | (101 | ) |  | $ | 129 |  |  | $ | (270 | ) |  | Other (income) expense, net
Embedded derivatives |  | (2 | ) |  | 1 |  |  | 2 |  |  | (3 | ) |  | Other (income) expense, net
Cash Flow Hedges All changes in fair value of derivatives designated as cash flow hedges are recorded in Accumulated other comprehensive income (loss) until Net income (loss) 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. Derivative instruments designated as cash flow hedges must be discontinued when it is no longer probable the forecasted hedged transaction will occur in the initially identified time period. The gains and losses associated with discontinued derivative instruments in Accumulated other comprehensive income (loss) will be 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 all situations in which hedge accounting is discontinued and the derivative remains outstanding, the Company will account for the derivative as an undesignated instrument as discussed below. The purpose of the Company’s foreign exchange risk management program is to lessen both the positive and negative effects of currency fluctuations on the Company’s consolidated results of operations, financial position and cash flows. Foreign currency exposures the Company may elect to hedge in this manner include product cost exposures, non-functional currency denominated external and intercompany revenues, demand creation 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 product in two ways: (1) Certain NIKE entities purchase product from the NIKE Trading Company (NTC), a wholly owned sourcing hub that buys NIKE branded product from third party factories, predominantly in U.S. Dollars. The NTC, whose functional currency is the U.S. Dollar, then sells the product to NIKE entities in their respective functional currencies. NTC sales to a NIKE entity with a different functional currency result in 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. The Company operates 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, as further described within the Embedded Derivatives section 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. Typically, the Company may enter into hedge contracts starting up to 12 to 24 months in advance of the forecasted transaction and may place incremental hedges up to 100% of the exposure by the time the forecasted transaction occurs. The total notional amount of outstanding foreign currency derivatives designated as cash flow hedges was $9.7 billion as of February 28, 2019. As of February 28, 2019, approximately $287 million of deferred net gains (net of tax) on both outstanding and matured derivatives in Accumulated other comprehensive income (loss) are expected to be reclassified to Net income (loss) during the next 12 months concurrent with the underlying hedged transactions also being recorded in Net income (loss). Actual amounts ultimately reclassified to Net income (loss) are dependent on the exchange rates in effect when derivative contracts currently outstanding mature. As of February 28, 2019, the maximum term over which the Company is hedging exposures to the variability of cash flows for its forecasted transactions was 15 months. Fair Value Hedges The Company has, in the past, been exposed to the risk of changes in the fair value of certain fixed-rate debt attributable to changes in interest rates. Derivatives used by the Company to hedge this risk are receive-fixed, pay-variable interest rate swaps. All interest rate swaps designated as fair value hedges of the related long-term debt meet the shortcut method requirements under U.S. GAAP. Accordingly, changes in the fair values of the interest rate swaps are considered to exactly offset changes in the fair value of the underlying long-term debt. The Company had no interest rate swaps designated as fair value hedges as of February 28, 2019. Net Investment Hedges The Company has, in the past, 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, are reported in Accumulated other comprehensive income (loss) along with the foreign currency translation adjustments on those investments. The Company had no outstanding net investment hedges as of February 28, 2019. Undesignated Derivative Instruments The Company may elect to enter into foreign exchange forwards to mitigate the change in fair value of specific assets and liabilities on the Unaudited Condensed Consolidated Balance Sheets and/or embedded derivative contracts. These undesignated instruments are recorded at fair value as a derivative asset or liability on the Unaudited Condensed Consolidated Balance Sheets with their corresponding change in fair value recognized in Other (income) expense, net, together with the re-measurement gain or loss from the hedged balance sheet position and/or embedded derivative contract. The total notional amount of outstanding undesignated derivative instruments was $6.0 billion as of February 28, 2019. 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. In addition, embedded derivative contracts are created when the Company enters into certain other contractual agreements which have payments that are indexed to currencies that are not the functional currency of either substantial party to the contracts. Embedded derivative contracts are treated as foreign currency forward contracts that are bifurcated from the related contract and recorded at fair value as a derivative asset or liability on the Unaudited Condensed Consolidated Balance Sheets with their corresponding change in fair value recognized in Other (income) expense, net, through the date the foreign currency fluctuations cease to exist. As of February 28, 2019, the total notional amount of embedded derivatives outstanding was approximately $419 million. 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, 2019, the Company was in compliance with all credit risk-related contingent features and had derivative instruments with credit risk-related contingent features in a net liability position of $1 million. Accordingly, the Company was not required to post any collateral as a result of these contingent features. Further, as of February 28, 2019, the Company had $137 million of cash collateral received from various counterparties to its derivative contracts (refer to Note 4 — Fair Value Measurements). The Company considers the impact of the risk of counterparty default to be immaterial.

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